Showing posts with label Monetary reform. Show all posts
Showing posts with label Monetary reform. Show all posts

Thursday, 10 March 2016

Money is not a store of value. It is a claim upon value



Note: This was originally published as a response to the Aeon Conversations piece 'What is Money'


Money is not a store of value. It is a claim upon value. This might sound like pedantic semantics, but it is crucially important, especially if you’re trying to alter how it works.

Imagine a Coca Cola bottle with Coke in it. That bottle is a store of value. If I open it and drink the Coke, it will kickstart energy processes in my body and help me to carry on surviving. Now imagine a piece of paper next to the bottle that says ‘whoever holds this is entitled to claim this bottle of Coke’. That’s a claim upon value. If a group of people come to believe in the validity of that claim, the note can be passed around as a means to metaphorically ‘transfer’ Coke value, or - more accurately - to transfer access to Coke value. That’s then a form of money.

The fundamental difference between the note and the Coke can be tested by a simple experiment. Burning them. Imagine I drop the Coke into a furnace and it evaporates away. Nobody can ever drink it now, and we have destroyed value. The note is simultaneously rendered meaningless. It’s just a piece of paper saying you can claim a non-existent thing.

Now imagine that instead of incinerating the Coke, I burn the note instead. The Coke remains, and no value is destroyed. All that has happened it that I’ve destroyed my claim to that value.

Let’s scale this vision up now. Imagine a nation of people with energy, intellect and resources to make things. This is real productive capacity, and it a source of real value in the form of real goods and services. Now imagine a piece of paper that says ‘whoever holds this is entitled to claim goods and services from the people of this nation’. That’s a claim upon value. Now imagine that 60 million people believe in that claim. A network like that is so powerful that it’s in nobody’s interest to not believe in the claim.

That’s pretty much like the British Pound, for example.


And if I take my £10 note and burn it, what happens? I’ve destroyed no value. All I’ve done is destroyed some of my personal claim upon the good and services created within the UK.

That’s an act of sacrifice, because the curious thing that occurs as a result of this is that all the remaining claims become worth slightly more. We call that deflation. So, when the Joker in the 2008 Batman film The Dark Knight burns millions of dollar bills, he’s giving up his claim to the underlying value they represent, and transferring it to others.


Of course, it’s a bit more complex than that, because that act of altering the number of claims in the system can induce all manner of economic activity. This is what we sometimes call ‘monetary policy’. Creating new money claims via credit systems is one means of activating and steering real economic activity producing real value.

And the key players in that are not just central banks, but the entire commercial banking sector. Because really, it’s not like most money claims take the form of physical notes any more. Most are data entries, binary code imprints on hard drives of computers within data centres controlled by commercial banks. The act of creating and moving monetary claims around in such a system is the act of editing databases.

And this poses interesting possibilities for designing alternative forms of money. Change the nature of the database, the rules concerning who gets to create claims, and the rules concerning what a valid claim looks like, and you can alter real economic activity in interesting ways.



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Wednesday, 27 June 2012

The Block-Chain of infinite mystery: What the hell is Bitcoin?


[Note: for my more recent article about bitcoin, see How to Explain Bitcoin to your Granny]

By now many people will have heard about Bitcoin. That’s the global, decentralised, online crypto-currency (check out this Wired Magazine article for some background). You can either buy it on online exchanges, or your can ‘mine’ it by running algorithms that are likely to cause your laptop to catch fire. You can then use it to buy things from vendors who’ll accept it, albeit Sainsbury’s still only accepts British Pounds. There are even mainstream currency traders who actively trade Bitcoin now.

I’ll bet all the Bitcoins I have though, that very few people actually understand what the hell Bitcoin is. I myself do not understand it. Try listen to this guy explain it, and feel your mind frazzle. More than anything, I have the sense that Bitcoin is a cult. A strange cybernetic cult. An anarchic techno-pirate, quasi-mystical collective on a dystopian mission to subvert the global monetary system. I guess that’s why it attracts me, but I’d still like to know exactly how it works.

