Maybe money really is a shared hallucination. Last Wednesday, a group of people huffed some paint thinner and imagined a new currency into existence — Ethereum: Bailout Edition. There was already a currency called Ethereum, but that has been renamed EthereumClassic. The new Ethereum quickly attained a billion-dollar market cap, creating instant wealth and prosperity for all.
The Bitcoin community has been observing these events for edification. So has the Federal Reserve, I imagine. Is this money real? It looks real in my account balance.
The new currency is missing a couple key properties, however. To qualify as money, a thing must be a medium of exchange; a unit of account; and a store of value. Ether has potential as a medium of exchange except that I can’t actually buy anything with it. It sucks as a store of value for any investment horizon longer than two minutes. The only qualification it actually meets is that it’s a unit of account — then again, so are my fingers.
To be fair, Bitcoin also lacked these properties in its first years of existence. Even gold wasn’t very moneylike in the Paleolithic age, but I’m sure it would have been a great investment if a Neanderthal had only held on for two million years. These were speculative tokens, not yet money.
The most important lesson, at least for me, and I hope for the public at large as well, is that the fiat currency in my pocket and also the cryptocurrency in various different wallets that I have, they all have value because of community properties, because the community believes them. –-Emin Gün Sirer
Please don’t learn this lesson. Currencies don’t have value simply because there’s a shared hallucination about its value. If that were the case, then we could all go into a room, huff some benzene, and start exchanging wampum.
A currency needs to be a store of value, which requires there be stable demand. The US Dollar has value because I have to pay my taxes (as well as parking tickets, traffic fines, and utility bills) in US Dollars. The US government doesn’t take Bitcoin, or Pesos, or even bars of gold. Sad!
As long as we have to pay our taxes and cough up US Dollars, USD have value. And when we pay our taxes to the USG, we’re paying for the fact that the government provides the public goods that allow us to create wealth for ourselves in this country.
We pay bitcoin to Bitcoin miners, because they secure the network and police double-spends. This enables trustless* peer-to-peer transactions. As long as people want to buy sketchy stuff on the internet, there will there be demand for this service. If that fails, the proliferation of Bitcoin ransomware is still a tax obligation that provides price support. (This assumes that no competing services displace Bitcoin. Disruption is possible, but no credible threats yet.)
In theory, we pay ether (gas) to Ethereum miners, because they run our “unstoppable global computer”. Except that the computer is not just stoppable, but malleable. An unstable computer does not beget stable demand.
And in theory, Ethereum miners are also paid to secure the network from attack, but… why bother? If your empire gets overthrown, just fork yourself a new one.
I see potential value in a self-enforcing legal system; that’s why I became involved in Ethereum (Classic) in the first place. Money is not a shared hallucination, but it does require shared rules. A single rule, The computer is gonna run some code; deal with it, is easy. The fewer the rules, the greater the possibilities around those rules.
Human intervention is a binary concept, either it exists or does not. But within the realm of human overrule we have infinite possible rules. Any intervention is based on an interpretation of previously unstated values. (If the values weren’t unstated, they’d already be in the code.) It’s impossible to accommodate every individual’s moral preference without fractures. An internet government cannot enforce social consensus the way the Turkish government enforces social consensus (although some might try). The end result is that everyone gets a private testnet of no value to anyone else.
Smart contracts are not designed to encapsulate an entire global economy. Maybe someday they will, but certainly not today. If you want a service that provides consumer fraud protection and insured deposits and universal basic income, take that up with your local jurisdiction. You know, the one that you already pay for. With your tax dollars.
*We trust the miners not to collude, but we don’t have to trust each other.
An Introduction to Fiat Money –interfluidity