What the hell *is* currency? I have no idea.steemCreated with Sketch.

in cryptocurrency •  2 years ago 

Where does money come from? I mean, not only various cryptocurrencies, but money, in general? In both senses of the question - "how did the first bit of currency come online", but also "how did currency come into use?"

The story we're all told is that we start with the barter system. Some farmer wants to sell his 3 ducks and can normally exchange them for 2 bushels of wheat, or something like that. Eventually we get to the point where he wants something more portable, so he instead sells his ducks for 5 OldCoins - physical currency. Which he can later redeem for his 2 bushels of wheat.

Early Currency

That's a decent start, but it still doesn't seem complete. Here's Wikipedia's article about Early Currency. (Of course, Wikipedia, Caveat Lector, blah blah. But still, a jumping off point)

It sounds to me like it first started with one, large trading source. A centralized place. You could go there and give them your ducks, and then they give you your 5 OldCoins. The Wikipedia article refers to the first currency as a "receipt." And I guess that's one way to look at it. But really, what you're talking about here is debt.

Your receipt is something that indicates that they owe you something - at worst, you should be able to get your ducks back (or maybe a little less, due to buy/sell spread? And let's not get into duck fractions...). That sounds like debt to me. Maybe it goes the other way; since they had your ducks and were able to 'use' them they now pay you back more ducks than you started with? I have no clue.

Commodities

Later, again according to that article, we get into using commodities - silver, gold, copper - and making coins out for them. But really, you're mostly trading for the commodity. Instead of translating your 3 ducks into 5 OldCoins, you're now translating your 3 ducks into X dinguses of Silver. It's really still just barter. It's just that we've now found some metals that everyone generally agrees roughly to what the value is, so many can use those metals for trade. Turning them into coins is just a shorthand for determining how much actual valuable metal is in them.

Modern times

One of the questions I've seen asked - and never really seen answered very well - is how does a US dollar get into circulation? Here's a stab at an answer from every Cryptocurrency-nerd's favorite institution - the Federal Reserve.

And, again, I still think it's just a signifier of debt. You go to the ATM and remove cash. How did that cash get there? The bank put it there. How did the bank get it? From Federal Reserve Banks. They have numbers on-hand for 'how much money do we have?' and can debit that amount and replace it with cash, based on what they need. They also borrow from each other. Why? Because you can charge interest for doing it. It's the only reason that any borrowing ever happens. Loaning money is an accelerator for the economy.

So, effectively, we're still dealing with debt. Debt manages to make money show up where it wasn't before.

I think that Early Currency example is probably the right place to focus on.

Debt As Currency example

Magic'ed from a real commodity (Method 'one')

So the Early currency example is probably the cleanest way to instantiate our debt. George go to Ducks 'R' Us, and he sells them 3 ducks and now has 5 florps. He buys something from Susan. George does some kind of fine-arts 'work' on the stuff he bought, and sells it for 7 florps. He can go and buy back his ducks for 6 florps (buy/sell spread maybe?) and has 1 florp profit.

This example seems pretty sensible. This guy, George, pretty much blinked-into-existence a florp. Though, really he took it from the anonymous purchaser of his fine art.

Magic'ed from nothing (Method 'two')

I want to instantiate a currency up from nothing. So here's how I start. I lend 5 florps to George, but he has to pay me back 6 in a month; that's our deal. He takes his 5 florps and buys something from Susan. Susan now has 5 florps, and George has 6 florps of debt. George does work with the stuff he bought from Susan. He sells his work product to someone else for 7 florps. He can pay back his debt of 6 florps and now has one florp for his savings.

I think we just started from 0 and now there's 1 'profit' florp that's circulating around. The bank - Ducks 'R' Us - they made 1 florp in the deal too. So they're happy.

Cryptocurrency

Cryptocurrency is definitely the second example, if any. We magic'ed the thing into existence. There certainly is the 'mining' part, which is similar to the Commodity example above - 'mining' might be named after mining for gold or silver or whatever? But in that example what's critical is that the 5 florps I lent out never existed before. And that other people are willing to take those florps and assuming they have some kind of value.

Also sounds a lot like Fiat currency, doesn't it? These relatively valueless pieces of paper have value because everyone thinks they have value. Although I consider myself a very harsh cryptocurrency skeptic, I think people who argue "But Cryptocurrency is FAKE!!!!" don't understand that - ultimately - so is fiat currency. The one big difference is that the US IRS will let me pay my taxes to them in Florps. And so that means it has value in this government system.

