On the Path to Absolute Money

The origin of money and the evolution of monetary relations

Essentially, money is one of the forms of social contract. It’s the universal equivalent (or equivalents) used as the measure of the value of all goods and services. In a broader sense, money is a universal means to express, transfer, and accumulate value.

When we consider its origin, we realize that despite the variety of forms money has assumed over the course of its history, (even physical forms), it’s actually an abstraction with a particular meaning and value only within the framework of a particular historical period and human community. But the concept of value itself is an abstraction as well; meaningless without the context of socio-economic relationships.

This thought is worth a more profound deliberation, but first, let’s briefly consider the origin of money so we can better grasp the big picture. In the course of this consideration, we will also focus our attention on important aspects of the evolution of monetary relations in general.

Barter: moneyless trade

At the initial stages of societies’ development, money as such did not exist. Societies largely engaged in subsistence farming, and the exchange of their own commodity surpluses for the needed commodity surpluses of other people or groups was carried out using barter. If one community caught more fish than it needed, for example, it could exchange the extra fish for grain grown by another community. And our fishermen, as a rule, were the final consumers of this grain; the consumers of the exchanged fish were those who harvested the grain.

In other words, at the dawn of civilization, people exchanged their goods directly and without the mediation of any value equivalent.

Since goods were exchanged in their natural state, bartering presented certain barriers for potentially more lively and productive exchanges. It was also quite difficult to save and transfer value. Therefore, human communities were forced to seek solutions to the problems that arise in the process of market development.

Commodity money: utilitarian objects as a measure of value

One of the first and most obvious solutions was the emergence of commodity money. Commodity monies are certain types of goods that, by virtue of their physical and consumer characteristics, were a more convenient means of exchange suitable for the role of value equivalent.

In many cases, those goods were cattle or salt. Cattle, in addition to its direct commercial value, also had the advantages of mobility and self-replication, and rendered additional services (transport, for example). Conversely, there were also natural disadvantages to cattle: the possibility of illness or death. Salt was used as a taste modifier, as well as a food preservative. It was relatively difficult to obtain and limited to specific geographic ranges (mainly on the periphery of the continents or near salty seas), which gave it additional value. It was also quite simple to store, transport, and accumulate.

These two types of commodity money had a significant impact on civilization, which is reflected in language. For example, the Portuguese word pecunia (money) comes from the Latin word pecus (cattle); the word capital comes from the Latin capita (head). The English word salary and Spanish and Portuguese salário (salary) are derived from the Latin sal (salt).

Other types of commodity money in different countries at various times include wood, sugar, cocoa beans, tobacco, yarn, cloth, etc.

The problems of commodity money were the fluctuations of their value, the impossibility (without losing utility) of dividing them into smaller parts, and the ease of damage or destruction. All this hindered their full application in more advanced forms of commercial trade.

Metals and the first signs of value measure abstraction

The discovery of metals and their processing technologies led not only to revolutionary changes in the production of weapons and tools but also to the emergence of new physical forms of money.

Along with their immediate utilitarian properties, the advantages of metals as a mean of exchange include their durability, divisibility, and the relative ease of movement and storage. In addition, their values were enhanced by the complexity of mining and processing, as well as knowledge and skills in the respective fields, which were limited or inaccessible for most people.

Initially, metals were most likely exchanged in their natural form, just like other types of commodity money (which, at this stage, they were). But they were later used in crafted forms (ingots, jewellery, and so on). Proto-coins then appeared as miniature metal emulations of physical goods, resembling earlier forms of commodity money. Thus, in the Middle East, tiny copies of swords, knives, or keys were in circulation; in Greece, copper and bronze coins in the form of small animal skins.

This is a very important point because here we can already witness the earliest manifestation of abstraction in measuring value: that is, the endowment of objects (still physical) with a value that may not be inherent in terms of their immediate utility. Thus, money began to acquire characteristics of true equivalence, rather than being simply items that are easy to trade (commodity money).

Those characteristics became even stronger as coins evolved alongside their societies, into small pieces of metal of more or less standardized shape, size, and weight with an issuer’s seal that guaranteed their (face) value.

Gold and silver: scarcity and the cultural factors

It is obvious that value in the case of coins was already an abstraction since the most precious metals (gold and silver) had the least practical value at the time. They were poorly suited for the production of anything more utilitarian than jewellery but were much rarer than the cheaper iron or copper.

