Published on Thu Nov 06 2025 00:00:00 GMT+0000 (Coordinated Universal Time) by Orkid Labs

How We Create Value: The Bridge Between Information and Economics

The Fundamental Question

We have established that information has a thermodynamic cost. Creating information requires energy. Processing information requires energy. Erasing information requires energy. By Landauer’s Principle, the minimum energy required to erase one bit of information is $k_B T \ln 2$ joules, where $T$ is the temperature of the system.

But this raises a critical question: if information costs energy to create, why do we create it? What is the benefit? What is the value?

The answer is that information reduces uncertainty, and reducing uncertainty enables better decisions. Better decisions lead to better outcomes. Better outcomes are what we call value.

This essay explores the mechanism by which information becomes value, and the critical question that determines the sustainability of any information system: is the value created greater than the energy cost incurred?

Part One: Value as Reduced Uncertainty

The Nature of Uncertainty

In any situation where we must make a decision, we face uncertainty. We do not know the future. We do not know the consequences of our actions. We do not know what others will do. This uncertainty constrains our ability to make good decisions.

Consider a simple example. Suppose you are a trader in a financial market. You must decide whether to buy or sell an asset. The price of the asset will change in the future, but you do not know how it will change. This uncertainty about the future price makes it difficult to decide whether to buy or sell.

If you buy the asset and the price goes up, you make a profit. If the price goes down, you make a loss. The uncertainty about the future price creates risk. The greater the uncertainty, the greater the risk.

Now suppose you receive information that reduces your uncertainty about the future price. Perhaps you learn that a major company is about to announce good earnings. This information suggests that the price is likely to go up. Your uncertainty about the future price is reduced. The risk of buying the asset is reduced.

With this information, you can make a better decision. You are more likely to buy the asset if you believe the price will go up. And if your information is correct, you are more likely to make a profit.

This is how information creates value. Information reduces uncertainty. Reduced uncertainty enables better decisions. Better decisions lead to better outcomes. Better outcomes are value.

The Quantification of Value

To make this more precise, we need to quantify the value of information. In decision theory, the value of information is defined as the difference between the expected outcome with the information and the expected outcome without the information.

Suppose we have a decision to make, and we have two possible actions: action A and action B. Without any information, we must assign probabilities to the possible outcomes. Let us say that action A has an expected value of $V_A$ and action B has an expected value of $V_B$.

If $V_A > V_B$, we should choose action A. If $V_B > V_A$, we should choose action B.

Now suppose we receive information that changes our beliefs about the probabilities of the outcomes. With this new information, we recalculate the expected values. Let us say that action A now has an expected value of $V_A’$ and action B has an expected value of $V_B’$.

With the new information, we might make a different decision. If $V_B’ > V_A’$, we now choose action B instead of action A.

The value of the information is the difference in expected outcomes:

$$\text{Value of Information} = \max(V_A’, V_B’) - \max(V_A, V_B)$$

This is the improvement in expected outcome that results from having the information.

If the information is perfect (it completely eliminates uncertainty), the value of the information is the difference between the best possible outcome and the outcome we would have achieved without the information.

If the information is imperfect (it reduces but does not eliminate uncertainty), the value of the information is smaller.

If the information is misleading (it increases our uncertainty or leads us to make worse decisions), the value of the information is negative.

Information and Entropy

Now we can connect this to our earlier discussion of entropy and information. Recall that information is the reduction in entropy. When we receive information, we reduce the entropy of our probability distribution over possible outcomes.

Before receiving information, we have a prior distribution $p_{\text{prior}}$ over possible outcomes. This distribution has entropy $H(p_{\text{prior}})$.

After receiving information, we have a posterior distribution $p_{\text{posterior}}$ over possible outcomes. This distribution has entropy $H(p_{\text{posterior}})$.

The information we have received is:

$$I = H(p_{\text{prior}}) - H(p_{\text{posterior}})$$

This is the reduction in entropy, measured in bits.

Now, the value of this information depends on how much it improves our decision-making. If the information significantly reduces our uncertainty about the outcomes that matter for our decision, the value is high. If the information only slightly reduces our uncertainty, the value is low.