Inflation

Another thing to note - as more and more currency gets into the world - whether by the first or second example - the rate at which more currency gets generated goes up. When George is working at the 5-florp level, he can clear 1 florp in profit (and 'instantiate it out of nothing') - but when he's working at the 500-florp level, he can now clear 100 florps in profit.

That's a positive rate of inflation, and I think it's fundamental to currency, and fundamental to lending. And I'm arguing that lending is fundamental to creation of business and creation of value. You can generate some value without it, but you can generate a hell of a lot more value with it.

Bitcoin doesn't do this. As we eventually get to the point where people are lending Bitcoin - and it's definitely happening - the number of 'fake' bitcoins that have been magic'ed into existence grows exponentially. But Bitcoins are only mined in an algorithm that produces fewer and fewer, every year. Eventually getting down to zero.

So, eventually - we get a run on the banks, and they will all collapse. Exponential growth (e^x) will demolish even polynomial growth (x^2), much less an exponentially backing-off growth curve. (The Bitcoin algorithm generates half-as-many coins every couple of years, until it hits zero after a certain number of decades).

Government

I think another interesting point to look at is the involvement of government. The only way currency - things worth less than the paper (or wood) they're printed on - keeps value is with the involvement of government. The Early Currency article talks about how the system worked well until various wars and conflicts managed to destroy the system, setting everything back. And I argued that the good ole' US Dollar has value because the US Government is interested in keeping it that way, and I can pay them my taxes using it.

So maybe Fiat Currency needs government, and government needs fiat currency? I don't know.

Invariants

What if a lot of the things I'm trying to hold on to as 'absolute must haves' aren't? What if debt is really bad? What if inflation is really bad? What if deflating currencies is really good? What if, just because things have 'always been done this way' - that doesn't mean we have to keep doing them that way?

I have no idea. As more value is produced in the world, it 'feels' like there should be more and more currency. And as new value is created from new levels of productivity - a worker in some robot suit - they should get more money for doing the same job as the worker without the robot suit. Right? Maybe? Maybe not? If they got the same amount, that's deflation. My robot-suit worker can make 10 times the widgets that my non-robot-suit worker could make. What if they made the same money anyways?

Cryptocurrency (Redux)

So from what I've worked out here, let's try and make a theoretical currency using Method One instead. So let's say, instead of our cryptocurrency doing dumb pointless math (Ahem BITCOIN), we actually do useful math. Think "SETI @Home" or something like that. Someone is willing to pay for the results of this useful math. You can do work and get credits, and those credits can be redeemed for fiat that has been paid. As more and more people participate, the amount of fiat you get back decreases. At some point, people might realize that they're getting paid less than the power their computers use - they drop off. Some people might realize they have technological advantages that allow them to keep competing.

(I'm just going to magic-ly 'assume' that you somehow can't cheat the system, but obviously that has to be something that gets covered. And could easily be a fatal flaw).

Of course, now our tokens really mean something. They're chunks of fiat that various people or places paid for. Some might redeem them immediately, but some might decide to just spend them directly - perhaps for various other services that can be performed on the big giant chain of value we have. As more value gets created, more tokens get generated. As the work gets done, the currency, naturally, inflates.

Maybe that's something I might be able to more easily get behind? Although, I wouldn't be surprised if I just somehow managed to describe Etherium, or some other already-existing currency....Hah!

Conclusions...

Uh, I dunno. I can't tell if I feel like I understand what currency is, how it works, why it works, or why it has value more than I did before. I mostly just wanted to think through some disjointed semi-economic thoughts I had about what currency is and how it's existed in the past. I don't think I'm necessarily on the cusp of understanding anything better than I did before.

I'm not 100% sure I believe the "currency=debt" idea, but the idea that buy/sell spreads mirror interest rates is intriguing. And as a guy who likes capitalism, but also likes to criticize it, maybe there's something in there. What would happen if you built an economic system where those spreads were always zero? Does debt go away? Does growth stop? Why would you run Ducks 'R' Us if you couldn't make any money at it?

Anyways, just trying to bend my thinking a little, and I think I at least accomplished that goal for myself. Maybe it does the same for you, or maybe some fancy PhD in economics can school me about how I'm thinking about this all wrong. Happy to hear about it, either way.

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