In physics, the definition of "energy" is "that which allows work to be done."

This means that money is energy, since it can be used to do work via payments to people. The energy in money can be thought of as "economic energy". Economists call economic energy "price" and measure it in terms of "euros" or "Kenyan shillings" and so on.

But, these units are abstract because their quantity changes over time. Physicists would prefer to use units such as joules or kilowatt-hours, which have a concrete basis in physical realities of mass (kg), length (m), and time (s).

Since money is energy we can apply the Law of Conservation of Energy, which says: "Energy cannot be created or destroyed, merely transformed.”

You might remember examples of this law from high school science: a toaster transforms electrical energy into thermal energy; a blender transforms electrical energy into mechanical energy.

A $100 bill has significant economic energy. And yet, it was created in an automated process using inexpensive raw materials and an insignificant amount of electrical energy. This invites the question: from where did the economic energy in a $100 bill come from?

The answer lies in economics 101, which says that price (economic energy) is a function of supply and demand.

As the overall supply of a commodity increases, the energy of each unit decreases. Therefore, the energy contained in a new $100 bill was transformed from pre-existing dollars, each of which lost a tiny fraction of its energy. Power is a zero-sum game.

This realization has ramifications for traditional monies such as dollars, proof-of-stake (PoS) monies such as those planned for future versions of ethereum, and proof-of-work (PoW) monies such as bitcoin.

As explained above, when authorities create new dollars, they take energy from holders of pre-existing dollars.

The energy equation is simple:

Let’s assume a future ethereum is a PoS network that awards new coins to ether holders in proportion to their holdings.

In other words, everyone holding X coins will have Cx coins after the next coin reward, (where C is some constant). Energy is transformed from old coins to new coins, which are held by the same people.

Without a flow of energy it is difficult to see the point of creating new coins in a PoS system. Supposedly the purpose is to find consensus on the growth of a blockchain. This remains to be seen.

The creation process of PoW coins (like bitcoin) consumes large amounts of electrical energy.

Bitcoin fans might be tempted to assume that this energy is completely transformed into economic energy of new coins and that, therefore, pre-existing coins do not lose energy.

However, the mining process also creates heat. If the energy in the heat is equal to the electrical energy consumed, then the energy in new coins must come from pre-existing coins. Fortunately, this seems unlikely, since machines tend not to be used if energy input is completely lost to heat.

It seems much more likely that economic energy is transformed from electrical energy with some efficiency loss to heat.

Whereas those who store energy in dollars have energy syphoned by economic parasites, those who store energy in bitcoin do not.

Bitcoin miners have found a way to convert electrical energy into economic energy.

As logical people realize that they can store pure economic energy without the drawback of hosting an economic parasite, they will sell their dollars for bitcoin. This will result in a conversion of energy from dollars to bitcoin.

It will also create a positive feedback loop: even people who cannot see the logic of holding a parasite-resistant money will see the economic energy (price) of bitcoin rise due to rising demand.

Later, as the total economic energy in bitcoin approaches that of dollars, people will notice the economic energy of dollars fall due to falling demand. Like a chemical reaction, energy will then transform quickly, and nearly completely (I say "nearly completely" because some people will refuse to stop believing in dollars).

Finally, from a physicist’s perspective, there is an inevitable trend in the universe for entropy (disorder) to increase.

Since PoW coins like bitcoin are the only money that contributes to increasing entropy through heat loss in mining, they are the only money that has a purpose from a universal perspective.

This post originally appeared on Medium and has been republished here with the author's permission.

Newton's cradle via Shutterstock