Monetary Policy
I intend for much of the content of this blog to be based on future technology such as that described by Ray Kurzweil in his 2004 book “The Singularity Is Near”. While Kurzweil describes in detail the economic scaling of technological advancement, usually in terms of value/performance per dollar of various technologies improving and an accelerating rate. He doesn't directly address how this is going to happen for monetary technology itself, and for understandable reasons as the technologies that will drive this economic version of his law of accelerating returns were still five years off when his book was released, and were not only not predicted, but thought to be technically impossible by many experts.
To say the future of money is digital would not be a prediction. Nearly all currency is digital in todays world. Rather I suggest that the future of money is distributed and largely autonomous. In 2009 bitcoin was released into the wild. I shrugged it off, not believing that enough people would adopt it to make it viable. It could easily have lingered in obscurity as many ahead of their time technologies do, only to be resurrected in another form long after. A couple years later it reached $1 in value and I realized people had adopted it, and I knew this would become the new paradigm.
For the sake of this post I will skip the technical explanations of how bitcoin technology works, and arguments for if it will be adopted. The simple fact that it continues to exist and now as a market cap over $20 Billion, with 100s of millions of dollars a day in transactions, and major backing from tech companies makes the fact that it works and that people can and will use it self evident. For those seeking technical details I would refer you to Andreas Antonopoulos, who written a detailed book on it’s technical details and has given many talks that are freely available online.
Why will bitcoin and it’s like define monetary policy in the future? Automation. We are rapidly transitioning into an automated economy. Money handling is not immune to this, and there is great incentive to let computer systems handle transactions with programmable money, and programmable contracts. The cost advantage is obvious, but trust and reliability as well. In addition to the enormous cost savings of crypto currency, it offers protection from devaluation (inflation tax), and permission-less transactions. Some crypto has inflation, bitcoin in fact has a fixed amount of it. However everyone holding and using it knows if their currency will inflate and how much. No one can simply print a trillion $ and destroy the value of your savings. You are also free to use this money as you see fit without any trust in a third party to facilitate transfer. Something most Americans probably don’t worry too much about, but is of substantial concern to much of the worlds population.
So what is the new monetary policy? How does bitcoin consensus work?
Like any open source software bitcoin can be forked, by anyone, at any time. Anyone who wants to can create their own bitcoin specifically tailored to how they think it should be and offer it in competition. Hundreds have, we call their creations altcoins.
What about bitcoin itself? There now exists $20 billion in value on the bitcoin network, and some of those who use it or invested in it will want to occasionally upgrade it or modify it’s policy. There is currently a very contentious debate going on in the bitcoin community over how to scale transaction volume on the bitcoin network. The current system is at it’s peak throughput and if a solution is not found users may turn to one of the altcoins for cheaper faster transactions. Some would just as soon see bitcoin stay as a small relatively expensive store of value, rather than a platform for the everyday transactions of a billion people and business.
The blockchain is a ledger of all transactions on the network. Anyone can download this ledger and use it as they see fit. Typically when there is a hard fork in bitcoin, when something changes that breaks compatibility with the existing clients, it is either a mistake or a planned upgrade and people rapidly agree on what is valid and continue as one unified system. However if some miners and users choose to insist on a change and others don’t they may create a fork and maintain ledgers that from that point on are different and disagree with eachother as to what transactions are valid can exist. This happened recently on the ethereum network.
There was a project called The DAO, a distributed autonomous organization that ended up holding a very large portion of the ethereum tokens. This system was compromised and a hacker managed to take these tokens. Because of the scale of the theft it was decided that ethereum would simply roll back and undo the theft considering it’s transactions to be invalid. Some disagreed with this move, arguing that all transactions must be honored and continued to support the original blockchain. From that point on there were two separate ethereum networks with two separate Ether tokens. Everyone holding ethereum now had both tokens, and could decide for themselves if they wanted to keep both, or sell one to stay on whatever chain the preferred.
A similar split could happen in bitcoin. There are two camps with different solutions to scaling bitcoin, who vehemently oppose each other. In the past all forks have resulted in one quickly gaining majority support and the other being abandoned. If bitcoin forks, and enough people stay behind a minor fork could survive and split bitcoin into two separate tokens leaving users to decide what coin they favor.
This is free market monetary policy, and it will govern how money works in the future. The economic advantages of using this type of money are so great that exiting government issued currencies will not be able to compete, and will have to change drastically to survive at all.
Kurzweil’s law of accelerating returns now applies to economics and finance. Like other industries it’s effect will not be limited to it’s own sector. The effects of this new more efficient economic system will speed the development and lower the cost of virtually all technologies that come after it, even allowing some products and services to be completely automated and decentralized, requiring no human management at all. We can already see early developments in this area such as Cell 411’s ride sharing service that essentially replaces Uber with software.
A very large portion of the work we all do goes to support overhead. Already existing crypto currencies such as bitcoin and ethereum could replace much of what the banking and finance, and legal industries as well government does. This effect is cumulative. All products and services, regardless of who provides them to us have these overhead costs at every level of the supply chain, and that cost is compounding. Alleviating 10% of overhead doesn't just mean we spend 10% less to get what we get for our money it means a 10% savings at every step on it’s way to us. Combined with other automation technologies this could eventually lead to a near post scarcity state for many products and services compared to what we pay now.