Blockchain revolution: Money and Credit

in busy •  last year 

The main thesis of this paper is that the current financial system steers (and also throttles) development by controlling the "credit-money" (fiat money), the only remaining money variety. Bitcoin and cryptocurrencies challenge the monopoly of fiat money thus enabling a new, complementary economy. They are in this respect what the old cowry shells were to the coins bearing the head of the King or Emperor.

Trade

Trade is essential to the development of human society. Trade allows division of labor and specialization. Specializing (doing the same thing over and over again) provides confort because it ... saves people from having to understand, learn and adapt to new stuff.

Understanding, thinking, learning are hard and use up a lot of energy. Humans prefer to spare energy by learning as little as they can get away with. So they observe what most people around lack or seem not to master very well, get hold of it or learn it and then specialize. This allows them to obtain or produce a lot more of whatever stuff they've learned how to obtain than they need or can use themselves.

By specializing they also become better at what they do and gradually manage to increase the quantity they are producing and, if the right market signals are in place, the quality of their production.

They rely on trade to exchange the surplus against everything else that they need.

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Cowry shells such as this one were among the first items to be used as "units of account", "medium of exchange" and "store of value", i.e. "money"

A short history of Money and Credit

Trade is lubricated through two complementary and somewhat overlapping mechanisms: Money and Credit. In the next chapter, I'm going to explore how money and credit intervene to facilitate trade.

Money versus Credit

Consider the following situations, in all of which a hypothetical "Alice" needs something, call it a "gizmo", that a hypothetical "Bob" has for sale and asks a price for:

1.Alice tells Bob she cannot pay the price now but will pay later. Bob doesn't trust Alice enough to accept the deal. The deal falls through – Alice's need remains unsatisfied, Bob still needs to find a buyer for his "gizmo". No trade, a serious brake to specialization, not a happy outcome.

2.Alice offers Bob to pay with some specific sea shells. Bob knows of no trader who will accept those shells as payment when it will be his turn to seek to satisfy his needs. Bob refuses so the deal falls through. Same consequences as above.

A_print_from_1845_shows_cowry_shells_being_used_as_money_by_an_Arab_trader.jpg
Arab trader uses cowry shells - print from 1845

3.Alice offers Bob to pay with some specific shells (like in the picture above) but now Bob has learned that some traders in an inland community, selling things he needs, value those specific shells (possibly because they can be used to create fashionable necklaces for their wives). Alice and Bob however cannot agree on a number of sea shells that should have the same value as Bob's gizmo. For Alice, Bob's gizmo is worth 10 shells. But Bob would not part with the gizmo for less than 100 shells. So again no deal is done.

4.Same as 3. but Alice and Bob agree on a commonly accepted price, say 50 shells. The sea shells have thus taken the role of "unit of account" and "medium of exchange". If Alice regularly needs to buy gizmos and other things that Bob and maybe others regularly sell, then next time Alice finds those specific shells she will carefully collect and keep them for later, as a "store of value". The sea shells have become currency, or money.

Note that in this scenario Bob doesn't need to trust Alice personally. He only needs to trust the shells that he can count and inspect in detail, and his own knowledge that the shells will indeed be accepted further down in a subsequent trade. Thus as long as Alice has "currency", Bob doesn't need to "credit" Alice, he trusts ("gives credit to" if you will) the ... Ocean Sea who spawns those shells and makes them scarce, but not too scarce. He trusts "the currency system" he implicitly accepts to be part of.

The possibility to specialize that this situation creates is in turn the engine driving this outcome. People live so much better when they can specialize and then trade, that they end up reaching consensus on something (even sea shells) to use as

  • unit of account
  • medium of exchange
  • store of value

5.The second time around, Alice hasn't managed to harvest more than 40 shells. She comes to see Bob for a new gizmo. She offers Bob 40 shells and says she'll come back the next day with 10 more shells. Thus she asks for credit. Maybe Bob takes her word for it, or maybe he asks for 11 or 12 shells the next day. Maybe he writes down (if this scene happens in a place and time where writing is an option) Alice's debt.