The relationship between information (entropy reduction) and value (improved decision-making) is not one-to-one. The same amount of information can have different values depending on the context and the decision being made.

But in general, more information leads to better decisions, which leads to better outcomes, which leads to more value.

Part Two: Value Creation in Markets

Arbitrage: The Purest Form of Value Creation Through Information

In financial markets, the purest form of value creation through information is arbitrage. Arbitrage is the simultaneous purchase and sale of an asset in different markets to profit from a price difference.

For example, suppose a stock is trading at $100 in the New York Stock Exchange and $101 in the London Stock Exchange. An arbitrageur can buy the stock in New York for $100 and sell it in London for $101, making a profit of $1 per share.

This profit is created purely through information. The arbitrageur has information that the stock is trading at different prices in different markets. This information reveals an opportunity to make a profit with no risk.

The value created by the arbitrageur is the profit: $1 per share. This value is created by reducing the inefficiency in the market. After the arbitrageur executes the trade, the prices in the two markets converge, and the inefficiency is eliminated.

The arbitrageur has created value by revealing information about the price difference. This information has led to a more efficient market, where prices are more aligned across different venues.

Maximal Extractable Value (MEV) in Blockchain

In blockchain systems, a similar mechanism operates. Maximal Extractable Value (MEV) is the maximum value that can be extracted from a blockchain by reordering, inserting, or censoring transactions.

For example, suppose a user submits a transaction to swap token A for token B on a decentralized exchange. The user specifies a minimum output amount. If the price of token B increases before the transaction is executed, the user will receive more token B than expected.

A searcher who has information about pending transactions can see this transaction in the mempool. The searcher can submit their own transaction to buy token B before the user’s transaction is executed, driving up the price. Then, after the user’s transaction is executed at the higher price, the searcher can sell token B at a profit.

This is called a sandwich attack. The searcher has created value (profit) by having information about pending transactions and reordering them to their advantage.

But here is the key point: the searcher has not created value in the sense of making the market more efficient. Instead, the searcher has extracted value from the user. The user receives less token B than they would have received if the searcher had not intervened.

This is why MEV is often seen as a negative externality. It extracts value from users without creating value for the market as a whole.

However, there is another form of MEV that does create value: MEV from arbitrage. If a searcher detects an arbitrage opportunity (a price discrepancy between two venues), the searcher can execute the arbitrage, making a profit and making the market more efficient.

In this case, the searcher has created value by revealing information about the price discrepancy and executing the arbitrage. The market becomes more efficient, and prices converge.

The Value Creation Mechanism

The mechanism by which information creates value in markets is as follows:

1. Information reveals an opportunity: A price discrepancy, a supply-demand imbalance, or some other inefficiency exists in the market.

2. Information is costly to obtain: Detecting the opportunity requires computation, data analysis, or other resources that consume energy.

3. The opportunity is exploited: An actor with the information exploits the opportunity, making a profit.

4. The market becomes more efficient: As the opportunity is exploited, prices adjust, and the inefficiency is reduced or eliminated.

5. Value is created: The profit made by the actor who exploited the opportunity is the value created. This value comes from the reduction in market inefficiency.

The key insight is that the value created is exactly equal to the profit made by the actor who exploited the opportunity. This profit is the difference between the price at which the actor bought and the price at which the actor sold.

But this profit is only possible because of the information. Without the information, the actor would not have known about the opportunity, and would not have been able to exploit it.

Therefore, the value created is fundamentally due to the information.

Part Three: The Energy-Value Trade-off

The Fundamental Question

Now we can return to the fundamental question: is the value created greater than the energy cost incurred?

By Landauer’s Principle, creating information requires energy. The minimum energy required to create one bit of information is $k_B T \ln 2$ joules.

In practice, real systems require much more energy than this theoretical minimum. A blockchain network might require millions of joules to detect a single MEV opportunity.

The value created by detecting the MEV opportunity is the profit made by the searcher. This profit might be $100, or $1,000, or $10,000, depending on the size of the opportunity.

