Inspiration
This article was inspired from publications about Blockchain by Daniel Jeffries and Vinay Gupta that led me down the money rabbit hole where I found tweets by Naval Ravikant, research by Prof Steve Keen and the wonderful positive money website. Thank you all for inspiration and great insights.
If you are into crypto and blockchain check out Daniel Jeffries’ DecStack, the Virtual Co-Working Spot for CryptoCurrency and Decentralized App Projects
BTW. It’s absolutely amazing and awesome that we live in a world where you can find this kind of material on the internet for free.
What is money?
1. Networks
Money does not now have an intrinsic value. Unlike gold that can be used to manufacture something, currencies endorsed by governments ($, £, etc.) or private organizations (BTC, ETH) are just pieces of paper or entries in computers. They are only as valuable as the goods, services and taxes they can pay for. Like every network, the more users that join the network, the higher the value. The value of a network with just one user is zero — same as money that no one will accept.
Money networks i.e., currencies with all supporting rules (who can issue money, how much, how it can be transferred), institutions (banks, miners, regulators) and technology, facilitate trade and the exchange of goods and services. They make it possible to split the production and consumption, or, another way of looking at it, buying and selling. Otherwise we go back to the concept of a weekly town market and trying to exchange software development for a piece of chicken. We can sell something now, i.e. deliver products or services to any money network user and receive tokens now, then buy something later, i.e. exchange your network tokens for goods or services offered by any network user in the future.
So the value of money comes from facilitating exchange now (selling stuff) and accumulating value for future exchange (buying stuff).
2. IOUs
Say someone is working for a money network user (i.e., a store or company), in this instance a coffee place. He or she is paid $10 per hour. This actually means that this work, that has a real value, is exchanged for a piece of paper or an accounting record with no real, intrinsic value. The only value of this paper or electronic token is the fact that the network owes him or her $10 in exchange for the goods and services he or she provided. Therefore money is nothing but debt, obligation, commitment, or a promise (debt sounds heavy and people can have negative definitions of this word).
Using IOUs to trade and exchange value is a very clever reversed-ledger. Instead of using a ledger of every transaction in the economy to keep track of who owes what, it uses standardized tokens to determine the same thing: how much value can I receive from the network for the value I provided to other users of the network? Back in the day, there was no other technology available to keep track of every transaction, hence trading physical tokens (paper money, for example) was the smartest thing to do. With electronic banking we now have the technology to account for every transaction.
How government endorsed money is created and destroyed
Interestingly, government backed money is created by commercial banks making loans. This is how 97% (at least in the UK, but more or less the same in other countries) of the money supply is now created (And BTW it has nothing to do with “the money multiplier”.) Money is destroyed, when loans are paid back.
This means that the amount of tokens in the network is controlled by: (1) the ratio at which or the ability of banks to give loans, and ( 2) the ratio at which or ability to pay back these loans by individuals, businesses and public bodies. It is clear the democratically elected governments don’t have a lot of control over the amount of money they endorse. The other public bodies, like central banks, have only limited, indirect instruments of influence on private entities, like banks, and on the amount of money supply.
Bad system design
The currently dominating money networks don’t work very well. Mainly because the money supply is determined by the actions of a relatively small group of commercial banks focused on their own short term profits.
- The system is unstable by design, leading to boom and bust cycles. (Details here and here, if you really want to dig deeper). In short, banks lend a lot when the economy is good, so the money supply increases leading to speculative investments and inflation leading to a crash. Then, when the economy is bad, the banks don’t want to lend so there is not enough money in the system. No one wants to spend it, everyone is selling, no one is buying, and businesses go bankrupt and people lose jobs. Banks don’t care what the money is spent on. It doesn’t matter to them if it goes into the real economy, creating jobs, paying for infrastructure improvement or is spent on financial markets creating a speculative bubble. Their only focus is maximizing their own benefits, not the benefits of all the network users.
- The cost of using their networks is very high. Banks charge interest, fees, and commissions. They have high operating costs hiring a lot of people and spending a lot on advertising, just as an example. And they can charge a lot, as no one else can supply the money. Now, there is a paradox regarding interest. Banks charge higher interest on loans that are perceived as higher risk and lower interest on low risk loans. Except that the higher the interest, the bigger the risk of default as the total sum of money that has to be repaid grows with interest.
- On top of this, despite having built-in instability, these networks are too big and too important to crash. The money network is like a utility. Economies can’t function without them so every time the banks mess up the governments has no choice but to bail them out with taxpayer money, leading to more cost passed on to other network users.
- Money supply is difficult to control. Central banks do have indirect tools to influence commercial banks — like setting interest rates and capital requirements — but this is influence, not control.
21 million Bitcoins
By design, Bitcoin has a cap. New coins are being created more and more slowly. There will never be more than 21 million created. Having a finite amount of tokens in the network and growing economy means deflation. Prices expressed in bitcoin must go down with time to reflect the fact that every year you can buy more goods and services with one coin.
Many people like this idea and purchase bitcoins to store for the future. No one wants to spend bitcoin now, everyone wants to buy. This pushes the bitcoin price up even higher and creates hoarding conditions. While this is perfect for investors looking for assets, it’s not so perfect for the real economy in need of liquidity, of means of exchange.
BTW: On 23/08/2017 the price of Bitcoin expressed in USD was $4,177.25.
- Is Bitcoin still a currency at this point or is it now a money market instrument?
- Isn’t this the next bubble of the traditional money network, where ponzi borrowers take loans to buy bitcoin because it will only go up
Solutions for the real economy
Regulating the banks didn’t work in the past so it’s not reasonable to expect it will work now. Letting the government control the money network could be a solution, but first we need to figure out how to control the government… Until then, a deregulated, distributed, peer-to-peer system should work best. It has worked with communication and information networks and is starting to work with energy networks. So cryptocurrency and blockchain it is.
Investors have bitcoin as an alternative money market instrument network where they can trade and hoard assets. But what about the average person just wanting to make a living? Creating a currency with a money network that perpetuates transactions now, but does not perpetuate storing value long term might be a solution. Here is my take on a possible system design:
- Every system user has an account. Accounts can be held by people, companies, public entities, or even banks. In the beginning, every single account has a balance of zero.
- Using myself as an example, if I wanted to buy something, say a cup of coffee, I would pay with my account and create money (let’s call them credits or ‘C’) in the moment of this transaction. I pay 5 credits for coffee, my account is now at negative five credits (-5C) and the coffee shop has a balance of +5C. Naturally, when someone pays me, my balance would increase and their balance would decrease. Users can trade freely with each other just by keeping a ledger of all the transactions. From their perspective it looks like they are exchanging credits, but the objective is the same: establishing what my balance is with other network users: do I have a surplus of value delivered to the network, so I can draw from it or a deficit of value, so I need to deliver to it. The total balance of all accounts is always zero.
Let me emphasise this again: this process creates or destroys money (depending on if the balances grow or diminish) in the moment of transaction. Just like commercial banks creating money with loans. Only here, every network user can create money so the money supply is distributed and is controlled by the individual decisions of all network users.
- The network would charge all users a monthly balance fee on both positive and negative account balances. In general, the higher the positive or lower the negative, the higher the fee. This fee is not only revenue to the network operator for running the network, but also motivates users to keep their balance as close to zero as possible. In this system, there is no sense in hoarding money as it loses value with time. A fee based on balance is a nice tool to regulate the velocity of circulation. Setting higher fees on positive balance and lower on negative will increase the velocity.
- Finally, every account is backed by an easily tradable asset. In the US it would be $. (Let’s say every user has to enter their credit card number into the system). ). At the end of every month, the network charges users with negative balances and pays this money to users with positive balances. All balances go back to 0. Going back to myself as an example with my coffee purchase, assuming me or the coffee place have no other transactions and there are no other users, this would happen at the end of each month: 1) the network charges me and the coffee place the balance fee on our account balances, 2) the network charges my credit card to pay the coffee shop and the balance fee and transfers to the coffee shop their positive balance, e.g. the amount due minus their balance fee.
So that’s my idea.
I imagine the network runs on blockchain but I have no idea how it should look from a technology point of view. Any suggestions are welcomed.
This is just the basic idea. Instead of banks, users create and destroy money. The system is designed to promote transactions and increase velocity or circulation instead of investing in or hoarding credits. There are many options possible based on those 2 main principles.
The accounts can be backed by any commodity. It can be gold, bitcoin, electricity, oil, water, etc., as long as it’s the same commodity for every account and there are means to trade it easily between the users.
With enough users in the system, it will work perfectly fine without any asset backing. There just wouldn’t be the final step of clearing balances.
The balance fee can be charged every month, every year, daily or even every minute. I’m not even going to pretend I have an idea of what the best timing is or the amount of the fee. This needs further discussions, modelling and testing.
In the beginning, I imagine transactions would be one way: consumers buying stuff from businesses and using this network as a cheaper credit card alternative. I think businesses would start trading with each other, especially in the case of dedicated b2b networks. The last step would be people accepting salaries in credits.
This can be implemented right now as a new kind of ‘blockchain credit card that is much, much cheaper’ (it has a nice ring to it, this practically sells itself doesn’t it?).
That’s it. Please let me know what you think and share your ideas.
Thanks for reading,
Source Medium.com
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