Money is fundamentally broken and it has two core problems. Bitcoin addresses the first. But we should start focusing on the second. Readjusting our collective perspective will unlock much more value than Bitcoin alone ever could.
Before we explain money’s problems, let’s take a step back. Money is a tool. Tools are things that have purposes and utility. And it doesn’t make sense to say a tool is broken unless we have an idea of what it’s supposed to do. So what is money supposed to do? That is a contentious question.
One can interpret the purpose of money charitably, or uncharitably. Here’s an example of an uncharitable interpretation: Money’s purpose is to let a small number of people wield huge power over a large number of people, with little accountability. If that is the purpose of money, then it’s working great. But we think there’s more to money than this potentially ugly truth; uncharitable interpretations aren’t very practical. They tell us little about how to make things better.
Here’s a charitable interpretation: Money’s purpose is to help people collaborate at scale by rewarding virtue to individuals or collectives. This is much more attractive. It’s also much more practical because it provides a North Star to steer toward. However, on this view, money is not working well. We will describe two problems that account for many of its shortcomings.
Let us begin to say, however, that this charitable interpretation isn’t crazy.
First, it is consistent with the thinking of money’s most famous fans. Ayn Rand, Milton Friedman and other libertarians say money rewards people who serve others. Now, we don’t generally agree with those writers. But we don’t think they fundamentally misdescribed money’s purpose. (They erred, rather, by being blithely utopian, ignoring the important ways that money does not serve Its purpose – more about that later.) Successful entrepreneurs indeed sometimes try to discern and deliver what others want, and this service of others’ desires resembles virtue. By rewarding that, money can facilitate collaboration at scale.
Second, the charitable interpretation of money’s purpose is also consistent with more “leftish," Keynesian perspectives. John Maynard Keynes saw that restrictions on the money supply often harmed societies, among other reasons because self-interested private money-holders were unable to profit from and/or coordinate around the maintenance of crucial, virtuous public goods such as infrastructure and job training. (During the Great Depression, bankers were too scared and uncreative to deploy capital, and so the economy stayed frozen.) Thus, creating a lot of money at the printing press could facilitate large-scale virtuous collaboration.
So maybe we can all de-jaundice our eyes and agree on money’s purpose.
Historian Yuval Noah Harari makes an interesting complementary point. He says that religion helps people collaborate at scale by giving them a shared set of values. Ordinarily, you wouldn’t let someone borrow your mule unless you knew them personally or received collateral. But if you believe in the story of Jesus and believe that the other person does too, then you'll let them borrow the mule without collateral even if you just met them because you are confident that both of you subscribe to a value system that precludes mule-stealing. This greatly expands the circle of people with whom one can collaborate.
Well-functioning money works similarly. It gives us confidence in strangers’ values. For example, we do not know Delta Airlines’ maintenance crews. But we'd literally bet our lives that they do their jobs well, because – like one true-believing Christian recognizing another – we believe that Delta’s shareholders and executives value money, which they will lose if planes start crashing.
For better or worse, similar examples persuaded many people of the wisdom of capitalism during the 20th century. But we don’t think people should remain unduly impressed by these examples. Even though it has accomplished some impressive things, money also has clear problems and it’s time to demand more from what is arguably society’s single most important institution.
Money problem #1
Money Problem #1, well known to bitcoiners and longtime holders of Venezuelan currency, is that money’s value depends on the actions of centralized states that issue it. Bitcoin and other cryptocurrencies address Problem #1 by creating confidence in popular, easily transmissible stores of value that are independent of state power.
But let’s scrutinize Problem #1 before closing the book on it. Is it really a bug rather than a feature, and if so, why? We can think of roughly three accounts of the problem with the state’s role in money. Even if they don’t match your thinking, they’re important because they inform other peoples’ thinking. Let’s call them the Miser’s account, the Pacifist's account and the Moralist's account.
The miser objects to the state’s role as money-backer because she feels it gives the state a particular illegitimate power: the power to devalue her money by printing more. She sees that as theft. (If states had stuck to the gold standard, the Miser would have far fewer worries about state-backed money.)
The Pacifist has a different worry. She notices that even though modern state money isn’t backed by gold, it’s still backed by violence. The dollar has value because the United States government has guns, which it uses to arrest tax evaders and, sometimes, invade other countries. The Pacifist would like to keep her hands clean of money backed by threats of violence.
The Moralist has a subtler worry: that states just aren’t exercising their powers and responsibilities very well. Her view is more moderate than those of the Miser and the Pacifist.
In the Moralist’s eyes, the state’s powers of money printing and coercion are not necessarily illegitimate – after all, decent governments sometimes use these powers to good effect. Yet, states are pretty flawed. Maybe we can do better.
