What is Bitcoin? What are Ripples? Part 2 | Hour Blog
2014/03/11 in Journal
To truly understand the Bitcoin revolution, you must understand money. I’m no economist. Let’s get that out in the open. But I do find value and exchange fascinating.
This wasn’t always the case. For most of my life I lumped money into the rather broad and definitely indefinite “things of this world” category. You can go ahead and roll your eyes at the hokey idealism, but I’ll defend my intentions to this day. I dismissed the significance of money because I never understood it as the incredible technology that it was–most likely because no one had ever presented it to me as incredible technology. Instead, money was cursed with the vague “root of all of evil” stigma, so I never had any incentive to understand what was, to my understanding, only a road to perdition.
While money can certainly get the best of us–as Greece is more than aware–the function it performs is essential to growth and progress on this planet. Money may not make the world go round…but, to be honest, it gets close.
Try to imagine a world without money. How would it work? A society devoid of a common currency would most likely rely on bartering, i.e. “my cow for your car,” to do business. This may conjure Utopian images of peasants pleasantly trading bushels of succulent produce for barrels of fresh beer and farm-churned butter, but after the rosy red glow of fantasy fades from your mind’s eye, the practical impossibilities set in.
Bartering is a fine means of exchange, but its limitations are legion. Let’s say you a fisherman. You work 6am to 6pm in a bay throwing and retrieving nets for your hourly wages, which are, in this culture, not paid in dollars but weighed in fish. Sure, your family will certainly get their Omega-3, but the needs of a growing household undoubtedly exceed Halibut for breakfast, lunch, and dinner. Your daughter needs braces, your son a new baseball hat. But no matter how plentiful your daily catches are, you can’t really purchase dental care or sports equipment unless both the dentist and the shopkeeper are seriously hungry for that Halibut. Sure, you could work out some sort of deal, but the difficulty of these arrangements becomes apparent when you consider the planning that would be necessary to cater to all the goods and service providers whose goods and services you need. Perhaps the dentist doesn’t need fish. He wants gold for his fillings. Maybe the shopkeeper’s a vegan. He’d take Broccoli instead. Now instead of going directly to the producer, you’d need to track down any number of secondary and tertiary producers just to pay for simple services.
Bartering only really works when there is a coincidence of wants. That is to say, when each party in a trade wants what the other has. In any other case, you’re going to have to do some real legwork.
Money solves this problem. By providing a common unit of exchange–something that everyone wants–money allows you to buy directly from the producer without any need for auxiliary trades.
All kinds of materials have been used as money. Precious metals, stones, feathers…the list goes on. For most of human history, money was either made from a commodity (like gold or silver) or tied to one (like a note redeemable for gold or silver). In the US, this relationship between commodity and currency was known as the gold standard, but the American government, along with the rest of the world, has abandoned this practice in favor of a purely note-based dollar–a fiat currency. Fiat currencies are intrinsically worthless, which means that outside its use as a means of exchange, it has no real or alternate value. Unlike commodity-backed forms of money, fiat currencies derive their worth purely from the faith of those who use it.
In other words, the US dollar is valuable because we believe in it.
While their value is essentially founded in our faith, fiat currencies do have certain qualities that support that perception:
Scarce: USD, like any money whatever, can only maintain value if it is scarce. While a dollar may be no more intrinsically valuable than a sheet of white paper, appearance sets them apart. Dollars are hard to reproduce. Extremely hard. After all, we wouldn’t have much reason to trust any form of currency anyone could copy at will, therefore counterfeit resistance–or scarcity security–is a must for money.
Fungible: This is a weird word, but the concept is straightforward: every dollar should be exchangeable for every other. Units that represent the same value should look and feel like they are worth the same amount. You can see why stones and feathers would have difficulty passing this test, as their inherent uniqueness butts heads with efficient trade.
Divisible: Stones and feathers would have problems here too. And divisibility is yet another point of failure for the barter system. Imagine you were a brain surgeon in our hypothetical bartertopia. While in a world with money, your job may put you ahead of the pack, in this universe the high value of your craft would make trade incredibly difficult.
After a long day of tumor removals, you head down to the local pub to buy a beer. But instead of money, the only thing you have to offer the bartender would be…tumor removals. In the off chance he has need of such an operation, you’d at least have bargaining chips, but unless you want a tumor removal’s worth of beer, you don’t have much in way of an ideal trade.
“If only,” you think to yourself, “there were some common, divisible unit of exchange that would allow me to use only a portion of the value of my labor towards anything I would like to purchase.”
Indeed. That would make things far more convenient.
(This is the end of part 2. Part 3 coming soon).