This is the third post of a blog series on Electricity-Backed Currency
Originally published by Triple Pundit on April 23, 2014
Dozens of new digital currencies are jockeying for a spot on the swell of popularity that Bitcoin is riding — and arguably created. Currency trading market AllCrypt.com lists well over 100 ‘altcoins,’ with new types of online money popping up nearly every week.
But very few have caught on. Most of these currencies — StoopidCoin, GamersCoin, DigiByte, GermanyCoin, — are worth mere fractions of a US cent.
You see, a currency has value only if a large community uses and accepts it as payment. For SolarCoin, the new digital currency designed to promote solar electricity production, this need to scale up is the primary barrier to gaining value as a form of money.
In other words, if SolarCoins are going to be able to buy goods and services, then the currency must become popular.
Each SolarCoin enters the ‘money supply’ when the SolarCoin Foundation grants it to the resident of a property with solar panels or the owner of a large solar array. It is given as a reward for producing one megawatt-hour (MWh) of electricity. A solar power producer can claim SolarCoin in addition to — not instead of — the money paid by the electricity’s buyer (usually an electric utility).
From there, it can be traded person-to-person over the internet, securely and without a bank or credit card company charging middleman fees. My intro to SolarCoin has the details on how it works and how to join in.
SolarCoin is intrinsically valuable because it’s based on a fixed amount of clean electric energy, something we can all agree has value. Last week’s blog post illustrates how the electricity-backed digital currency benefits human society and the global ecosystem, but as far as useful value, a more practical question remains.
What can we buy with it?
Need for scale
The short answer is not much, yet.
Sure, SolarCoins represent trust thanks to a public transaction record (the block chain) and stable unit of value (1 MWh). In addition, they encourage the goodness of carbon-free, renewable electricity. However, to reiterate my first point, a large community must start to trade SolarCoins like money for them to gain monetary value.
People, organizations, and businesses need to accept them as payment, which will only happen if they have confidence that their SolarCoins will be useful elsewhere. A merchant won’t let consumers pay with SolarCoins unless those SolarCoins can purchase goods from suppliers, pay employees, or be traded for dollars on a currency exchange.
Means of exchange
Fortunately, SolarCoin can gain widespread acceptance rather easily. If many people value something, then by definition it is valuable. Simple as that.
A business or charity can begin accepting SolarCoins as payment by downloading a wallet here and then displaying their unique address or QR code prominently on their website or a physical sign. Treating SolarCoins like cash will be a way to show that an organization agrees with the premise that the benefits solar power provides to society and the climate are greater than the price of electricity in wholesale markets. (Disregarding certain subsidies, which vary drastically across states and countries, electricity markets do not naturally differentiate between sources of electricity like coal-fired power, hydropower, nuclear, or solar, since the product — electric power — is the same.)
As more businesses accept SolarCoin as tender, more people will recognize the cryptocurrency as useful money. As demand for the currency increases, its value will rise and stabilize.
Once one SolarCoin trades at a stable exchange rate relative to US dollars for an extended period, we can declare it a mature form of money, since dollars are the most widely accepted currency in today’s world (whether or not they deserve to be). At that point, any person or retailer would be silly not to accept SolarCoins, because they could be turned into any other currency almost immediately, at zero to very little cost.
Store of value
Trading in a currency is one thing, but of course holding SolarCoins will remain somewhat risky, in the same way that using any currency as a long-term store of value involves trusting that its value will not change dramatically overnight. For example, if the US Federal Reserve prints billions of dollars today, then all our savings will be worth a lot less as soon as prices adjust upward to reflect that money is less scarce.
Yet by holding our money in US dollars, we show trust that the Fed won’t devalue the dollar with rapid, inflation-causing increases in the money supply. With SolarCoins, we can trust that they will only be granted as fast as solar power producers generate power and claim their reward.
When a currency offers a more stable representation of value than other currencies, it becomes useful for keeping money for retirement or a rainy day, not just for everyday transactions. Generally, this happens when its inflation rate — the rate at which one SolarCoin becomes less valuable over time, much like a dollar today is less valuable than a dollar three decades ago — is relatively steady and very low, perhaps one percent per year.
Right now, however, one SolarCoin is getting more valuable over time, since it is only beginning to gain popularity. Technically, this is called deflation, but you can think of holding SolarCoins as an investment in a start-up currency.
As SolarCoin gains popularity, and thus exchange value, the extra reward for solar electricity producers becomes a bigger and bigger incentive. If SolarCoins can be spent nearly anywhere, or traded for a significant amount of an official (or alternative) currency, then they will effectively serve as an additional money payment to generators of solar power.
Cash incentives for any behavior encourage more of it. So we can expect SolarCoin to contribute to the ongoing solar boom, once it scales up.
The next post in the series will discuss SolarCoin’s potential to drive solar power investment and speed the de-carbonization of electric power. Stay tuned!
My digital wallet does not yet hold any SolarCoins other than the fractions (SolarCents?) I’ve received at charitable faucets. As long as I’m writing about their inherent value and the need to become popular, I should get some skin in the game. Help out a poor writer! Send SLR to: 8Rs7YHL4z5jeNenpMD3X4BnaMZstx7QwEk