Cryptocurrency: Seamless Value Exchange
Crypto, among other things, aims to allow fast, cheap and painless exchange of value–not necessarily money, but since money is a measure of value we could simply say “money”. Sending money around the world is currently still rather inefficient and expensive–try sending money to some otherwise unknown (and poor!) country like Malawi and you’ll actually have to budget for the transaction expenses! But what really gets sent when we say we are sending money? Surprisingly not money, but numbers! It is now so commonplace to receive money as mere numbers that we never quite question the fundamental meaning of this. In this article we talk about, rather summarily, what money is for and how new money can be of benefit.
A mythical
story goes thus: Way, way back when people needed to exchange goods they could
only do so by giving away goods they owned in exchange for goods they wanted to
have. They would then need to find someone who needs what they wanted to let go
of. Since they did not have flying machines and pretty paved roads back then,
such exchanges may naturally have been between friends and relatives in close
proximity. Later on it appears people realized that it is mighty hard to run
into someone who needs what you have at the exact time that you need what they
have!
While it turns out that this (barter) system is not exactly what preceded
money, this story highlights an interesting aspect of goods exchange: there is
value (and valueables) being exchanged. In such a system when you gave someone
two bags of maize in exchange for their goat, you had an exchange using things
that had intrinsic value—and that term—intrinsic—is an important one!
But, so the myth continues, a few smart folks figured that they could use tokenization! The idea was as follows. Suppose I want to have your 11 cows, and while I could give you my dogs in exchange, you obviously don’t want my dogs since…who would accept dogs in exchange for cows anyway. So instead we—started with me and you, but this we now includes our whole token-bound community—agree that you can give me a token that I can use to get something of as much value as the cows that I want from you. Two things emerge: first, we need to determine and agree on the value of the cows; and, second, we need proof that indeed you can use this token in the said manner.
That token is money. Money is used to measure the value of things—and in unfortunate cases ‘things’ may include humans. I can give you this token called money which has no intrinsic value—unlike the cows, you cannot eat the money if you get hungry; similarly, money won’t go hunting with you like the dogs may. So, money has no value on its own. But, and a huge but this is, we as a community can give money value! We do this by simply agreeing that it has the value we desire.
You may then wonder what physical object is the most desirable token aka money? Initially it seemed necessary to have something that is scarce, perhaps hard to make or acquire. This use of some special objects was mostly done to fight counterfeit tokens. The tradition continues to this day whereby only certain organizations, such as central banks, are allowed to make legitimate money. You and I can still agree that some such piece of paper is worth some such value (e.g. company shares work somewhat like this), but this would not be called legitimate money, and we may struggle to find users beyond the two of us. What remains true is that the form of the token does not matter. The use of gold or silver or specially printed bank notes is not to say that these things are any more eligible to be money than a piece of paper off my notebook. Again, the major reason is to control the flow of these tokens, and avoid counterfeiting. An interesting extreme therefore has come about recently.
If money or
the token of exchange can be of any form, does the token then need to be
physical? Remember that the problem we were trying to solve by having only a
few lucky people have the power to create money was to create some level of
legitimacy or trust in the system. This idea of trust comes about especially in
contexts where you’re dealing with strangers, who may or may not be in the mood
of being honest. So, a stranger walks up to you to do business. She buys your
land and pays with a token. She hands you the token that she pulled from her
pocket and then on it writes: “Give Whoever Has This Token Anything Of Value
Equivalent To Eleven Healthy Living Cows”. Perhaps to make it more legitimate
she could sign off with her name: “#MoneyMaker”. There is a good chance you
have been scammed. To prove this, go to the local merchant and try to get
something with even one-tenth the value of 11 Healthy Living Cows.
Now instead of her own token, she can give you a government token. Yes, the
government token may be prettier, but aside from that her self-created token
and this are no different. And yet, with this government token you can go about
trading with others. What the gov token has is public trust. The government
token has been assigned value by the community—though it still lacks intrinsic
value. People trust this token because they trust the system whose de facto
head is the government. This has little to do with whether you like the
government of the day or not: you have trust in a system where government plays
an important role but the system is still a people-led one.
Cryptocurrencies aim to create the required public trust independent of the government or traditional central authority. Note that trust is only needed if there is room for someone to act dishonestly. If it is impossible, or mighty hard to be dishonest, then trust is not called for. Using advanced security features and making it very hard to forge transactions, cryptocurrencies conjure up community trust simply because no one (actually not 100% true…) can make counterfeit crypto.
It costs money to make money. It used to be necessary to print money and issue shiny coins with which we could also play Heads or Tails. These legitimate tokens were an advancement in exchange of value, but it is now a cost that is superfluous. Countries like Malawi that already have a tight budget would do well to move quickly toward these so called trustless systems—trustless to mean you don’t need to trust the bank or the individual you’re engaging with because the algorithms make sure nobody cheats.
Going hand in hand with cryptocurrencies is digital money. Digital money (not necessarily currency) has been around in some form already for a long time. While cryptocurrency is recent (started in earnest around 2009), digital money (money that is wholly electronic/or just numbers backed by no physical assets) can be said to have been around for as long as decades prior to 2009. For some time already money has not really been changing hands—rather it has been information changing in people’s accounts. The advantage of this is that information takes up less space and is not as costly to make as are physical tokens such as coins or notes. Digital money therefore is an attractive option even for places that do not yet want to implement cryptocurrency.
What are the downsides of cryptocurrencies and perhaps digital money in general? As with all things some people will stand to win more than others. In cryptocurrencies there are individuals or corporations with computing resources that allow then to earn significantly more money and influence through facilitating transactions—much the same way that banks milk you in exchange for the services they provide. There is also room for destabilizing another economy without ever setting foot there—simply via the internet. This is an example of cyberwarfare, and is not necessarily just due to the advent of cryptocurrencies. Additionally, philosophers and other social researchers fear that the future may belong to a new breed of feudal lords—those who understand and manage these technologies. The creators of these tech systems are not necessarily political or religious leaders. They thus have little obligation to behave morally. The hope however is that should they create a flawed system—that is, one that benefits just them—the majority of people would abandon the system, rendering it truly “trustless” and thus without users.
Cryptocurrencies are a nice idea some of whose aims are to make transactions more efficient, to make fraud much harder, and to avoid central currency issuing or controlling authorities misusing their power in such a way that they disrupt the economy and innocent livelihoods. Perhaps a future is coming where money, of any form, may no longer be needed. At the moment however, Bitcoin and others are taking us away from physical money AND a central issuer of such physical tokens, to enable us to transact and interact more seamlessly trustlessly.
To read more about cryptocurrencies and digital currencies: