Negative Money

If fiat and cryptos are to amicably co-exist, what tokens are best?

In his “Histories”, Herodotus writes about the Egyptian king, Psamtik, who tested a hypothesis amongst two toddlers raised by mute nannies in silence. When kids pronounced their first word it was “bread”, but not in Egyptian language — it was in Phrygian. This led the king to admit that the origins of the Phrygian people are more ancient. Be it a fairytale or a lack of nannies’ discipline, there is the modern idea too — that ontogeny repeats phylogeny. It is possible that the way mankind has learned to speak is reflected in the course of speaking skills development of a particular child.

Similarly, this may be the unique decade in history when we can learn a lot of “natural economics” simply by watching the process of crypto adoption. Crypto-economies offer a whole new set of incentives. It is a ‘child’, not yet spoiled by any old rules. The nature of fiat money is both a powerful cause of our successes in the past couple of centuries and a stumbling block in the last couple of decades. Cryptocurrencies and crypto-economies have arrived just in time to give us a chance to reform things, perhaps bloodlessly.

“Gaia” Hypothesis on After-transition Regime

Cryptos have deigned to this world not to replace the inflationary fiat money, but to balance its vagabond ways which abuse the planet’s resources.

There is a very inspiring computer simulation called Daisyworld. A hypothetical planet has two varieties of daisy as its only life forms: black and white. White petals reflect light and black petals absorb light, therefore the planet’s albedo depends on daisies population split. The simulation shows that although the planet receives changing amounts of energy from its star, the surface temperature remains almost constant. This simulation is one of the plots in the “Gaia hypothesis” — the narrative that a rightly-diverse set of species is not a parasite, but a protector to the common nidus. The Planet (Gaia) minds itself.

In this analogy, the contemporary global economy lacks the necessary balancing. The “earn more, spend more” incentive has no required antipode. There are only black, “absorbing-type” daisies of the consumerism-provoking inflationary money system. The quasi-involuntary exchange of real values for mere Philistine convenience literally heats up the planet.

Cryptocurrencies may give birth to the “white daisies” behaviour (nobody wants to spend an extra microbitcoin unless it is absolutely necessary). Some people argue that switching to a deflationary money system will result in a decline in the consumption and after that, in production. Other people convincingly prove that monetary policymakers can operate with central bank debt based on currencies like Bitcoin, just as with ordinary fiat.

The Daisyworld logic diagram by Dave Bice, Dept. of Geosciences, Penn State University

The dispute is probably futile, as we are not facing a “switch”, but rather a dynamic co-existence of the two systems. Maybe it was only due to the lack of advanced computational and communicational capabilities that a long-latent general society’s demand for an alternative economy and money system hasn’t surfaced up earlier. Resources will run out if we don’t change our ways. That is the sword of Damocles that no environmentalists or politicians could remove. Wouldn’t it be great if the crypto-movement does the job?

The Gaia hypothesis has less heroic practical implications. On one hand, if we consider fiat money not as a foe but as a necessary long-term counterweight to cryptos, many currently proposed tokens are pointless. On the other hand, the Gaia hypothesis also allows the highlighting of sectors with tokens of greatest potential in the long run. Let me give one example for each hand.

“No Crypto Credit” Sub-hypothesis

A ‘pure crypto economy’ offers no on-blockchain way for debt enforcement. In a hybrid fiat/crypto global economy, this part would naturally be served by incumbents.

Besides providing a comparatively peaceful scenario for the entrance of cryptos to the world economy stage, the Gaia hypothesis helps to cope with the crypto credit problem. An average business needs credit; however, so far, only fiat black daisies provide the service, because there’s no such thing as a ‘decentralized cryptodebt’.

Debt is a “currency” that no one wants to possess and every owner would not mind to “lose”.

The original Bitcoin paradigm is the opposite: one protects the ownership with private keys and achieves the universal recognition of the possession with a sort of a mesh-networked witnessing. Can this logic be reversed? Well, cryptos favor anonymity so, social enforcement becomes questionable; at the same time, the concept of irreversibility of payments complicates various technical aspects of providing a credit line.

The few white papers on blockchain credit creation protocols we were able to retrieve provide no answers, justifying particular ICOs. A couple of blockchain factoring projects that have run their token sales in the crazy summer of 2017 are full of scammy red flags and fail to prove the point. Founders of the decent decentralized alternative finance project — it aims to facilitate cross-border credit accessibility for small and medium businesses — specifically emphasize that all principal capital transfers have to remain in fiat. There’s a number of honest crypto projects facilitating credit, but they are all limited to indexing credit scores, billboarding, and other secondary functionality.