The Blockchain
One thing I do know is that the Bitcoin network worships something called the BlockChain. I don’t really know what the blockchain is, but it exists on a huge global network of nodes. It all sounds a bit like the Matrix. My friend @Webisteme understands it, and he keeps trying to explain it to me. The other night we were at the Dogstar pub in Brixton and he said various complicated-sounding things like:

1) "It's almost like a section of the blockchain has my signature on it, and then I sign it with your name, and then the whole network agrees that we've done a transaction"
2) "The blockchain is on everyone's computer. The nodes compete to process the blockchain, to create the next piece, which then everyone has to validate again"
3) "The network is so powerful, you'd need at least 50% of the total processing power to override it, and not even the world's largest supercomputer can do that"

I'm not sure if I've quoted him correctly, but I mostly sat at the table and stared at him with a strong feeling of bewilderment. In the absence of a nuanced understanding of the currency though, I come up with my own rough analogy: "Riiight" I say, "So would you say it's a little bit like the Borg in Star Trek?"


Is Bitcoin the BORG?
THE WORLD'S FIRST PICTURE OF BITCOIN'S BLOCK CHAIN
If you’ve never seen the Star-Trek episodes with the Borg, you can check out clips on Youtube. The clips do have something of a negative spin on them, with the Borg being portrayed as an enormous sociopathic cube bent of destruction. The interesting thing about the Borg though, is that it's an entity which has no leader, its direction being rather a function of all the pieces that make it up. According to WikipediaThe Borg manifest as cybernetically-enhanced humanoid drones of multiple species, organized as an interconnected collective, the decisions of which are made by a hive-mind, linked by subspace radio frequencies.” It is perhaps most famous for the phrase “Resistance is futile”. The analogy with Bitcoin is apparent to see: Interconnected collective? Tick. Hive-mind? Tick. Linked by subspace radio frequencies? Hmm... well, I think it uses internet relay chat. Resistance is futile? Yep, the Feds can attack it, but it doesn't exist in one place so they'd have to attack all nodes at once to shut the system down. Wait a minute, Borg and Bitcoin even have two letters in common - a coincidence?

@Webisteme looks at me from the table. “Um… I guess it’s kind of like the Borg," he says, "The network is very resilient but we’re not really cybernetic drones. It’s mostly guys with big computer rigs and powerful graphics processing cards”.

The mojo of Nakamoto
What strikes me most about Bitcoin though, is how it’s managed to capture the imagination of its users. People cite various reasons why it’s powerful, including how it’s managed to overcome double-spending problems you find with other online currencies. To me though, the real source of its power comes from its mythical foundation story, involving the mysterious character of Satoshi Nakamoto.

Let me explain. Imagine a group of researchers at MIT said "Hey guys, we’ve invented a cool new crypto-currency that is decentralised and resilient. Do you want to try it?" Maybe some people would take them up on that, but it would have no mystery, no intrigue, no dark story about mafia and the CIA. Now imagine that instead of that, a mysterious dude with no traceable identity releases strange tracts onto the web, describing a new currency, and then disappears. That’s exactly what Satoshi did, and it’s the very mystery of his story that makes people want to take part in the first place. It gives the currency soul, and that’s crucial because currency that is not legally mandated needs to be imbued with soul in order to start working. That’s one reason why gold continues to be viewed as a valuable currency: It shines and you can’t really do anything with it, and for some reason humans take that to be a good indication that it has mystical quasi-religious properties worthy of being valued.

Satoshi Nakomoto basically created crypto-gold, and sent all the miners out to find it. He then departed the earth, leaving disciples such as Gavin Andresen to continue the work in his absence (check out this psychedelic video that visualises the activities of the original developers). The elite nature of that exercise is part of the appeal too. Everyone has the potential to get the crypto-gold, but only those who invest the most time and passion will actually do so. I mean, look at this fanatical maniac who will almost certainly burn his warehouse down with his Bitcoin rig. There’s something about the sheer absurdity of devoting huge amounts of computing power to something that has no physical existence which gives power and reality to the currency.

