Money created by debt vs. money created by work: how a bitcoin is born
Which is safer: U.S. dollars or a cryptocurrency like Steem or Bitcoin? When determining a currency's various risks and weaknesses, people typically look at a physical dollar in the hand, and a Bitcoin on the computer screen, and see the physical dollar as the safer option.
But those who understand the differences between fiat and crypto currencies know two things "typical" people don't. The first is that, here in the U.S., only about 10 percent of our economy's currency exists in the form of physical bills and coins. That means 90% of our currency exists in a computer ledger, just as cryptocurrencies do.
The second is even more mind blowing: American dollars are created by debt. In stark contrast, cryptocurrencies are created by work. If there was ever a scam at work in the world of currencies, creating new dollars out of debt would seem pretty high on my list. Mining Bitcoin or curating Steem? Not so much.
Money created by debt
In most countries, money creation is actually called "credit creation." Here in the U.S., the Federal Reserve creates a new dollar by adding it to a digital ledger - a process not terribly different from the way cryptocurrencies are created. The Fed then injects this new dollar into the economy in one of two (admittedly oversimplified) ways:
- The Fed lends this new dollar to a bank, or
- The Fed uses this new dollar to purchase a financial "asset" like a bond
The reason money is created by the Fed is to encourage new debt... to them. Under No. 1, the bank (and possibly you, their customer) owes the Fed a debt. Under No. 2, the issuer of the bond owes the Fed debt. Of course, it's much more complicated than this simple explanation, but the details are no less scandalous.
Money created by work
But while the Federal Reserve creates currency as a unit of debt, blockchain currency is created as units of work.
Each unit of a cryptocurrency is created by people who are “mining” for them, just as new money used to be created when someone mined gold, took their nugget down to the bank, and received a bank note – a receipt showing they just deposited that much gold into their deposit box. This receipt from the bank could then be traded for goods and services, which is essentially how paper money began. Each new receipt penned at the bank and given to the gold miner was a new dollar entering the economy because a new asset (a gold nugget) had been removed from the earth and had then entered into the economy.
A currency like Bitcoin is also mined into existence, but not with picks. A person mines Bitcoin by offering their computer's processing power to facilitate Bitcoin transactions. This is a service, a job that needs to be done, and Bitcoin will create a new unit of currency to pay this worker. That's how new bitcoin is injected into the economy, not as debt, but as payment for work.
The difference is striking. And when "typical" people start to realize what the differences actually are, they'll begin to see the Federal Reserve and its system of debt as the real scam.
Nice, if you are interested to know about my experience so far as a Steem miner, let me know! Very interesting times we live in. I very much look forward to the (our) future.
All value is based on a persons perception of it. If something is deemed worthless by enough people then its value will be low, if it is deemed valuable by enough then it will be. In Roman times Peridot was prized as being incredibly valuable, not so much now. Yet before De Beers began campaigning and marketing Diamond rings Diamonds were almost worthless, now Diamonds are incredibly valuable.
Create a shift change in enough peoples mind and anything can become valuable.
Good work. I did a similar post a while back and will probably revisit it in the near future. Personally, I consider STEEM to be a way better option that USD.
It was actually grain, and clay tablets. And before that it was seashells.
The only thing that really matters is if the seller believes the currency has value when you want to buy something.
Grain, seashells, even salt were all used as currency, yes, but the bank receipt was the first form of paper money.
But the point is the only thing that really matters is that people see it as valuable.
Great article. Was happy to share this on Twitter. Stephen.