Note there are "credit theories of money" such as Alfred Mitchell-Ines's but in this example it appears as a stretch to equate "money" (the sea shells) with credit. On the contrary it seems more useful to diferentiate between the two concepts rather than lump them together.

6.Same as 4. above but with a specific quantity of gold dust that Alice carries around in a small leather bag, and a balance. However, Alice doesn't trust Bob's balance while Bob doesn't trust the purity of Alice's gold dust (what if she mixed in some copper and silver dust so finely grained that he cannot distinguish?) No deal goes through because of this shared mistrust. We see here that gold is more trouble to be used as currency than ... sea shells, which might sound a bit paradoxical.

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source

7.Same as 4. but instead of gold dust Alice offers Bob a coin purportedly made of solid gold. The coin is emblazoned with the figure of the Emperor that everybody knows, that is the "source of trust". The head of the Emperor on the coin lends additional needed trust, Bob has already seen those coins and knows they are indeed made of solid gold (nothing fishy inside) and they have a pre-agreed weight so no need for his balance. Bob accepts the coin and hands Alice the gizmo. We witness the usage of classical currency. In this example Bob implicitly "trusts" or "gives credit" to the Emperor that indeed the gold coin holds a certain amount of pure gold.

Note that he doesn't need to trust or credit Alice. She might have stolen the coin as far as Bob is concerned. "Money has no smell" it is said, once it's in Bob's pocket, it is Bob's (bearer instrument). But if Bob goes to trade in a country which hates the Emperor, then he might be better off melting the coin and casting one or more gold "crumbs" that he could use for trade based on the intrinsic value of gold. Note that he might thus end-up in a situation similar to that in 6. We see here that the role of the coin minting and emblazoning is quite important

8.Fast forward and Alice offers Bob a piece of paper on which there is the head of the Emperor, or the Queen, or the President that everybody knows and the words "I promise to pay to the bearer on demand ..."

Promise-To-Pay-300x200.jpg

With this type of money, there is no intrinsic value like with the gold coin. The only source of value is the image and the words printed on that paper. Here it would indeed be useful to point out the similarity with credit: by accepting such a piece of paper in exchange for his gizmo, Bob doesn't need to trust Alice, he needs to trust the Emperor (Queen / President) who printed that paper, to trust that other people will do the same (and also to trust that the paper is genuine and not a forgery).

The Power of Money

In today's world, this latter type of "credit-money" (often called fiat money) is the only type that remains. The problem here is with the "only" - as so often, monopolies put inordinate, absolute power in one concept / entity / person / system and "absolute power corrupts absolutely".

Thus today's money (of the "credit" variety), embodied by fiat, obnubilates and warps with its power the mind of people, large swathes of which are obsessed with the stuff.

Today's system of fiat money in turn allows those who control it to selectively disrupt trade for whoever antagonizes them. People who control the system, either by holding large amounts of money or by being in key positions to influence the money flows can, and have abused their power more than once at various levels. It is the uncontested-monopoly nature of the "credit-money" system that opens those avenues for abuse.

Note that even the Orange-outan has understood that - with his guts - and seems hell bent on perpetrating the ultimate abuse of power - at sovereign state level.

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A parallel money system

The worldwide monetary system has morphed into a faceless "Emperor" which guarantees to a certain extent selected fiat money. Until today, the IT systems have, like a powerful Praetorian Guard, served the existing "Emperor", the existing monetary system, making it more efficient, more robust and generally increasing its power. Today, the lowly cowry shells cannot hold their own and offer an alternative to our one and only, monopolistic fiat money system.

Yet the "Ocean Sea" that spawns the cowry shells has been reincarnated today as ... the Internet. On its shoulders, the blockchain software pattern and its applications: Bitcoin, other cryptocurrencies, more and more diversified systems such as Steemit, have emerged as powerful "traitors" against a corrupt Emperor, a bit like the character Maximus Decimus Meridius from the classic "Gladiator" movie.

masculinidade-699x342.jpgsource

The cyptocurrencies and the finely-grained crypto-economies they will gradually enable are an insidious threat to the monopolistic position of the fiat monetary system and to the hegemonic position enjoyed by the minters of credit-money. They probably realize this and would rather see their challengers dead. But just like Commodus, they do not quite dare antagonize the plebs.

