Blockonomics: real world value in a virtual environment

Driving Currency Value

Reach into your wallet or purse if it’s near you right now, you probably have at least a couple dollars of paper money somewhere in there. Some of us will know without even looking relatively how much cash we have, some won’t. Others may have forgotten the contents of theirs and be pleasantly surprised to find a couple dollars. If you have done so and you are now holding a bill in your hands, and even if you aren’t, take a second to ponder what gives that bill value. There certainly isn’t any intrinsic value in the little green pieces of paper-cotton blend millions of people exchange every day, and just for arguments sake let's say you aren’t holding a bill of any historical value. So what gives our currency its value? It comes down to one thing: belief.

Now here I will expect some argument, you could say that the government makes a guarantee of the value of your currency, in fact the government only guarantees that you can pay your taxes in said currency. You might even think that gold reserves still back our currency, which if you do I’m sorry to be the bearer of bad news, that hasn’t been the case since Nixon. Truly the only thing that gives our dollars, or any fiat currency, value is the faith in the government issuing it. Remove the faith in the government and you see ridiculous inflation and devaluation (see Venezuela).

Faith in Institutions

The faith that we have in our Federal Reserve is bi-fold: First we trust that our currency is, and will stay, sufficiently scarce. Second we trust that our currency is durable. Put more basely: we trust that our currency is secure and that we will be allowed to use it as we see fit within the boundaries of legality.

US dollar scarcity comes from a function of the Federal Reserve's open market actions, they affect demand and supply of money by changing the interest rate and printing bills in whatever quantity they see fit in order to raise or lower inflation rates. If the problem with a small group of people (The Fed) having such broad control over the value of our dollar fails to strike you please take a couple of minutes to learn about what happened in Germany in the 1920's. Runaway inflation devalued the German Mark so much that it was cheaper to burn notes than to buy firewood with them. If you still have a strong enough belief in the moral compass of our fed I don’t blame you, faith in people and institutions is a strong character trait.

Let’s move on to the second point, durability. Particularly with respect to an awesome new bill introduced to the senate in May, S.1241, or the “Combating Money Laundering, Terrorist Financing, and Counterfeiting Act of 2017”. What a great name, nobody likes money laundering, terrorists, or counterfeiting! Why would you want to oppose this bill that will clearly make you and our country safer? Except one thing, this bill attempts to extend the already broad reaching civil forfeiture laws present in our country. The New Yorker has a great piece that I would highly recommend reading on the topic. For our purposes it will suffice it to say that civil forfeiture requires neither proven guilt nor charges of wrongdoing.

In very broad strokes S.1241 defines unreported assets of over $10,000 as illegal to possess. Say you happen to have pulled $10,000 out of the bank to purchase a car, if you are pulled over on your way to buy that car that money could be taken from you along with money in other accounts you own. Or say you are attempting to travel internationally and happen to own more than $10,000 in cryptocurrencies, that could be ‘seized’ (here demonstrating a gross misunderstanding of cryptocurrencies and a collision of the old and new worlds). Neither of these sound too bad because you ‘have nothing to hide’? Check out section 2 of S.1241, it defines blank checks attached to accounts with value higher than $10,000 as potentially being used for smuggling cash.

All of these conflating points get at one point: your dollars aren’t as durable as you may perceive them to be.

Do Cryptocurrencies Stand Up?

Many people have dubious faith in cryptocurrencies, even amongst investors and speculators within the tech there is still a large amount of resistance to the concept that value can be transacted without a central source guaranteeing its value. But as has been (hopefully) communicated through this writing, the belief in a ‘guarantee’ is a falsity. So do cryptocurrencies stand up to our definition of a currency? In some cases no, but in many cases yes. Bitcoin for example has a capped supply of 21 million coins, that is, there will only ever be 21 million bitcoins. Bitcoin also has a defined policy for how the currency is created with an algorithmically defined supply policy, fulfilling our requirements of scarcity. Bitcoin is also incredibly durable. You can store your account information in many different ways and in many different places at the same time. Keystore’s, hardware wallets, handwritten on paper, and even in your head. As long as you know where it is stored it is yours. Unlike an accounting ledger the ledger of any blockchain is stored in thousands of different places at once, so unless someone could access and change the same piece of data over and over again (costing them a prohibitive amount of resources) in many different places, your value is your value.

