A new world Paradigm: Cryptography and math vs fallible middlemen and institutions
Lets assume we’ve found a new habitable planet with primitive current lifeforms so that we could go over there and start our domination, and spaceX is able to provide commercial grade super space crafts with ability to transport to any place in the universe. You and your friends are the first to reach here, followed by a few 100 others, a certain cosmic event has occurred which prevents any further travel between this planet and the earth for the next million years.
The spacecrafts are equipped with enough resources to last an year, the future of you and the group, and the civilization that will develop on this new planet will depend on your ability to adapt to the new world and most importantly, efficiently be able to trade amongst each other.
The fellow humans on earth have no direct access to you and hence can only speculate about the fate of the people on this planet. Amongst the ones speculating, the most curious ones would be economists. The economists on earth would love to observe on this new planet how the channels of trade get established and where and how money originates. The real curiosity is about money, cause we have no clue when and where was it exactly that the barter system got replaced with money.
The few hundred people on the new planet may not have an immediate need for money and could live with barter system. Barter system works as long as the resources and civilizations are very compactly spread over space. Once the distribution spreads big, it will become challenging for 2 parties to exactly match the goods and quantities they want to exchange with each other. When the few hundred of you become a few thousand there will be an absolute need for a system involving money, like the one we have on earth. However here’s the catch, its the central banks and governments of countries which issue and maintain money on earth, so you probably need to get through the messy job of creating a republic first before getting to money.
Its interesting to look at how we ended up in this situation on earth. Early civilizations were started by powerful men forming kingdoms and bringing together societies, Our civilizations have always demanded the presence of a supreme force to look over and guard it. The supreme force were the kings and had unchallenged power, it was not granted to them but they had taken it by force if needed, the social civilizations had little choice but to obey. Starting in the past 100–150 years the supreme force has been replaced by democratically elected people’s representative, giving the society more of a choice in deciding its king.
But our kings didn’t always use paper money like today, there was a time when gold coins issued by the king court houses were used as money, the value of the coin coming out of the gold present in it. A fair currency one can say, something you can ponder to use in your new world, alas you don’t have gold. In this historic world of gold coins there isn’t a problem of someone creating more coins or invalid coins since the value of the coin comes from the gold in it. So there is no way someone can create a fake coin which has no actual value.
So much for being the perfect system gold had one basic problem. Its supply was erratic, mining new gold was troublesome. Wars of one kingdom or country on others left the victorious country with a lot more new gold and the losing one with a lot less. As globalization took charge in the 1800s and 1900s the amount of trade and hence the number of exchanges increased, the economy demanded more liquid form of money and this was difficult to make with gold as its supply was pretty scarce and unpredictable.
So the governments/Kingdoms decided to create paper currency. To give the paper currency a value, each government or kingdom had to set a fixed exchange rate for the paper currency and gold such that the conversion from paper currency to gold can be done anytime at that fixed rate. This meant that the issuing authorities had to maintain proportionate reserves of gold. The only way to print new currency without lowering the exchange rate was to obtain gold. For a considerable time paper currency backed by gold was able to meet the liquidity demands of the growing world economy.
Still a good system, But we don’t follow this too now. Why so?
Well the gold standard is like a debit card you can only spend what you currently have, there is no scope for borrowing. A little thought will tell you this is ok in the short run but not a great approach in the long run, there will be periods when you run out of cash, a credit card will keep you running through these periods, the debt incurred you pay back in the future. In the gold standard the economy had no credit card to swipe, so periods where the circulating supply of cash fell, it led to economic depression. This was the situation of the war ridden world in 1900s. So we moved to a loosened gold standard or rather the dollar standard. All world currencies got valued against dollar and dollar itself was valued against gold with a fixed rate. The governments had a free hand in printing money at the risk of devaluing the currency. This was least of the concerns of governments since they needed to pump in air(Money) into the deflating economies.
Many years later, after the US had pumped world economies with its dollar, it saw it as a threat that countries might start cashing in on dollar and convert it to gold. Which meant US would have to pay them gold as per the rate previously set. Foreseeing this threat the US fully abandoned the gold standard in 1971.
With the gold standard gone, the control over money fully wrestled into the hands of central banks. Gold became just another commodity traded on the market. The value of gold and any currency was determined based on their exchange rate on market which varied based on demand supply. Central banks now had the ability to print and pump as much money as they seem fit into the economy.
However a small catch is that they can print as much as they want and keep it in the reserves its no good if it cant be flushed into the economy, the only way banks can release money into the economy is through loans, so interest rates are dropped to encourage borrowing during which the banks pump the new money into the economy.