The Moralist’s account makes the most sense
We think the Miser and the Pacifist both make serious errors.
The Miser’s complaint that “inflation is theft” ignores that governments do not promise not to inflate. Rather, they ask their currency-holders to accept the possibility of inflation and in exchange give them a guarantee that they will accept the notes in discharge of many vigorously enforced obligations. If you don’t like this deal, you don’t have to take it: You can hold your savings in baseball cards and trade those in for banknotes at tax time.
The Pacifist, too, stands on shaky ground. Money makes no sense unless it can buy things. And every real-world thing of value that money buys depends on unspoken threats of coercion – from the discharge of a tax obligation to a claim of property in land, to a loaf of bread. The question cannot be whether there is any coercion in the supply chain, because the answer is always yes. The question is whether that coercion is parsimonious, just and legitimate.
This leads us back to the Moralist. Hers is the most sophisticated account of Money Problem #1: Fiat money’s ability to facilitate virtuous collaboration at scale depends largely on the quality and legitimacy of the issuing government behind it. So if we can build more legitimate, more sensitive, more democratic money issuers who wield the inflationary power better than governments, we should. Such issuers might be better able to identify the public good, thus rewarding virtue more accurately than either states or markets can. Likewise, they might bind communities into closer and richer collaborations. They could help money work better.
Money Problem #2: Moral monoculture
Bitcoin addresses Money Problem #1. It gives us a reliable, transmissible store of value that doesn’t depend on any state. That is quite something. But it addresses the Misers’ and Pacifists’ accounts of the Problem more than the Moralist’s.
Building from her earlier argument, the Moralist might identify the second shortcoming in money. Money Problem #2 goes something like this: It is complicated and difficult to place the power of money issuance into the hands of dynamic, diverse and deserving non-state institutions. But doing so could cause an explosion in money’s ability to serve its purpose.
Money’s value at once depends upon and extends the power of the institutions that issue it. Imagine that some really bad institution, like a drug cartel, started issuing "Narco Bucks." It’s pretty clear that you shouldn’t buy, accept or use that currency. If you did, you’d be bootstrapping from the cartel’s ill-gotten power and enhancing its leverage to do more harm by issuing more.
(Don’t forget: Money’s purpose is to help people collaborate at scale by rewarding virtue. Empowering bad issuers is clearly at odds with this.)
In a certain light, Bitcoin seems to cleanly sidestep this problem by not having an issuer. But this isn’t the whole story. Because no one can mint more BTC, the holders at any given time simply are the de facto issuers of the currency. That just transforms the holders – a fairly arbitrary set of people and institutions – into the empowered institution. That may or may not be terrible. But at best, it’s regressive in that it empowers the already powerful.
Let’s peel back one more layer. In questioning whether money-issuing institutions deserve their power – whether they are legitimate – one of the main characteristics we might object to is their large scale.
State fiat money, for example, arguably steamrolls diversity and neutralizes some of the virtuous dimensions that we’d like money to have, by placing everyone’s commercial doings against the background of the same mega-institution. Whenever anyone holds or accepts U.S. dollars, they are entering into a relationship with the United States. But the huge scale and impersonal nature of the government desensitizes us to that fact. Our currency choices would better express our values if they placed us into relationships with knowable institutions.
What if there were a much greater diversity of knowable currency-issuing institutions? Think how much more richly your economic decisions would express your values, for example, if you could ask the ice cream vendor to accept the coin of your local church. Every institution could effectively have a monetary policy, instead of just a fiscal policy.
This might sound ridiculously complex, but we don’t think so. We can easily build tools to help people keep track of all their different currencies. It will bind communities together more meaningfully and give them a radical new tool to be more self-sufficient.
Some people might object that everyone will just “translate” the value of every local currency into a global one anyway. But I’m not sure. Instead, we may head into a world in which globally poor communities can enhance their ability to cooperate locally (and therefore also raise their global standing) through currency issuance by key local institutions.
It is even more exciting when you consider the possibility of institutions expressing their values through programmable rules affecting the dynamics of their currencies. Your currency-issuing local church, for example, might have rules that would forbid "Church Bucks" from being swapped for Narco Bucks or that would permit local church authorities to confiscate Church Bucks remotely, under certain circumstances. And if that doesn’t sound attractive, opt out: hold dollars or BTC instead. Church Bucks would permit a particular community to bind itself more closely through shared values.
In the world we are describing, where you can mix and choose from countless currencies, that choice has moral significance. Using Narco Bucks would be irresponsible while using Church Bucks might or might not be. Interestingly, the reason for this has to do with the different ways that the cartel and the church interact with the real world – and in how they treat people. The issuing powers, like governments, have relationships with other institutional and human actors. The character of those relationships helps determine the justifiability of supporting them by using their currencies.