Here, in fact, one of the most important characteristics of universal value equivalence — scarcity — is demonstrated quite clearly. Why do we think that this characteristic is the most important one? We will return to this question later.

In addition to objective characteristics, such as rarity and corrosion resistance, purely subjective factors propelled gold and silver to the top of the monetary Olympus.

First of all is the aesthetic beauty of these metals, which is something neither truly natural nor objective, since beauty (as we all know) is in the eye of the beholder. Secondly, religious traditions and habits probably played a role here. In primaeval civilizations (particularly Babylon) priests, knowledgeable about astronomy, taught the close mystical and divine relationship between gold and the Sun, silver and the Moon. This inspired beliefs in the magical properties of these metals, as well as objects made of them. Ancient rulers, who ultimately took control of the precious metals’ mining and minting, used these beliefs to sacralize their own power. One of the earliest historical figures to strike his profile on coins was Alexander the Great, of Macedonia, who was also famous for proclaiming himself a descendant of various gods and even a god himself.

Another possible reason why gold and silver prevailed was the result of Gresham’s law — “bad money drives out good”. If there are two forms of commodity money in circulation having a similar face value, the more practically valuable commodity will gradually disappear from circulation.

These and similar factors only strengthened the abstract essence and value conditionality of precious metals and coins made of them, which brought them even closer to the true equivalent of the abstract concept of value, compared with more ancient means of its measure, exchange, and accumulation.

Paper money: the pinnacle of value abstraction in the pre-digital era

It turned out that money made of precious metals was such a successful invention that it accompanied Western civilizations, at least, for quite a long period of time: in fact, right up to the last century. But finally, the time came for the next stage of abstraction of money. So paper money came into play.

The first paper money emerged in ancient China (9th century AD). In Europe, its forerunner began to appear in the Middle Ages. Despite the relative convenience of storing and moving metal money, it was still quite difficult to settle accounts using it (especially if we’re talking about transporting large sums). Also, the expansion of what we would now call international trade required a more convenient method of payment.

Transportation of significant funds, even for more or less insignificant distances, was fraught with many risks: from trivial robbery to loss, for example, at sea in a shipwreck. Therefore, it became increasingly common practice to store money and items made of precious metals in relative safety with a jeweller, who would in exchange issue a special receipt stating that he took the such-and-such amount of money for storage from the such-and-such person (or company). These documents could not only be conveniently stored and transported but also easily transferred to others, (thereby transferring the right of ownership for valuables stored in a safe place).

Exactly these practices later became the prototype not only of the banking system but also of paper money: banknotes. At that moment, an abstract value was no longer expressed by the utility of a physical object. It was expressed only by the face value written on a piece of paper; that is, on a physical medium, which in itself doesn’t have even a fraction of the value it represents.

Thus, paper money can be considered the pinnacle of abstraction among all iterations of value measurement in the pre-digital era.

Unsurprisingly, many people initially regarded paper money with distrust. The transition from precious metal coins to banknotes turned out to be a degree of abstraction too far for the broader masses. The process of gradual abstraction of value measurement has, however, not actually been interrupted since the inception of money; rather, it has constantly gained momentum.

But paper money itself also underwent its own internal evolution, driven by the development of credit relations, as well as by the need for an increase of the money supply to cover the demands of both national and the world economies (in fact, this was one of the main reasons why paper money started to replace metal coins in the first place). So national currencies underwent a further value abstraction process and finally departed from the so-called Gold Standard (when paper money was backed by the issuer’s actual stock of precious metals, for which this money could — at least theoretically — be exchanged at a certain exchange rate). Finally it led to full conversion of the national currencies of most countries into a fiat (from Latin fiat — decree, command) or fiduciary (from Latin fiducia — trust) money: that is, credit and unbacked banknotes, the value of which are based solely on trust in their issuer, as well as in their monetary policy.

It worth mentioning that, as in the case of the minting of coins made of precious metals in earlier periods, the issue of paper money was ultimately also monopolized by the state in the form of central banks. Thus, trust in fiat currencies is essentially trusted in the governments issuing them, in their monetary policy, and, in a broader sense, in the economies of those respective countries.

The practice has shown that such a basis is not very reliable for a number of reasons — principally due to human factors that directly affect the current and future value of a particular fiat currency, (or more precisely due to the need for unconditional trust in it).

