I've written before about the evolution of money - from barter to blockchain - and the increasingly complex role finance plays in our lives. This commitment goes much further than simple blog posts. In fact, together with a couple of friends, I've made a serious wager that the world of finance is about to get turned on its head.
The decision to start a blockchain company in 2017. and not do an ICO got us a lot of strange looks from blockchain skeptics - why would we use a slow, inefficient database unless we were jumping on the ICO bandwagon? The strange looks, though, were a blessing in disguise. They made us question everything we thought we knew about blockchain and energy. Out of our soul-searching came a realization that if we did this right - it would change the world!
The interconnected world
As you're reading this, tens of thousands of miles of optical cables diligently transport data sent by server farms worth a hundred billion dollars from New York to London, from Hong Kong to Amsterdam, Rio to Moscow, Johannesburg to Oslo... The connections we've build promise a world where information and commerce travel freely across the globe.
The internet is the most powerful technology we've ever built - and it only took us thirty years to set it up. In less time than it takes to pay off a house, we've built a worldwide network connecting billions of people. So much so that some people have Internet but don't have running water. In 1999. Dawid Bowie called the internet "an alien life-form" - and I couldn't agree more.
The financial system is one which has been influenced the most by the internet. And as late Mr. Bowie said "I don't think we've even seen the tip of the iceberg". Even though there were a couple of revolutionary changes - most were evolutionary. While we may have servers capable of transacting millions of times a second, the assets they are transacting were drafted and implemented in the 1970s when Internet was nothing more than a copper wire connecting two computers in a university basement.
Every fifty to a hundred years, humanity reinvents its currency. This happens at an inflection point when the current system starts ripping at the seams. Metal coins transitioned to paper money. At first, they were mere proxies - redeemable worldwide for gold, silver or other commodities. Middle of the 20th century saw us brake from commodity backed money into fiat. Named after the latin phrase "let it be done" - fiat money was issued by a central authority and controlled by expanding and contracting the money supply. This power was transferred by the people to their elected representatives (or unelected in the case of US and EU and most others). They had control over the levers of interest rate and the mechanisms of primary and secondary emission to control the amount of money in circulation. To vastly oversimplify, the goal was - keep the inflation of money at a healthy rate to incentivize investments and grow the economy.
This worked well for fifty-odd years, but it doesn't work so well anymore. The world has changed dramatically since Internet connected us all. As the president of Estonia said - "Our citizens are going digital and global. If the state doesn't keep up it will become obsolete".
The concept of sovereign states issuing money doesn't work in a global digital society. We've already lost untold billions (if not trillions) converting from dollars to euros to yen to franks and back again. We've lost billions using closed banking systems. We've paid billions in fees, waited days or weeks for our money to travel cross borders. We've connected the world with the internet, yet our money seemed stuck in the past century. What gives?
It became increasingly clear that it wasn't time for an evolution. It was time for a revolution.
Blockchain - placebo or panacea?
In 2008. the financial world was falling apart. The markets took a nosedive and century old institutions closed their doors. Millions lost their jobs, their life savings and their homes.
It was the same year that the bitcoin whitepaper was issued. It seemed that out of the ashes of the broken financial system a phoenix rose. Global money, trustless, decentralized. Made by the internet for the internet. Next year the Bitcoin network was launched.
A decade later the system failed to become worldwide peer-to-peer cash. Technical issues aside - bitcoin doesn't work as money should. It's far too unstable and it's limited supply means it will always be better to hold than to spend. It seems self evident that if usage grows and supply stays the same - the price will go up. So we were, once again, left with sovereign nation currencies as the only stable means of exchanging value.
Luckily for us - humans are nothing if not stubborn. Blockchain built a trustless payment network - all we had to do was built a currency on top of it. Easier said than done, but doable nonetheless.
Collateralized digital money
After we realized classical cryptocurrencies were not going to cut it we started thinking about ways we could build money which has the best of blockchain and the best of fiat.
What do we need? We need an internet-first, worldwide currency which is stable in the short-to-medium term and has a healthy rate of inflation in the long term.
Say hello to Dai.
Dai is a currency built on blockchain. It's stable in the short term, healthily inflationary in the long term and a first-class citizen of the internet. Globally transferable, trustless and decentralized.
But how does it work? If you want a more detailed explanation visit the MakerDAO website, but the elevator pitch version is - you put digital asset as collateral into the MakerDAO system and in return you get some amount of Dai. At any point your collateral is redeemable for Dai.
Because your collateral is inherently unstable you never get the full amount of Dai but instead you get some proportion of your collateral (e.g. you put $100 worth of Ether and get $50 of Dai - if ether falls 30% your Dai is still fully collateralized).
This system has proven to be very effective at being the money of the internet. We've covered the first part of the title of this post - but what about renewable energy sources?
Choosing the right collateral
The question which comes up naturally when we talk about collateralized money supply is what will the collateral be?
To discuss this we need to look at history once again. Why was gold a bad collateral for the money of the 20th century?
If the money you have is redeemable for a commodity - the amount of money you can issue can never be bigger than the amount of commodity that exists. When the economy is growing faster than gold is being mined - any currency backed by gold starts being deflationary. It increases in value over time and people are incentivized not to spend it. This can end disastrously in an event called the deflationary spiral.
The ideal collateral would grow proportionally with the economic output of the world. As it turns out - energy production is strongly correlated with the economic output! This holds true even in developed countries focused on energy efficiency.
And this fact makes sense intuitively. GDP is the sum of all economic activity and to have economic activity you need to spend energy. Currently this energy is spent as electricity for housing and industry and oil for transportation. As the transportation sector transitions towards electric vehicles the vast majority of the energy consumption in the future will be electricity.
To have energy, you need energy sources. This implies that energy sources are the ideal collateral for the money of the future.
Making energy sources digital
The title says digital assets. Power plants are very much physical assets. There needs to be a way to mirror these physical assets onto the blockchain. This is what we do at AMPnet - we bring the ownership of energy sources on the blockchain. Our platform ensures that the legal ownership of renewable energy sources is matched completely with the ownership representation on the blockchain.
Before we can even consider using renewable energy as collateral for the money of the future - we need to build a robust system which digitizes the physical power plants. And to make this truly work on a global scale - we need to make it decentralized.
Doing this requires a cautious step-by-step approach and planned divestment from centralization to decentralization. We're committed on making decisions that reflect this world-view in the long term.
Note: AMPnet has no affiliation with MakerDAO. The post expresses the possible interplay of the platforms once MakerDAO releases multi-collateral Dai.
Renewable energy only
At AMPnet we are committed to only digitize and fund renewable energy projects. This is the social responsibility we all have towards ourselves and the future generations. Luckily for us - solar is quick becoming the most profitable energy source. In developed countries - renewable energy is also strongly correlated with economic output. Not a bad coincidence!
Even ignoring the social responsibility - renewable energy is the only way we could ever hope to collateralize money with energy. Fossil fuel, much like gold, has a finite supply and it's getting harder and harder to get a hold of. Renewables, coupled with increased energy efficiency, can scale as much as our society needs them to.
With all this in mind - I have no doubt that this is the way the money of the future will work. Blockchain powered, collateralized by digitized renewable energy sources. It's a bright vision of the future and we're working hard to make it come true.
AMPnet is building a platform for crowdinvesting renewable energy sources, retail and wholesale energy trading. If you're interested in cooperating, contact us at firstname.lastname@example.org