Emperor-Commodus-–-Gladiator-best-Villains-of-all-time.jpg
source

Conclusion

Blockchain software, from generic cryptocurrencies to dedicated systems for self-sovereign identity to elaborate micro-economic systems such as Steemit will continue to evolve and develop naturally, the intensity of their challenge to the existing hierarchy of power only increasing. The pushbacks will come, sooner or later, at several levels. It would be pretentious to claim that I know how this challenge will play out but I trust it will help us and our society progress and live better, happier lives.

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The fact that money is a concept is often forgotten. Humanity has a tendency of finding a way to improve upon old ideas and manifest them better and better. The same is with money, you clearly pointed out a history in which the same concept of money, store of value, unit of account and medium of exchange, has taken many forms and cryptocurrencies is just the newest one.

The part I really like about the post is that you pointed out the current structure of money is controlled and used for control, I would love to read more on these mechanisms from your point of view.

The internet came as a blessing and I am very grateful we are living in the digital era. We were not able to construct human structures of large-scale trust and consensus, but we were able to build digital ones. What I really find fascinating about blockchain technology is something so discrete that is not apparent yet. Before blockchain, consensus was one of the scarcest resources in human history, but now we have abundant digital consensus, all we need is to build around it. This is a profound game changer, hopefully for the best :)

I really am glad to have found you in the steem ecosystem, thank you for sharing pertinent and coherent information with us!

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Indeed - trust and consensus are the scarcest and most precious resources of our societies. With trust and consensus we produce pure beauty

n.dame-amiens.jpg

With mistrust and strife, sheer ugliness

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Good article!

Nice to read about the evolution of currencies and basic pattern and their advantages and inconvenients.

We will see the future of cryptos, but as long as people can't buy their coffee, purchase their food at the grocery or buy clothes online, quite easily, the adoption rate will stay low.

Ex Nihilo money creation

A point that would be interesting to elaborate more is the fact that today and since a while, money is created from nothing.

It started with "orfèvres" (silversmiths), the first bankers, that were storing good for rich traders or boat captains once they trade their good. They started a kind of paper money that was well recognized in many aera and is wass easier to carry than a pocket of gold.

Then at one point they started lending more that what they have in their big safes as no one was asking for their gold at the same time. That way they can charge more fees and interest from borrowers while lenders weren't aware of the trick and weren't really affected. ANd over time bankers become really rich from interest on money they don't really have. Although as a system it was working fine as long as people aren't affraid that their money can't be obtained again.

Today's bank works on the same paradigm, with of course some regulation, but in most occidental countries, when you lend 1000 to the bank, the bank can lend 1000 to 10 new borrowers.

That creation Ex-Nihilo, force the society to continously grow as most of the creationof new ressources goes to the bankers via interest. The new thiefs guild of modern world.

One great initiative I support ine Switzerland (one of the last real democracy in this world) in the initiative Monnaie Pleine. It's goal is to bring back fiat money soveriegnty to a country related entity tied to the goods of people instead of leaving that power in the hand of commercial banks.

Here's my latest article on it that have the link on all previous ones.
Monnaie Pleine : LA question essentielle

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There are many angles under which one can look at money. But step back a little and note that the mere fact of us putting money in the middle and then looking at it under several angles is a bit worrying: we are currently spending a lot of our time thinking and discussing about money, we are enthralled, almost obsessed with it. Monnaie Pleine or monnaie vide, who cares ? Why does it matter ? Is it so important ? Why it's so important that we have a "monnaie pleine" ? Take anything else, say ... food for instance! We do think and talk about food in relationship with junk food versus healthy food and the obesity epidemics but is the time and energy spent thinking and talking about food even comparable to the time we spend thinking about money ?