As we can see, paper money became a kind of pinnacle of the evolution of money, in terms of the value abstraction process. But at the same time, it exacerbated the problem of general stability and predictability of the monetary system based on fiat money, as well as the need for trust to the issuer.

We’ve seen that both conscious and unconscious abuse of such trust has repeatedly led to disastrous results in the economies of entire countries, leading, in particular, to the loss of people’s savings in fiat currency at scale.

However, before we try to find a response to such a challenge, we will continue our consideration of the evolutionary stages of money development.

Electronic money: the absolute abstraction

The next significant milestones on this path were credit cards and, in a broader sense, electronic money.

As with mistrust in the transition from metal (“real”) money to paper money, some were initially wary of credit cards and electronic money. In their eyes, “real” money was that which they could hold in their hands, (that is, paper).

But in fact, electronic money is just another stage of the abstraction process already familiar to us. This time it was made possible by technological progress in the fields of electronics and communication.

At this stage, the money that previously existed in the form of physically-transferred credit notes turned into electronic records of accounts and transactions, stored in special electronic accounting tables (ledgers) on servers of centralized institutions (central and commercial banks), or providers of other types of electronic money, (in cases other than national currencies).

In an economic sense, we are still dealing here with fiat money, the value of which is based on the trust in their issuer and in their monetary policy.

But formally, such money is already almost an ideal abstraction, since it no longer even exists in a physical medium, but as pure information. On the one hand, this type of money provides us with unprecedented amenities and opportunities. Electronic money is fairly well-protected from the possibility of physical theft or loss, it’s easier to transfer than ever, can be simply and quickly sent over almost any distance, is easier to accumulate and store in almost unlimited quantities, etc.

But at the same time, the centralized form of classic electronic money has a number of new flaws and very serious threats.

First of all, it represents the surrender of virtually complete control over the funds of individuals and organizations to someone else (banks, the state, financial service providers, etc.). There’s also the possibility of total monitoring of any business and private financial activity by both the banks and the state, as well as other centralized structures whose intentions may not always be good (especially when it comes to totalitarian states). Transactions in centralized systems can potentially be blocked, cancelled or changed, funds can be frozen or confiscated, and so on.

Moreover, potential attackers are not limited to those who control the centralized system. Third-party malicious actors who obtain illegal access by, for example, hacking or other mischiefs only increase the list of potential threats.

In short, centralized electronic money carries as many new challenges as solutions to old problems. But most importantly, it doesn’t solve the fundamental problem of any fiat money — the problem of the need for confidence in their issuer and its monetary policy, as well as the problem of predictability and rationality of such a policy.

Thus, despite the fact that ordinary electronic money is a kind of absolute abstraction of the measure of value, makes it a contentious claimant to the title of “absolute money”.

Fortunately, evolution has not ended here.

Cryptocurrencies: absolute money?

Only a decade ago, during the global financial crisis of the late 2000s, an unknown programmer (or group of programmers) under the pseudonym Satoshi Nakamoto created Bitcoin, the world’s first digital currency based on a cryptographically protected distributed ledger: a new technology, called blockchain.

Unlike traditional digital money, cryptocurrency has a number of advantages; answers to the problems of both conventional digital money and fiat money in general.

The primary advantage is that a cryptocurrency is an essentially programmable money, which means that all the rules for their emission and further operation are strictly defined in the system code itself and are virtually immutable. Even the creator cannot interfere in the code once the system is launched, and any change is possible only with the consensus of the whole community supporting the particular cryptocurrency. These rules, furthermore, are transparent to all participants. The operation of cryptocurrency is therefore as predictable as possible (since everyone knows all the rules in advance) and almost indifferent to human factors. There is no central authority of decision-makers on issues of cryptocurrency, its monetary policy and so on — as would be the case with fiat money, or any other types of money as well.

As already discussed, in addition to transparent rules of operation, cryptocurrencies have another important feature: namely, clear emission rules, as well as the final limit of this emission. This property sharply distinguishes cryptocurrencies from all other types of money, where no one (not even the issuer) knows exactly what amount of the currency is in circulation at any particular moment of time, nor how much there will be in the future. In the case of cryptocurrencies, we always know exactly how much is in circulation now, how much there will be in the future and when. This brings the control of inflation and its predictability to an unprecedented level. In addition, cryptocurrency allows any programmable model of operation, including a deflationary one (wherein the amount of money does not increase over time, but decreases predictably).