The question is: is the profit greater than the energy cost?

If the profit is greater than the energy cost, the system is economically viable. The value created exceeds the cost incurred.

If the profit is less than the energy cost, the system is not economically viable. The cost incurred exceeds the value created.

The Efficiency Frontier

In practice, different systems operate at different points on the efficiency frontier. Some systems are very efficient, creating a lot of value with relatively little energy. Other systems are less efficient, creating less value per unit of energy.

The efficiency of a system depends on several factors:

1. The quality of the information: Better information leads to better decisions and more value created.

2. The cost of creating the information: Systems that can create information cheaply are more efficient.

3. The size of the opportunity: Larger opportunities create more value.

4. The competition: In competitive markets, multiple actors are trying to exploit the same opportunities. This competition drives down the profit per actor, reducing the value created per unit of energy.

5. The market efficiency: In efficient markets, there are fewer opportunities to exploit. In inefficient markets, there are more opportunities.

The Sustainability Condition

For a system to be sustainable, the value created must exceed the energy cost incurred. This can be expressed as:

$$\text{Value Created} > \text{Energy Cost}$$

or, in terms of profit and energy:

$$\text{Profit} > \text{Energy Cost} \times \text{Price per Joule}$$

If we denote the profit as $\pi$, the energy cost as $E$, and the price per joule as $p$, we have:

$$\pi > E \times p$$

or

$$\frac{\pi}{E} > p$$

The left-hand side is the profit per joule of energy. The right-hand side is the price per joule of energy.

For the system to be sustainable, the profit per joule must exceed the price per joule.

This is the fundamental condition for sustainability. If this condition is met, the system can continue to operate indefinitely. If this condition is not met, the system will eventually fail because the cost of operation exceeds the value created.

Part Four: Value Creation in Different Domains

Value Creation Through Prediction

One of the most important ways that information creates value is through prediction. If we can predict the future more accurately than others, we can make better decisions and create value.

For example, if we can predict that the price of an asset will increase, we can buy the asset before the price increase and sell it after, making a profit.

The value created is the profit made from the correct prediction. This profit is possible only because we have information that others do not have, or because we can process information more efficiently than others.

The energy cost of creating this information is the cost of the computation required to make the prediction. This might include the cost of collecting data, analyzing data, running machine learning models, or other computational tasks.

For the prediction system to be sustainable, the profit from correct predictions must exceed the energy cost of making the predictions.

Value Creation Through Coordination

Another important way that information creates value is through coordination. If we can coordinate the actions of multiple actors more efficiently, we can create value.

For example, in a supply chain, if we can coordinate the production and delivery of goods more efficiently, we can reduce waste and create value.

The value created is the reduction in waste, the improvement in efficiency, or the increase in output. This value is possible only because we have information about the state of the supply chain and can use this information to coordinate actions.

The energy cost of creating this information is the cost of the computation required to collect, analyze, and communicate information about the supply chain.

For the coordination system to be sustainable, the value created through better coordination must exceed the energy cost of creating the information.

Value Creation Through Trust

A third important way that information creates value is through trust. If we can verify that others are behaving honestly, we can trust them and engage in transactions that would otherwise be impossible.

For example, in a blockchain system, we can verify that transactions are valid and that the ledger is accurate. This verification creates trust, which enables transactions that would otherwise be impossible.

The value created is the value of the transactions that are enabled by the trust. This value is possible only because we have information that verifies the honesty of the participants.

The energy cost of creating this information is the cost of the computation required to verify transactions and maintain the ledger.

For the trust system to be sustainable, the value created through enabling transactions must exceed the energy cost of creating the trust.

Part Five: The Paradox of Value Creation

The Paradox

Here we encounter a paradox. On one hand, we have established that information has a thermodynamic cost. Creating information requires energy. By Landauer’s Principle, there is a minimum energy cost per bit of information.

On the other hand, we have established that information creates value. Better information leads to better decisions, which lead to better outcomes, which lead to more value.