Money in the gold standard world is simple, owning money is as good as owning an equivalent amount of gold the balance between which stays fixed. Money in our current world is far more complex and likely out of scope of this blog. To put it briefly money today is a mere financial instrument used by central banks & governments to control the direction in which the economy has to be moved.
For the civilization that developed on earth the control of money always existed in the hands of middle men like institutions(Banks) and governments, and it continues to do so. We have always backed that the supreme force either the kings or the governments will always act in the best interest of the general society, although we never really had a choice of not backing them.
Back to you and your friends on the new planet, with all the knowledge and experiences of earth you have a rare opportunity to start a civilization which gives more power to the general public.
In the early 1990s there were research proposals published on using cryptographically secured chain of blocks to store and timestamp data, the idea was to timestamp and record data as and when required in blocks and store new data in new blocks, the blocks were chained so that the timestamp could not be altered or backdated without messing with the chain. Cryptography was the technology behind achieving this digital chaining of blocks. A cryptographic hash is performed on the contents of each block and the hash value is included in the successor block. The hash pointers linking each block to its predecessors enable this immutable digital chaining of blocks. This formed the fundamental idea behind Blockchain technology hype which was to come.
In the year 2008, an open source proposal published under the secret identity “Satoshi Nakamoto” promised a new revolution to the concept of ledgers and possibly shake up the existing economic structure. Satoshi took the idea of blockchain, an idea which was known but dormant for two decades and breathed life into it. Satoshi’s proposal was to create a digital currency using a token he called bitcoin and use the blockchain way to record every transaction of the currency, i.e. all the data recorded about activity happening using the bitcoin token was to be timestamped and bundled into blocks, these blocks are then chained using their cryptographic hash to form a Blockchain, this effectively became a digital ledger recording all the transactions happening using the bitcoin token.
The revolutionary approach proposed was to not use the so far in practice approach of middle men and institutions to maintain the ledger and validate transactions but to distribute the job to a network of computers. The idea was to have as many computers on a network as possible. Any update to the ledger can be done via any one of the computers on the network, the remaining computers on the network pick up the update and verify the validity of the new block added by running a proof of work algorithm. The acceptance of the new update to the ledger which is the addition of the new block to the chain is declared by continuing the chain forward from this new block. The computer accepting the update will make its update to the ledger by adding the next block as successor to this. In the case of a malicious update, the computers on the network can catch this through the proof of work algorithm, however suppose the software on these computers is compromised by the attacker, they could accept the malicious block by adding further blocks ahead of the malicious one. Other computers on the network could reject this growing chain due to presence of a malicious update which will lead to 2 parallel chains. Satoshi’s resolution to this problem was to accept the chain which was agreed upon by majority of the computers. This was easy to do in the system, the longest chain is always the one that is being operated upon by majority of the computers. Although the attackers are trying to add malicious blocks they would have to do it faster than the rest of the network to outpace them and create the longest chain, for which they would require control of majority of the computers.
You could try this out on the new planet, you can reuse the powerful solar powered computers on the spacecrafts to build a network and create a cryptocurrency like bitcoin. This doesn’t have the trouble of someone creating new or fake coins, once a supply of these digital coins is created its fixed, no one not even the original creators can create extra new ones. This being a digital currency does not have the liquidity challenge either. The best part is you don’t need to establish a republic, no armies or wars, there isn’t a need for anybody to place their trust in some middlemen to secure their transactions.
The only thing that’s left to decide is what is the value of this new coin, say guy X needs to purchase a particular resource say 6 gallons of water from guy Y, guy Y has excess of water and is willing to sell it for some of the bitcoin but he needs a promise that the bitcoin will allow him a purchase of what he might want in the future probably could be Rice or brick or water itself. This transaction on earth using Fiat currency would be X issues Y a credit slip of US government which is the dollar, the credit slip is a guarantee backed by the US government that what Y wants in the future for the exchange of 6 gallons of water will be fulfilled whenever Y furnishes the credit slip.
But in the system created on the new planet there is no US government, so who guarantees the buying power of bitcoin in the future?
Well you might say the buying power of dollar isn’t guaranteed altogether even today, inflation causes the buying power to diminish over time. what 1 dollar could fetch you in the year 2000 could cost you 10 dollars now. Central banks actually run with targets to keep the inflation rate at 2% minimum.
But why do these middle men want to deliberately create inflation? We have to go back to the days where gold standard had to be abolished so that money could be pumped into deflating economies. By printing more money and pumping it into the economy through very low interest rates on loans for reasonable amount of time, the governments were able to encourage people to spend and buy rather than be uncertain about the future and try to save. This leads to increased demand which leads to economic growth and ultimately improves employment. Governments and central banks have been doing the inflation targeting for almost 50 years now, so the economic situation of the world should have blossomed so high by now that there should hardly be any unemployment or suffering.
