Albert Wenger, investor at Union Square Ventures, wrote a piece about the technological ages of human history, and some characteristics of the modern age. This paragraph jumped out at me:
Much of what we believe to be true about society is informed by the more recent historical record. But the forager age might be more informative going forward. Why? Because both the agrarian age and the industrial age were fundamentally marked by scarcity. Only the forager age had a relative sense of abundance. In the digital realm, however, we are dealing once again with abundance and we are gradually extending that to the real world.
What does it mean to live in an age of abundance? How does a truly ubiquitous digital era bring that about, for one, and what does that change? By way of aiming at an answer to those questions, I started thinking more deeply about Bitcoin. As this article very elegantly describes, Bitcoin protocol is an open-source ledgering system, so by keeping a record of where every Bitcoin goes, one can allow direct transfers between individuals with no need for a third party insurer. As Balaji Srinivasan, Naval Ravikant, and many others have explained and predicted, this protocol is powerful not just because of the value of Bitcoin on any given day (unlike what most speculators might lead you to believe), but because of what an open source, increasingly-hard-to-game ledgering system will enable in terms of all types of transactions. I want to walk you through the one that’s captured my imagination today.
First of all, a word about Bitcoin itself (rather than the protocol). It is a resource-based currency, like gold, rather than a fiat currency, like the US dollar. This means that it is backed in something real, while something like the dollar is guaranteed by a government central bank, but holds no intrinsic value. In the case of Bitcoin, unlike gold, real isn’t physical, but digital. But you still have to mine Bitcoin, as you would mine gold. There is a known supply of Bitcoin in circulation, and each one is intrinsically valuable. In both of these cases, fiat and resource-based, the philosophy of the currency is based primarily on managing its scarcity.
Bitcoin is obviously scarce, in that you have to mine it (a time-intensive, arduous process) or buy it to have access to it, like gold. And the dollar is scarce in that the central government has to print it or you have to exchange valuable goods for it in order to have it. Currency scarcity results in a specific set of network behaviors that we all do without even thinking about them – the currency itself, by virtue of being scarce, quickly becomes not a means to an end, but an end unto itself.
Plenty of Bitcoin entrepreneurs (and the thinkers behind something like Ripple) use it as a fundamentally ‘speculative’ product. That is, its valuable today because it’s going to be more valuable tomorrow. This is a feature, not a bug, of scarce currency (ForEx is the same). Saving cash, stealing cash, and investing (in general, perhaps) are all examples of network behaviors that are a function of scarce currency. I can’t produce a dollar (or Bitcoin) whenever I need one, so there are certain behaviors I tend towards as a result. What if currency scarcity weren’t an issue? How would that change network behavior? And how would that even be possible?
Enter mutual credit systems. Most loans accrue interest, and that interest is added value to the lender, who has gained from the transaction, by virtue of getting back more than the value of what he put in. The borrower also gains, by accessing goods and services when he/she needs them, rather than when he/she has the immediate barter value to pay for them. And “pay later” enables all sorts of cool commerce (just look at a mortgage). So credit is sort of made-up value. Every time you give me something, and instead of paying you now I pay you later instead of now, that is debt that gets added to the ledger of a system, out of thin air. If you have credit, you don’t need currency. (Side note- these days, debt can be split up, combined, sold, bought, etc. Large swaths of the financial services industry are simply this. Information technology was the first step towards this, so the financial services industry owes a lot more to technology than they might admit.)
A mutual credit system, then, is one where there is no currency, and only credit. In these cases, the total transactions on the system are effectively IOUs. If you owe me and I owe her and she owes him and so on and thus, you can create a big ledger where everyone is keeping track of everyone else’s debts, and everyone can use their actual goods and services to pay down their debts, and can create credit to access more goods and services in the system. My brilliant friend Alex Chung has worked on some problems in this space; I’m finally properly wrapping my head around how it works.
This gets especially interesting because when it’s just ‘credit’, the ‘units’ are somewhat arbitrary. They can be IOUs, or hugs, or high-fives, or really anything. There are models all over the world where the units are hours, called time banks. But I wonder what other units there could, or should be for what Trust Labs calls “community currency”. Trust and safety is critical to the success of a system like this, like many peer-based networks. You can “price risk” better with more information, which is why most mutual credit systems to-date have been for very small groups of people (in the hundreds): they have enough information about any other actor that there is a high level of community trust, and thus comfort in any given transaction. high level of community trust, and thus comfort in any given transaction. Also most mutual credit systems have a limit, so someone can’t run up a bunch of debt and then leave. But the Internet works towards enabling the trust/reputation layer. Moreover, making ones credit/debt available on a ledger is a very powerful social feature that would conceivably change behavior, since what you owe or are owed is your reputation in and of itself.
Why does Bitcoin protocol matter to this? A ledgering system that is immune to being gamed is very powerful. And given that it’s open source, one can fork it not only for things like Snapchat of email, or music (and other digital good) distribution systems, and so on, but one can use that ledger to power mutual credit systems, as well. And consider the implications of this!
Thanks to David Anderson, Ryan Jacoby and Alex Magnin for pushing my thinking on this.