Getting my piece of the Blockchain

I've decided to buy Bitcoins. I want a file on my computer with a bunch of numbers, created by the mysterious hands of the miners, little keys to the blockchain. If only I could enter the network, jumping from computer to computer, navigating my way through the corridors of the blockchain right to the very core of the entity created by Satoshi Nakamoto himself… or herself… or themselves. I'm not sure I could do that, but I have set up an account on InterSango and have just purchased 3.986 Bitcoins at around £4.15 per coin. Now I need to work out what to do with them. Any ideas?

If you want to learn more about Bitcoin, you can go to the main site here. If you want to work on developing it yourself, check out the Sourceforge site here. If you want to see Bitcoin blocks as they’re created check out Blockexplorer, and if you want to monitor transactions as they occur see here. If you want some free Bitcoins, you can apparently get them from this kind Samaritan here. If you want to check out more general info, see WeUseCoins. Good luck, and keep me posted on how it goes.

Sunday, 22 May 2011

How to get involved in disruptive finance: The Finance Innovation Lab


Trading floors and paneled offices in Canary Wharf look profoundly hi-tech, and yet they are built on blueprints inherited from the past, in some cases the very distant past. Modern financial institutions like to use the language of innovation, and yet they endorse only a narrow conception of innovation, focused on product innovation. There’s very little tinkering with the base level assumptions from which they are created.

To challenge the deep-level normative status quo requires one to move out of the mainstream salons, and into the fringe coffee shops and covert speakeasies. Close to Moorgate station is one such safehouse, down a small alley, behind an austere wooden door. Enter the Finance Innovation Lab.

The Finance Lab initially started as a joint project by the WWF and ICAEW, asking the question “What does a financial system that serves people and planet look like?” It’s now a forum for an assortment of financial heretics, some outrightly so, others more subtly so. The community is partially centered on an online platform hosted by the Ning social networking architecture, and partly on monthly meetings where ideas are presented and workshopped.

On Friday, I attended the monthly brainstorm. The setting is old English, in a meeting room with gilded portraits, but the content was anything but traditional. The session focused on work by David Braid, showcasing his graphic design visualisations of the financial sector as a tool for altering the way people perceive the sector. Ben Curtis was also there to discuss the PositiveMoney campaign that seeks radical monetary reform. The atmosphere is part collaborative, for people to throw around wacky ideas, and part critical reflection, to bring attention to shortcomings in proposed innovations. Friday’s session saw both impulses in action. For my part, I wanted to see David’s financial maps interpreted by graffiti artists on the walls of the urban downtown, and I wanted to see a more robust proposal by the PositiveMoney guys.

In the end, the sessions are not designed to be prescriptive. Presentations are used to set up loose themes as a backdrop for open-ended explorations. Key topics that have developed over the months include complementary currencies, social finance innovations, methods for dealing with complexity in finance, building resilience and dealing with risk, grassroots finance and mutual credit systems, social enterprise and community investment, behaviourial economics, environmental economics and the art of dealing with externalities, crowd financing, religion and philosophical aspects of finance, alternative conceptions of value, alternative metrics of economic wellbeing, and alternative goals for economic systems.

In part, the specifics of what is discussed doesn’t necessarily matter. More important is the fact that you’re able to do it, and to meet others who are doing it. Ideas have a way of fertilising other ideas and creating mutations. It’s the Silicon Valley effect. You hang out with people like Bertrand, Eli, Tav, Nick, Mary, Timothy, Max, Deeti, Giles, Rachel, Jen and loads of others who are doing similar things, and your own ideas get sharpened and informed in light of theirs. 

There’s also no single objective. Some have a particular agendas. Some frame their goals in utopian or moral terms, whilst others are more hard-edged or pragmatic. There's a general sense of trying to make the financial system better. For me though, the objective is disruption, change for change’s sake. I think the true value of these forums is to workshop ideas that can cause shit, for better or for worse, and see if the resultant disruptions, outcomes not strictly known, could potentially lead somewhere worthwhile. I like the idea of a creative dialectic to keep the system on its toes.

Over the next few months I’ll profile some of the movements I've encountered at the Finance Lab in this blog, some of the fascinating thinkers and some of the shit-stirrers. Keep tuned, and sign up.