But regardless of the model, almost any cryptocurrency (with rare exceptions) has an ultimate indicator of max supply. This means the maximum number of coins that will ever be released is defined, and it will be impossible to release more than that specified amount within a specific cryptocurrency. Bitcoin, for example, has a max supply of only 21 million coins.

Thus, for the first time in the history of mankind, a true distributed digital scarcity has been created.

We talked about scarcity above, as one of the important characteristics of money. Gold, precious metals and other rare materials, being naturally occurring and naturally scarce, can theoretically lose scarcity in various circumstances. For instance, a previously-unknown deposit field could be found, or another source of obtaining a resource could appear; or scientists could learn how to synthesize or produce a resource artificially at a relatively low cost (as has happened with diamonds, aluminium, and others). If the resource is utilitarian, then its value may decrease when a cheaper replacement is found, or products in which it is used become obsolete. In short, mankind cannot fully control the scarcity of any physical or natural resource, and therefore its future value cannot be guaranteed.

Meanwhile, the degree of limitation of digital scarcity can be clearly stated and programmed. This creates an unprecedented degree of certainty and predictability.

But are cryptocurrencies really the absolute money? Unlikely, if we’re talking about pure cryptocurrencies. After all, they also have their drawbacks.

There’s the impossibility of direct integration between various blockchain solutions — the isolation of each cryptocurrency or ecosystem from other similar solutions, as well as from the traditional financial world. Further, the high technical complexity of traditional cryptocurrencies significantly limits comprehension of the principles of their functioning by most. Non-intuitiveness, and in general a low focus on the end-user experience, feeds into scalability issues with currently existing solutions as well as other technological and ideological limitations.

All this continues to hinder the adoption of cryptocurrencies by the market and users (to an extent which the technology probably deserves). Although an individual cryptocurrency may not be the absolute money, cryptocurrencies in general, as the newest monetary and economic phenomenon, promise an evolution in the very concepts of money and monetary relations.

A new look at money and monetary relationships

The emergence of cryptocurrencies not only provides solutions to many seemingly-eternal problems of money, but it can also serve as a catalyst for change in the very nature of money. Modern society is used to seeing money as something ‘official’, ‘global’ and ‘serious’ ‘backed by the authority’ of its (largely state) issuers.

Money is, however, in the first instance an abstract measure of value. And value can be very diverse, and more specific in focus than a national fiat currency can address. Value can take many different forms: attention (content views), approval (likes on social networks), support (crowdfunding, charity), delegation (elections), and so on.

Previously, all this could be encapsulated in a single form of currency (the world currency, or at least the dominant one in a given country or region). Now, the ease of creating cryptocurrencies and tokens allows almost everyone to create a currency with programmable characteristics for their own unique purposes. There could even be separate currencies for a single purpose, or for a certain type of activity, or for different financial uses (international payments, micro-payments, settlements, loans, savings) and so on. And each of them can be designed and optimized to extremes for its specific task.

Moreover, new currencies could choose not to claim to be ‘universal’ at all, nor to strive for widespread acceptance (for which any currency would struggle). Any group of at least two people sharing value of some kind can create a currency for transferring, storing and exchanging it, and that currency need be accepted only by that group.

It’s difficult for us to even imagine all the possibilities, let alone the social and economic implications of this kind of ‘currency liberalization’.

But it’s much easier to imagine the challenges that such a future holds. And one of the more apparent is the question of the effective interaction of all existing and potential cryptocurrencies. Of how to link all this diversity into a single global financial and economic system, simple and intuitive for end users — most of whom are not always willing and able to grasp all the technical and economic subtleties of a system or technology.

So what’s next?

Studying the history of money and the evolution of monetary relations, as well as being inspired by the opportunities and prospects that appeared with the emergence of blockchain technology, we came to the conclusion that it is necessary to create an open distributed system designed not only to overcome the limitations of existing cryptocurrency solutions but also to link the world of digital assets with a universe of real-world assets and values.

In other words, the ultimate goal is the integration of the whole variety of existing and prospective economic, monetary and, in a broader sense, value ecosystems into a single universal ecosystem, where trustless systems can effectively coexist with systems based on trust.

So the idea of creating the GEO Protocol was born.

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