How are they different

While nearly every cryptocurrency is durable not all fulfill the scarcity component we have typically required for a solid currency. Even while its value continues to climb, currencies like ether have somewhat undefined economic policies. So why is ether valuable? Use cases. Ether is the gas that runs the ethereum network. A network upon which new uses and techs are being built every day. Golem (GNT) is a platform designed to decentralize supercomputing, it will use its currency as the gas to run these computations, STORJ is decentralized data storage and will be burned for every transaction on the network. Some coins, like STORJ have scarcity, durability, and use cases, providing large future growth potential.

Social Scalability and Blockchain Economies

Recently I was asked for what reasons we wouldn’t want to have a singular currency to run every market. After some thinking on the issue I came to one example I believe succinctly epitomizes the issue, The European Union. While the overarching political and economic goals of the EU are virtuous the actual mechanics of the system are somewhat broken. Politicians of larger member states have stronger pull in the system and are expected to work for their constituents, this leaves smaller member states in the dust especially when they have an economy that can’t keep up with the larger ones. The strength of larger members’ economies reduces the purchasing power of the smaller states, forcing cutbacks, making their goods and services cheaper, and eventually squeezing every last drop of value out of the states economy.

Until our modern advances in technology however, the idea of having individual currencies for different purposes was incredibly mentally taxing. For example, use of individual currencies parallels the workings of a barter economy. In a barter economy with only 4 goods it would be pretty easy to keep track of the relationship of each different item to one another. But scale up to barter economy with 100 goods and suddenly you must track 4,950 different relationships! Certainly not feasible in any way. Enter the advent of modern technologies, AI and defined, programmatic operation of currencies will allow the relationships to easily be defined in an algorithmic manner.

This is a huge point of strength in cryptocurrencies, they can help us minimize the cognitive burdens surrounding our day to day transactions. Your thought processes surrounding monthly memberships, utility payments, even corner store purchases will be minimized by microeconomic systems designed around each type of transaction. Minimization of cognitive burden is how we as a species are able to put less and less thought into mundane tasks and pursue new and exciting frontiers, our ability to minimize cognitive burden is truly what separates us from all other life forms.

Dunbar's Number

How many people do you think you currently maintain relationships with? Anthropologist Robin Dunbar posited in the early 1990’s that humans can only maintain stable relationships with a maximum of 150 people at any given time. Whether this number is exact or not is unimportant, what is important is that there is a limit to the number of people with whom we can interact in a meaningful way. This number is the reason that central institutions have grown fantastically in the last couple of centuries, instead of only transacting with people you trust you can find people to transact with based on a common point of trust. These common points of trust; banks, exchanges, etc. have huge influence in our society and as such one would hope them to actually be the trustworthy intermediaries we expect them to be.

Events in recent times however have proven otherwise. The financial crash of 2008 took place due to casino banking practices amongst some of our largest banking institutions. These practices would not have been possible if the Glass-Steagall component of the U.S. banking act of 1933 had not been repealed in 1999. These banks made plays in many dubious and junk grade investments and even at times bet against the very products they were selling to their customers. After all this was said and done and the banks had lost vast sums of their customers money who was expected to bail them out but the American taxpayer, the very person whose money was gambled away in the first place.

So how durable is your dollar really?

For further discussion on currency and its origins in our society I encourage you to read Unenumerated. Unenumerated is a blog written by an incredibly smart man named Nick Szabo, one of the premier thinkers on blockchain and a true polymath.

*Full disclosure I have positions in STORJ and BTC