The powers that be over bitcoin issuance (holders and miners) have relationships with other institutions and humans, too. But those relationships are inconsistent, impersonal and often blind. Reasonable minds can differ about whether this is a feature or a bug, but it would clearly be interesting if more richly textured relationships were possible.
This is yet another reason why on-chain identity is so important. It would allow cryptocurrency issuers to formalize their relationships with other institutions and entities on-chain – for example through non-plutocratic (i.e, non-coin-driven) governance systems. That would allow the character and reputation of issuing authorities to be coherently judged even if, unlike cartels, governments and churches, they had no off-chain relationships or reputation.
Irregular networks with monetary policies: A big deal
You might think, “sure, blockchain technology could help the old idea of complementary currencies." But despite a rich history for this idea, it has never truly taken off. And even though Ethereum has been around for the better part of a decade, making it easy for anyone to issue a currency, we haven’t seen tokens successfully used in this way. So are we writing this article in 2021?
Well, we believe complementary currencies' potential has long been severely underestimated. And there are good reasons not to be surprised if the floodgates are only just beginning to crack open. First, cryptocurrencies have until recently been extremely hard to understand and use, so they’ve only been useful as fairly static stores of value and for a narrow band of applications, but mass comprehension will sooner or later enable much more vigorous uses in regular commerce. Second, as we’ve suggested, proof-of-human identity systems allow cryptocurrencies to be governed both non-centrally and non-plutocratically. Let’s pick apart this second point – it’s important.
Until recently, the supply of every complementary currency was controlled by either: (1) one or several definite institutions (like Berkshares, or the earlier Church Bucks example); or (2) some sort of wide-open plutocracy (like bitcoin).
Definite institutions have had the advantage of being knowable, possibly democratic, relatively strategic and coherently embedded in social contexts and the disadvantages of being opaque and cheap to manipulate (or regulate).
Open plutocracies, on the other hand, have the advantages of being transparent and expensive to manipulate (or regulate) and the disadvantages of being unknowable, necessarily undemocratic, relatively un-strategic and abstracted from social contexts.
Proof-of-human systems, for the first time ever, will allow best-of-both hybrids between these two kinds of structures. That means currencies will be issued by coherent networks of accountable humans, capable of voting and governing themselves non-plutocratically (and so strategically pursuing concerns other than simple greed) – all without having any particular institution(s) as a point of failure. Such networks could be formal or informal, with infinitely different systems of determining membership and governance, pursuing an infinite array of ends.
This sort of thinking and alignment of incentives can enable new types of sustainable human/blockchain hybrid systems, such as decentralized energy grids and agri-permaculture deployments capable of long-term management. This concept of “dexgrids” (decentralized grids) of human networks will be a pivotal part of the crypto narrative.
And armed with the power of currency issuance, we can expect some such networks to become extraordinarily powerful. Here’s why: Accepting a particular network’s coin in exchange for your labor will come to be seen as a gesture of allegiance to that network. So the networks whose conduct advances popular values will always be able to mobilize a lot of labor. And some networks will become very clever in maximizing the amount of labor they can mobilize by ensuring not only that outsiders have an incentive to join the network, but also that insiders have an incentive to supply labor to one another (e.g., through demurrage).
Such coordination will serve not only to support the value of the coin in terms of other currencies but also to accomplish ambitious, complex goals in the real world. The governors of bitcoin and other extant permissionless cryptocurrencies simply cannot coordinate in that way – and the mind boggles at what would be possible if they could.
Don't be surprised if, in the coming years, some networks like this come to rival nation-states as actors on the international stage.
Money is about aiding collaboration at scale. But many important kinds of collaboration that aren’t possible at a scale of billions of people become possible at a scale of millions, thousands or dozens. Currencies operating at those scale levels will open the floodgates for new endeavors.
Moreover, money is about rewarding virtue. But because money puts its holder in a morally significant relationship with its issuer, very widely held currencies subtly enforce a kind of moral uniformity. This makes it harder for communities to define and articulate their particular, non-global virtues. This is a deep vein of collaborative human potential that new monetary technologies can unlock.
Much of this is possible and in the works. But so much more will become easier when we get used to proof-of-unique-human systems letting us interact on Sybil-free blockchain environments, i.e., where each user controls only one account. Building decentralized institutions that express human values depends on being able to interact democratically as humans, instead of plutocratically as piles of tokens. A new generation of unconventional decentralized networks organized to mobilize labor in this way might accrue enormous power.
Bitcoin solves Money Problem #1. Ethereum and other smart contract platforms, combined with proof-of-unique-human systems, have given us the basic tools to solve Money Problem #2.
The inevitable conclusion: It’s going to be a wild decade.