Even half-measures and adjacent services fail:

• P2P Bitcoin lending didn’t work. Google still indexes about a dozen providers on that key phrase, but websites either don’t function or have switched the focus to fiat.
• Secured ‘crypto-debt’ is pointless. Based on joint-escrow smart contracts — for example — misses the fundamental goal of closing cash flow gaps. A retrievable collateral has to be on-chain (i.e. same type of money) so, it could have been used for financing directly, in the first place.

We believe in innovation and general growth of goodwill in society, but common sense tells me that solving the debt issue will always require some sort of physical enforcement. Let us hammer another nail into the coffin of crypto debt: think of typical terms. What are four years, for example? It is “long enough” time — things like a college degree or disappointment in a President take that long — but it is not exactly “long-term”. In crypto, four years is not long-term; it’s an entire epoch, an eon. Four years ago, ICOs did not exist, bitcoin cost forty times less, and we saw a new altcoin every week.

“Primacy of Commerce” Sub-hypothesis

Crypto marketplace is not empty; it hasn’t been created yet.

We’ve witnessed several hour-long discussions lately about what relative positions Polkadot, Cosmos, and Wanchain will occupy. The seriousness of the attitude and the sum of money involved made us stunned. Who needs it yet? No actual business uses the previous step, Ethereum, which was supposed to be a proof-of-concept. Merchants and real businessmen mostly ignore all cryptos, from Bitcoin to the latest cross-chain solutions. The movement has little to offer commerce: no new credit opportunities, no new money that makes sense — commerce does not care about the hyped “new, libertarian money” lure.

Bitcoin, by the way, is such a discouragement in this respect. It has ‘stole’ quite a lot of adoption time from alternatives, killed in the womb. A typical rhetoric is to praise the first cryptocurrency as one beyond politics and large corporate interests. So people have hoped; however, not only is Bitcoin is burdened with some governing structures, its primary logic presupposes a large gap between the poor and the rich. Even without Satoshi’s coins, the degree of wealth concentration is enormous. In some way it feels like Bitcoin wasn’t even meant to become broadly adopted — is it really a champion of Commons?

For months we have been searching for a good crypto-bait for the people of commerce, retail in the first place. One idea was to place cheque circulation on top of a blockchain and combine the best of two worlds in payments. Another idea was to come with a merchant POS app as a Trojan horse and smuggle in some bitcoin habits. Apparently, there’s just no such demand. Merchants are fine with plastic cards and do not mind VISA’s ~3% interchange ‘tax’ (imposed on the entire society through universally increased prices). Merchants do not really plan to unlawfully evade taxes even if they have a chance. And, of course, they are apathetic regarding the whole liberty thing.

Maybe the correct answer to the question of how cryptocurrencies should be adopted into commerce is simple, and it was always right in front of us, as is usually the case — an e-commerce platform that issues a cryptocurrency, directly as a reward to participants for concentrating their economic activity onto the platform. Wasn’t it always obvious what kind of “liberty” businesses really miss and the crypto space still did not provide? It’s the marketplace itself! We are so used to the fact that it belongs to the state — which taxes every elementary move on it — so that we can’t even theoretically separate one from the package.

Read the fine print on a dollar bill: it says the piece of paper is “legal tender for all debts, public and private” (read: “every deal will be VATed”). USD is a comparatively strong currency, so it uses a soft way to put it. In countries with weaker currencies, the notion is much stronger — “the only legal tender” — so one goes to jail for using anything but that particular currency, regardless of fulfilment of tax obligations. Weaker economies have no option but to try to force their currency into circulation. So, a currency and a corresponding economy constitute one indivisible package.

Technically, taxes in the crypto space are hard to force. There are various degrees of enforced transparency and the wide range of currencies make it quite difficult. Therefore, crypto taxes will be paid in “best countries” only — people in Scandinavia pay taxes not because they will go to jail otherwise but rather, to a large extent, because they see where the money goes and they are willing to be taxed.

Fiat is here to stay and keep the nation economies’ fenced-in. The borderless planet does not look like a timely idea anyway, considering destabilization factors of that sort lately. Token systems that facilitate commerce in a “native” crypto way will find themselves in the positive feedback loop. Thus, as the good becomes better and the bad further degrades, native crypto commerce should prosper.