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Toward a New Monetary Standard: Creating a
universal energy backed currency built on
blockchain technology
Draft 1.0
Daniel Goldman
February 2022
Abstract
Currency systems are evolving due to advancements in digital tech-
nologies such as the invention of blockchains. These technologies allow us
to create a new digital currency pegged to global energy markets. Such
a currency would have near universal intrinsic value, without the issues
of centralized government issued fiat currencies. It would also avoid the
issues that returning to a gold standard would create. This energy backed
currency would be stable, trustworthy, and could act as the foundation
for the future global economy.
1 Background
Most currency used in the world today carries little intrinsic value. Government
issued currencies maintain their value by requiring it to pay taxes and require
that debt collectors accept payment in the currency. Unfortunately many cur-
rency systems have fallen victim to hyper inflation, including the currencies used
by the Wiemar Republic, Zimbabwe, and Venezuela. Even for currencies that
are considered relatively stable, such as the USD, since the United States re-
moved its soft peg to silver in 1964, when it stopped making its dimes, quarters,
half dollars, and dollar coins out of 90% silver, the USD has lost almost 95%
of its purchasing power. This estimate is based an approximate current price
of silver of $24, and that assumption that one USD in 90% currency contains
approximately 0.715 troy oz of silver.
Some individuals have suggested returning to a gold standard. However,
such a standard is plagued with numerous issues. First, governments have to be
trusted to actually store the amount of gold they claim to store. Furthermore,
governments cannot be trusted to remain on this standard, as they have strayed
from it in the past. However, perhaps one of the most difficult problems is
that there simply is not enough gold available to back the amount of economic
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activity occurring in the world today, though advocates of the gold standard
may ignore this issue, by suggesting that any amount of money could serve the
economy.[5] This last statement is questionable. With a very low supply, the
velocity of money would have to be extraordinary.
Therefore we would at least have to find a different resource to pack our
currency. But that issue begs the question of what resource to use. The backing
resource should be one that is expected to maintain its value for a long time. It
must also be one which is nearly universal, at least within the economic system
of interest. If that system is the global economy, the resource’s value must be
fairly universal to all human activities. There is such a resource, and it is the
most fundamental resource in the universe: energy. However storing energy
itself is difficult. and it would be hard to directly back a currency using energy.
Moreover, the other problems discussed are not solved if this method is used.
Yet, there is a solution, thanks to the advances made in blockchain based fi-
nances, and the development of decentralized finance (DeFi) protocols. Blockchains
are special databases that can be made secure and trustless, meaning that no
central trusted body need be involved. They are the perfect place to create and
maintain digital assets. However a digital asset still needs to gain value. Ether, a
base currency of the Ethereum blockchain, does have value. It is required to run
smart contracts and execute trades on the platform. However, Ethereum has
a declining supply, even as demand increases, leading to a number of problems
that will be addressed in section 2.3 of this paper.
Because Ethereum is a very imperfect currency, and because it is not a
currency that people generally use, a few entities have created assets which are
pegged to existing government issued currencies. These pegged assets include
USDT, USDC, and DAI. Such currencies are known are stablecoins. The first
two assets work much like the gold standard did, with a trusted custodian
holding actual USD to back their cryptocurrencies. Dai however is different. It
maintains a stable purchasing power without the need to actually hold USD.
Instead, Dai is self governed and utilizes a combination of "Ethereum smart
contracts, decentralized price feeds, and the global Maker governance commu-
nity to maintain its soft peg" backed by a variety of collateral types[1]. This
system could be adapted to create an energy pegged currency instead. Specifi-
cally, one unit could be pegged to 1kWh of energy. However energy has different
economic value in different locals, so there is still the question of what exactly
peg should be.
2 An Energy Pegged Currency
Energy is fundamental to the universe. Even matter can be considered energy
with form. All matter could, theoretically be created from hitting photons to-
gether, creating protons, electrons, and neutrons, and then using nuclear physics
to create all other atoms. So far all that has been created is an electron-positron
pair[2]. And so actual construction of matter is still technologically beyond us,
but not physically impossible. Therefore energy is a universal resource. It is
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the most fundamental resource in the universe. Indeed, it has been argued that
energy, or at least "embodied energy" in aggregate economic activity is a pre-
dictor of economic value[3]. So it makes sense to use energy as the base of a
universal currency.
2.1 Composite Index
But there are numerous types of energy. Selecting which one to use as the peg
will require some consideration. One option is to peg the currency to a fraction
of a barrel of oil or cubic meter of natural gas which has the energy equivalent of
1kWh. However, there might be concerns with the sustainability of fossil fuels.
Another option is to peg it to 1kWh of electricity, but prices vary considerably
as there is no uniform open market which pools electricity prices. Such a market
would be difficult to make as it would require a massive interconnected power
grid distributed across the economic area of interest, possibly the entire planet.
There is an open market for ethanol futures[4]. So purely relying on ethanol is
an option. However, there are alternatives, such as creating a form of composite
index of various energy sources and peg the currency to that index instead.
This method is preferable, as it would not rely on any single form of energy
remaining dominant. It also allows the system to diversify its basket into mar-
kets that are less dependent on each other. The price of one asset in one market
can be manipulated in many cases, but it is far more difficult to manipulate
numerous assets across multiple different markets. And so a heavily diversified
basket would help make the peg resistant to manipulation.
