Note: This is a chapter from my book "Satoshi" which you can get for free here: Satoshi by Stephen Parato
Money is quite the interesting phenomenon.
You see… Forms of exchange have evolved as humanity has evolved.
The communication of value. That’s how I like to look at it. Because money is so much more than a means of buying stuff. It’s a highly sophisticated form of communication.
Before I go off on a tangent, I want to explain the difference between money and currency. It’s honestly not that big of a deal. But if you want to be laser-precise with descriptions, understanding the subtle differences in terms can’t hurt.
Money is an intangible asset.
Currency is a tangible concept based on the intangible money.
Currency is what brings money to life. Currency is the means by which money manifests. For example, the idea of the US dollar – the collective agreement of value - is money. While a quarter is currency. With David Chaum’s Digicash, for example, the idea of Digicash – the collective agreement of value – is money. While the bits of data that determine ownership are the currency.
Again, the difference is very subtle. So instead of dwelling on it, I want to talk about one of my favorite subjects; the history of money.
You see, any medium of exchange can loosely be considered as money. Barter exists in the animal kingdom. A monkey trades a banana for sex. That’s barter.
Us humans started with barter. But, as we all know, the human mind likes to make things more and more complex – for better or worse. As tribes began to grow and more and more diverse activities occurred, barter became almost impossible to track.
Let’s say Big Joe Caveman brought back a moose that he hunted. With a group of 20 people, it’s feasible to ensure that everyone got a reasonable portion. But with a group of 100 people, keeping track becomes a nightmare. So when his tribe reached 100 people, Big Joe created a tally, a public ledger etched in stone to record who received their share of the hunt. This ensured that everyone would get their fair share and no one would go hungry.
Ledgers worked well when only a couple things needed to be tracked. But when tribes grew larger, and more and more objects and services started to be exchanged, ledgers wouldn’t cut it. Having a moose ledger, an egg ledger, a berry ledger, a carpenter’s ledger, a medicine man’s ledger and whatever other ledgers – would’ve been a huge headache to keep track of.
With several different commodities and services to exchange, ledgers and barter became a major pain in the ass. For barter to work, the other person needs to have exactly what you want and you have to have exactly what they want. If I had a goat and wanted a spear, I would need someone willing to sell a spear and wanting to buy a goat. That’s severely limiting.
So people eventually thought, “What if we have a universal medium of exchange, that equates to a certain value, that we can exchange anything for?”
This led humans to the bright idea of using an object, which represents something else, to be exchanged. For example, a shell could be worth a basket of berries, a pound of meat, and a bundle of wood. If this value was agreed upon by a community, a shell could be exchanged for anything else.
This was the beginning of currency.
Cultures throughout history have used all kinds of different objects as currency: cowrie shells, cacao beans, whale teeth, beads, coins.
And remember this. Money, being an agreed upon communication of value, is a STORY. Yes, a story. Whether it be shells, gold, US dollars or e-cash; they all only have value based on collective consensus… A co-created story.
However, some things inherently make for better “stories” than others. For money to be effective, it needs to have a few properties:
• Divisible - Can be divided into smaller units of value.
• Fungible - One unit is viewed as interchangeable with another.
• Portable - Individuals can carry it with them and transfer it to others.
• Durable - An item must be able to withstand being used repeatedly.
• Acceptable - Everyone must be able to use the money for transactions.
• Uniform - All versions of the same denomination must have the same purchasing power.
• Limited in Supply - The supply of money in circulation ensures values remain relatively constant.
These properties are phenomenal barometers of the legitimacy of a certain type of money (or story). The US dollar, for example, does not meet the “limited in supply” criteria. They keep printing more and more and more, leading to greater inflation. Gold on the other hand, meets all criteria. The only drawback is that it’s less divisible and portable than paper currency.
Digital cash though… It excels in all of those categories. Infinitely divisible, certainly fungible, easily portable, as durable as the digital world itself, definitely acceptable, uniform, and can be programmed to be limited in supply. If executed correctly, digital cash could combine the best aspects of gold with the best aspects of paper currency.
Now back to the story of money. Eventually, gold became the dominant medium of exchange. Why? Because it has all of the properties a good currency should have.
The only problem with gold though is that it’s heavy. So people eventually started storing gold in vaults. And someone came up with the idea to exchange paper notes representing the gold instead of the gold itself. This was way easier than transporting gold back and forth.
There were some groups who controlled these vaults where people stored their gold. And soon, these groups realized that they could actually issue more paper notes than gold they had stored. Unless everyone wanted their gold back at once, no one would even know.
This was a dangerous step: A central institution that can create a potentially infinite amount of money themselves.
Paper currencies are a claim check on wealth, not the wealth itself. It’s like the receipt you get from the dry cleaners to claim your clothing. That receipt is not your clothing, but a claim check on your clothing.
Paper currency began to spread far and wide. And paper currency was backed by gold, until 1973, when the US took the US Dollar off of the gold standard.
This was another dangerous step. Money no longer was a claim check on gold at all. It was mere paper that only held value because the government said so.
The government began printing trillions of dollars. Banks could loan 10 times as much money as they had through fractional reserve lending. And unlimited supply inherently diminishes the value of something.
This is a larger-scale version of centralized institutions creating an unlimited supply of currency. It doesn’t take a genius to see the potential for totalitarian control.
But there’s something new on the horizon!
We went from bartering, to objects like shells, to gold, to paper representing gold, to paper based on belief in government, and the next wave is digital.
There were a lot of predecessors to digital currency. Charga-plates were plates that were stamped with every transaction. Airline miles have basically been digital currencies since the 1930’s. And credit cards came about in the 1950’s. Credit cards though, are just digitized representations of the paper dollars.
Here’s the thing though. All of these technologies were created in a pre-internet world. Though we can draw from some aspects, they’re not built for a digitally interconnected world.
Centralized institutions and borders create unnecessary barriers in a world where I can send an email to someone in China in 3 seconds. Why can’t money move like email? Why does it have to go through 3 banks and get cleared by whatever other authoritarian party to be sent from me to my friend in China?
For a digitally interconnected world, we need digital money.
Peer to peer… Me to you. We have the technology to do this.
We no longer need middle men, authority figures standing as a “trusted authority” between us.
In the middle ages, a king would provide protection. So it made more sense than being vulnerable on the countryside alone.
Before the printing press, the only place to get information was through the church.
Before the internet, information was still centralized. People would need to get “the facts” from the television, newspaper or encyclopedias – which are all centralized institutions that control the flow of knowledge.
For a long time, banks actually made people’s lives easier when it came to money. But now, they’re standing in the way of our evolution.
We no longer need authority figures. Everything is becoming decentralized.
Alternative currencies are nothing new. People have turned to alternative currencies in times of crisis and uncertainty. But now we have the underlying technology to create truly useful digital currencies as alternatives.
I actually write a blog all about alternative currencies, as it’s a subject that endlessly fascinates me.
A world of digital alternative currencies, free of central control and immune to borders. That’s where things are inevitably heading.
So it’s basically ride this wave or be rendered irrelevant.
Surf’s up.
Note: This is a chapter from my book "Satoshi" which you can get for free here: Satoshi by Stephen Parato