How Bitcoin is like American Idol
Everything we buy (with money) we pay for (with energy). There is no such thing as a free lunch.
In this issue:
How Bitcoin is like American Idol
How Bitcoin is like American Idol
“You say that the capital costs of proof-of-stake are just as large as the energy costs of proof-of-work, but energy is only one input into production. It is an empirical question if the capital costs of proof-of-stake are larger or smaller than the costs of proof-of-work. It isn’t a tautology. The energy to produce a bad song a good one are equal but their revenues are different. Doesn’t that break your model?” — Adapted from a conversation on Twitter
I quipped yesterday that I was doomed to unsuccessfully explain the opportunity cost of capital forever and I guess the prophecy is true because here we are. 🙂
If you haven’t already you may want to read this post about how Proof of Stake will not save us and this post comparing the externalities of proof-of-stake and proof-of-work more directly. But to summarize very briefly: proof-of-stake systems don’t eliminate energy use they simply shunt it outside the system where it is more difficult to observe but also less efficient at buying security. If you bid $10 for [something] in an open, competitive market the market will spend $10 worth of energy competing over your contract. That isn’t a tautology but it is always true.
The first thing to note is that the value of something has nothing to do with how much it cost to produce. It would be very difficult, expensive and time-consuming to dig a hole to the center of the Earth but no one wants to pay you to do that so the hole itself is worthless no matter how much it costs. The cost to produce [something] determines how much of [something] is produced (for a given price) but it is the buyers that determine how valuable it is.
That’s important because a cryptocurrency network is not a producer of network security, they are the buyer. In the metaphor of songwriting crypto networks are not writing songs but holding songwriting contests. If you are trying to commission a song and you offer a $10 reward, very little energy will be spent on your contest. Maybe your friends will submit songs they already had lying around. But if the reward you offer is $10M, people will fly in from all over the world just to compete in your contest. Lots of energy will be spent — specifically ~$10M worth.
Put another way when Lizzo sells a song for $10M she doesn’t need to spend $10M worth of energy to produce that song. But if record labels announce they plan to spend $10M buying a hit song they do cause $10M worth of energy to be spent by people competing to be (or help create) the next Lizzo.
How much energy is spent in your songwriting contest is not a function of how much electricity was used to write the winning song but of all the direct and indirect energy used by anyone who changed what they were doing because of the contest’s reward. The fuel that everyone spent traveling to the contest, but also the fuel they spent driving to and from guitar lessons when they started practicing.