John Maynard keynes in his 1930 essay “Economic possibilities for our Grandchildren” predicted that in another 100 years the world wealth will grow so much that the future generations may have to work much less and spend more of life on Art and creativity than survival. His first prediction came true, GDPs grew almost 16 times, GDP per capita 6 times, but the current generation actually is under more pressure and spends more time at work than its previous generations. How come? Because although the wealth grew, the gap between the top 1% and the rest has gotten much bigger, although the rest have more wealth than in 1930, their purchasing power has stayed same or even lesser than the top 1%
The real cause of this wealth gap is quite disputed, some say its technology driven, i.e. those agile with use of technology have raced ahead, some say its globalization and access to cheap work force, some say its the capitalist system of not rewarding the worker a fair share of the impact of his output.
But a fact we do know is that the rate of return on capital assets(real estate or financial assets) far exceeds the rate of growth of real income(wages). The direction in which the economy has been steered by central authorities with the help of the tool at their disposal — “money”, has been towards a creating an asset bubble. Thomas Palley wrote just before the 2008 recession kicked in “US economy relies on asset price inflation and rising indebtedness to fuel growth. Therein lies a profound contradiction”. The monetary policy of printing new money and pumping it into the economy is important for the asset price inflation which helps in lowering interest rates and make borrowing easy. This debt financed consumer spending then flows into asset prices. The biggest gainers of these economic policies have been those with big capital assets, earned or inherited. The average consumer who depends on regular wage, works harder and harder knowing that the buying power of his wage is waning all the while as his debt increases which he has to make to finance his regular spends. We know the result of which has been a generation of struggling and depressed youth. Somehow this gets blamed on social media, whereas the actual cause is the fucked up economy. Social media just shows how all the top 1% of the world are living their lives, the rest maybe getting depressed by not being able to afford it but the remedy is not to tell them to ignore that such lives exist by shutting of social media. We all deserve to know the truth why we can’t.
Our fictional future friends on the new planet are on the epoch where the choice they make will decide if the future generations of this planet will live in a more equal society. The most important thing to do would be to prevent any single person or institution or group of people become too powerful by concentrating key control aspects into their hands.
The bitcoin way shows that they could create a monetary system that didn’t require a single supervising authority and couldn’t be manipulated to lead to the kind of inequality on earth. But remember creating coins digital or real does not equal creating money, money is a credit contract whose fulfillment is guaranteed at all times in future.
Our friends could create a bitcoin replica in their new world too, but the tricky part is how does this get distributed and used as money. For the bitcoin replica to work as money, it needs to have a demand of its own. There is no absolutely deterministic way to do this or guarantee that it will work to create an equal world.
The way it works is and was Satoshi’s proposal for bitcoin is that once the network is created, its a race by the participants of the network towards mining and owning these coins. Mining for bitcoins is as simple as adding a new block to the blockchain which need not contain any new transactions, all that needs to be done is to solve a cryptographic puzzle to come up with a specific kind of hash for the block, these are not puzzles some intelligent mind can solve faster than computers, its a brute force find and the first to find it gets to add his block to the blockchain. The creation of each new block creates a new coin which goes to the creator. This goes on till the fixed number of coins are created. Certainly the one who uses superior compute power will lead the race, the resulting scenario will still be an unequal distribution of coins.
But this situation is fine, one cannot create an ideal equal distribution since that would mean giving away free money. More importantly the competition and effort needed to get the coins would create a demand for the coins themselves and hence give them a value, as the ones who couldn’t earn enough through mining will look to earn them through market trade. As long as there is a demand for the coin it can act as money since the demand means it can be used in part of a trade exchange hence it can act as credit contract. To continue the network once the fixed number of coins are created a transaction fee would need to be charged to give the network participants an incentive to continue the proof of work and add new blocks with the new transactions, an inescapable situation since nothing comes free.
The choice being made gives the civilization on this new planet a radically different beginning to the one on earth. With monetary taken care by the de-centralized blockchain approach, it can be extended for other important tasks governments on earth do, anything related to storing and tracking data, such as keeping track of ownership of property. Central authorities like governments could still spring into existence but their role could mostly be limited to maintaining law and order. The blockchain way by no means guarantees a rosy all happy civilization but what it ensures is true decentralization of power, a person could become very wealthy in this world but the wealth will not buy him the power to flex control over the civilization.
What are the possibilities of a world which evolves without an authority to which everyone bows? I think theorizing it is beyond the capability of our minds, we could only know when this fictional story becomes real.