The paradox is this: if information has a cost, and information creates value, then the value created must be greater than the cost incurred for the system to be sustainable. But in many cases, the value created seems to be much greater than the cost incurred. How is this possible?

The resolution of the paradox is that the value created by information is not limited by the energy cost of creating the information. The value created depends on the size of the opportunity, the quality of the information, and the competitive environment.

In some cases, a small amount of information can create a large amount of value. For example, if you have information that a stock is about to increase in price, and you buy the stock before the price increase, you can make a large profit with a small amount of information.

In other cases, a large amount of information creates only a small amount of value. For example, if you have detailed information about a market that is already very efficient, there may be few opportunities to exploit, and the value created may be small.

The key insight is that the value created by information is not determined by the energy cost of creating the information. Instead, the value created is determined by the size of the opportunity and the quality of the information.

The Opportunity Cost

But there is another way to think about this paradox. The value created by information is not just the profit made by the actor who exploits the opportunity. It is also the value created for the market as a whole.

When an arbitrageur detects a price discrepancy and executes an arbitrage trade, the arbitrageur makes a profit. But the market also benefits. The prices in the two markets converge, and the market becomes more efficient.

The value created for the market is the reduction in the price discrepancy. This value is shared among all the participants in the market.

The arbitrageur captures only a portion of this value (the profit made from the arbitrage). The rest of the value is captured by other market participants who benefit from the more efficient prices.

So the total value created is greater than the profit made by the arbitrageur. The total value created is the sum of the profit made by the arbitrageur and the value created for the market as a whole.

For the system to be sustainable, the total value created must exceed the energy cost incurred. This is a much weaker condition than requiring the profit made by the arbitrageur to exceed the energy cost.

In fact, in many cases, the total value created is much greater than the energy cost incurred, even if the profit made by the individual actor is small.

Part Six: The Future of Value Creation

The Limits of Value Creation

As we have established, there are fundamental limits to how much information can be created and processed. These limits are set by the laws of thermodynamics.

The maximum rate at which information can be created is:

$$\frac{dI}{dt} \leq \frac{\eta Q_{\max}}{k_B T \ln 2}$$

where $\eta$ is the efficiency of the system, $Q_{\max}$ is the maximum cooling capacity, $T$ is the temperature, and $k_B$ is Boltzmann’s constant.

As we approach these limits, the cost of creating additional information increases exponentially. At some point, the cost of creating additional information exceeds the value that can be created.

This is the fundamental limit to value creation. We cannot create value indefinitely by creating more and more information. There is a limit, and that limit is set by the laws of thermodynamics.

The Transition to Sustainable Value Creation

In the future, as we approach these limits, we will need to transition to a model of value creation that is more sustainable. This will require:

1. Focusing on high-value information: We should focus on creating information that has high value relative to its energy cost.

2. Improving efficiency: We should invest in improving the efficiency of information processing, approaching the theoretical limits set by Landauer’s Principle.

3. Transitioning to renewable energy: The energy required to create information should come from renewable sources that do not contribute to climate change.

4. Recognizing the limits: We should recognize that there are fundamental limits to how much information can be created, and we should design our systems to operate within these limits.

5. Creating value through coordination and trust: As the opportunities for value creation through arbitrage and prediction become more limited, we should focus on creating value through better coordination and trust.

Conclusion: Value as Information

We have explored the mechanism by which information creates value. Information reduces uncertainty. Reduced uncertainty enables better decisions. Better decisions lead to better outcomes. Better outcomes are value.

The value created by information is not limited by the energy cost of creating the information. Instead, the value created is determined by the size of the opportunity, the quality of the information, and the competitive environment.

For a system to be sustainable, the value created must exceed the energy cost incurred. This is the fundamental condition for sustainability.

As we build global networks and information systems, we must keep this condition in mind. We must create information that has high value relative to its energy cost. We must improve the efficiency of information processing. We must transition to renewable energy. And we must recognize the fundamental limits imposed by thermodynamics.

The future of value creation depends on our ability to create information efficiently and to use that information to make better decisions and create better outcomes.

This is how we create value.

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Written by Orkid Labs