The point of my article is that blockchain enables the comoditization of money creation. Yes, in a sense it might look to you as the very opposite of the "monnaie pleine". Instead of replacing our current fake money - that pretends to be "plein" but is actually empty, "vide" - with an possible utopian "full money", why not complement it with hundreds if not thousands of other "empty money" ? Stop the hypocrisy and the pretense ! There is no full money and the past has taught us that our attempt to create sound money is doomed. Let's step back and take a different tack: accept that money is only "pretend money", banalize money!

Instead of attempting (in vain) to pry the immense power of creating money from the grasping claws of the banks, we have a chance to suck most of the power out of the money creation !

Sounds paradoxal but it would help us cure our obsession and focus better of what really matters: trust !

Because in the end distrust is the root of all money - as Nobuhiro Kiyotaki and John Moore put it in their famous conference paper (catchingly titled) "Evil is the root of all money"

The most important function of money going forward is to serve as a fertile soil for growing trust between people - to allow them to make each other credible promises. Blockchain can do that, let's stop worshipping money

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Je vais répondre en français ;)

Vous apportez de bons points, il est intéressant de prendre plus de recul et de changer les paradigmes ou au moins nos angles de vues avant d'envisager ce qui pourrait être mieux pour notre système d'échange en société.

Au final le Dieu argent n'est qu'un concept inventé par l'homme et ses prêtres financiers veulent vaincre avec leur croisade et en prêchant la bonne parole...

J'ai fait un bon article sur la vague d'obésité et les problèmes de santé, je te laisse lire, mais j'en ferai un 2e plus sur l'ensemble des poisons qui attaques nos organismes (pollutions, vaccins, OGMs, pesticides, additifs alimentaires, sucre raffinés, etc.) Merci pour l'idée.
Vague d'obésité déferlant sur le monde

En effet le pouvoir ne devrait pas être dans l'argent, mais dans les choses concrètes, les relations, l'accomplissement de soit, nos actions, etc.

Par contre la culture de la célébrité, de la réputation :a tout prix et de qui a le plus de like est aussi dangereuse... et addictive.

Bonne réflexion.

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Follow-up (rather than editing previous comment). You might want to check out this article by @robertgenito

This right here my new friend, is the most bullish case for crypto I've read in the longest of times. I'm finding myself agreeing so hard I'm about to break the enter key on this keyboard.

We are basically returning to the broken down idea of "coinciding wants" as the paper describes and eliminating the points of possible corruption.

I'm going to send this to a couple of friends, they will get a kick out of the paper.

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thank you, thank you !

Correct!
Excellent article. FIAT vs Crypto Crypto has far greater chance of survival and equity for monetary systems.
Thx for a great read
Followed

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thank you!

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Welcome

i strongly believe blockchain will revolutionize the whole finance and trading system. its just matter of time. within 10-30 yrs, the whole world
will adopt the cryptocurrency.

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I would venture: cryptocurrencieS (plural, not just one), but indeed, so do I

It would be really cool to travel back in time with some diving gear, imagine we could be kings collecting "Cowry shells"...

I personally just really want crypto to be the thing that fixes everything for all of us...

Sometimes it feels almost like a strange religion where https://coinmarketcap.com is the place where we go to worship, everyone has their own "saint"/crypto and we are all "praying", some people just want a "Lambo", other people want a better more fair world and maybe also a Lambo, he he ... 😋

Thanks again Sorin, great article, I love the "thumbs up"!

thanks for the valuable information. looking forward for more information. we need more ppl like you. keep up the good work

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thank you!

agreed!
I'm selling http://satoshicash.io if anyone is interested

cool post upvoted please can you do the same for me thanks

@trufflepig <- let's try again :-D

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Hmm, that's odd...

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Somehow the api.steem.com node crashed after him voting on your post, so the comment never made it through. Sorry

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yes, it was indeed a bit weird, I had noticed trufflepig had voted but not commented ... whereas I was mostly interested in the comment ... less in the vote :-)

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Huh? Seems like I already voted on this post, thanks for calling anyway!