2.2 Implementation Concerns
Either way, there is a problem in both cases. We will need an intermediary
asset, at least for now. We know the price of Ethereum and other assets in
USD. But we don not know the price of Ethereum in liters of ethanol or 1kWh
of some composite of different energy sources. Simply using one currency, such
as the USD as an intermediary should work, as taking the ratio of the price of
the collateral and the price of the unit of energy, both in USD, would generally
result in the USD’s contribution dropping out. However it might be less than
perfect and be problematic if anything happened to the USD. Instead the peg
should use an average across multiple different intermediate currencies.
This system would be only moderately more complex than the current Maker
Protocol. It would not require any major design changes, and instead simply
require a few more data feeds and few additional formulae. The actual collateral
management system would be identical. It is the calculations that are fed into
the collateral management system which would change, altering the amount of
collateral needed in return for a certain amount of output currency.
There is one final issue that needs to be addressed. In the future, it may be
possible to create energy markets priced in Ethereum or some other cryptoasset.
At that point, it would be preferable to switch away from government issued
intermediary currencies. It will therefore be necessary to alter the protocol.
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Changes, such as the addition of new collateral types, altering the basket of en-
ergy resources, and other similar changes would be performed through the same
mechanism as Dai: on-chain governance allowing the community to change how
the currency functions. This system will allow the users of the currency itself,
rather than any central authority, to make changes that they deem sensible.
2.3 Evaluation as a Currency
One might as why we do not simply make Ethereum our default currency. While
Ethereum offers a number of benefits, it has a number of problems as well. The
biggest problem is that Ethereum is a deflationary asset. Its purchasing power
is expected to increase over time. People do not want to use deflationary assets.
They want to hold them until they go up in value even more. Therefore the
primary function of deflationary assets is speculation.
This feature creates a Veblen good, one which increases in demand as price
increases and decreases in price as demand decreases. Such assets are highly
volatile. Between the volatile nature of the assets and the propensity to hold the
asset rather than use it, the velocity of money would be slow, while the needed
velocity to sustain an economy would increase. Furthermore, the volatility in
purchasing power of the currency would make pricing very difficult. The price
of goods and services priced in it would fluctuate constantly.
Energy, on the other hand, is not a Veblan good. Its demand will decrease
as price rises, and increase as price falls. Moreover, supply is flexible. As prices
increase, new producers will enter the market, increasing supply, and driving
prices back down. Similarly, if prices fall, producers will leave the market,
decreasing supply, and driving prices higher again. This feature makes an energy
based currency stable, allows for easy pricing in the currency, and promotes the
currency’s use. Meanwhile, the peg to a universal asset like energy makes the
currency valuable and a good store of value.
3 Summary
Even taking into account the lack of energy markets priced directly in cryp-
toassets, creating a cryptocurrency pegged to a composite energy index, which
tracks the approximate value of 1kWh of energy would not require significantly
more work than was needed to create Dai. This currency would function as a
new currency standard, without the issues of previous standards, such as the
need for a central governing body and trusted custodian, as well as eliminate
the problem with limited available resources that would arise from using a sin-
gle collateral type. Moreover, because energy itself is the most fundamental
resource in the universe, such a pegged asset would have the most universal and
meaningful value of any pegged currency, even a gold or silver pegged currency.
A currency pegged to a government issued fiat currency, on the other hand,
is not truly stable, and is always subject to the manipulation of the issuing
government. It also carries little meaning in economic regions that do not use
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the underlying currency. And even within countries that do use the underlying
currency, there is no intrinsic value other than the one forcibly assigned to it
by the issuing government. And yet currently the only so called stablecoins are
the ones pegged to government issued currencies.
It is therefore of extreme importance that project leaders begin consider-
ing the development of such a currency. Development could be conducted by
MakerDAO, which manages Dai, or a new foundation which creates a forked
version of the original project, and manages it independently. In doing so, we
will move further away from traditional currency systems, run by corrupt gov-
ernments, and towards a more holistic and universal currency that is beneficial
to the global economy.
References
[1] » Busting MakerDAO Myths: Seven Misconceptions About Dai.url:https:
//blog.makerdao.com/busting-makerdao-myths-seven- misconceptions-
about-dai/.
[2] Collisions of Light Produce Matter/Antimatter from Pure Energy | BNL
Newsroom.url:https://www.bnl.gov/newsroom/news.php?a=119023.
[3] Robert Costanza and Robert A. Herendeen. “ Embodied energy and eco-
nomic value in the United States economy: 1963, 1967 and 1972”. In: Re-
sources and Energy 6.2 (June 1984), pp. 129–163. doi:10 . 1016/0165 -
0572(84 )90014 - 8.url:https :/ / doi. org /10 . 1016/ 0165 - 0572(84)
90014-8.
[4] Ethanol Futures Contract Specs - CME Group.url:https://www.cmegroup.
com/markets/energy/biofuels/cbot-ethanol.contractSpecs.html.
[5] How to Return to the Gold Standard - Foundation for Economic Education.
url:https : / / fee . org / articles / how - to - return - to - the - gold -
standard/.
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