The Science-Fiction Superhero of Cryptocurrencies
Disclaimer: This blog is not investment advice. It is just "like, my opinion man".
It was late 2017 when I got interested in cryptocurrency. Yes, I was initially skeptical. One of the main reasons I believe I was skeptical is that I have a degree in economics from UCLA. Specifically, I remember a course I took (I think Econ 130) titled "Money and Banking". This was a standard course for all Econ majors. Without giving a detailed critique of the course, suffice to say I deserve my tuition refunded for that particular class. To be fair, I tremendously value my experience at UCLA. That said, my coursework in money and banking was not accurate or sufficient. When I started to learn about blockchains, I quickly saw I needed to take a deep-dive and re-educate myself on money. Below is my analysis and key observations on the nature of what we call "money". When I write money with quotes ("money"), I am referring to the general usage of the term in society, and not a strict scientific or economic definition. It is my deep-dive analysis of money, and subsequent observations, that led me to my personal favorite crypto.
Observations on the nature of "money":
Many have "done their own research" and travelled down a variety of "rabbit holes" only to find that the terminology in use leads to much confusion. Trying to understand "money" is no exception. There are two very key elements of the consensus understanding of "money" that need scrutiny:
The definition of money is vague - When we speak of "money" we are speaking somewhat lazily. Money is assumed to equate to fiat currency and specifically physical notes. If we speak more broadly then "money" could also include stacks of virtual notes stored in a bank (savings accounts). If we take stacks of "money" and buy a house, then we no longer call this "money". These stacks of virtual notes are converted into real estate. The term "money" is insufficient/inappropriate to describe the myriad situations where we speak about "money".
The consensus view on the characteristics of money are lacking - If you perform a google-search for "characteristics of money", or any similarly worded search, you will receive quite a few lists of characteristics. These typically include durability, portability, divisibility, uniformity, limited supply, and acceptability. Amazingly, there is never a mention of one of the most important characteristics: Stability. This characteristic has recently become increasingly important and yet there is very little mainstream discussion of this topic. Yes, the media talks about inflation. What is not discussed nearly enough is the relationship between inflation and the stability of the "money".
Consideration of the above has led to the two following viewpoints on the "money" as it exists today:
Suffice to say that in a free-market economic system, "money" should be a competitive good like any other. We will not address this topic here.
What most of us consider "money" is a convenient illusion or misconception. How did we all come to this same misconception? I will leave my reader to conduct an investigation into the cause of this widespread confusion. Later, when we describe the nature of (sound) money, we will assert it is most accurate to define the concept of "money" by two distinct (and conflicting) characteristics. Broadly these characteristics (or features) can be called:
The store-of-value component "money" - call this the asset characteristic of "money"
The medium-of-exchange component of "money" - call this the currency characteristic of "money"
Conclusion: What we currently describe as "money" is a significant over-simplification.
Historically, this simplification was likely done due to expediency or for other reasons. Today, technological advances allow us to correct (and properly monetize) this oversimplification of "money". When we understand money from this perspective. Namely, that we are trying to achieve two objectives with one vehicle in today's fiat currency system. We are trying to use fiat currency (i.e. US dollars) as both an asset and a currency.
Assertion (spoiler alert): The superior type of "money" is one that converts (with near-zero friction) between it's two manifestations: As an asset and as a currency.
Characteristics of a better form of "money"
To elaborate on the assertion above, At the limit, our goal for money is to be used both as an appreciating asset(store of value). and also as a medium-of-exchange (currency). It would be ideal if the value of our physical dollar notes continually increased. But, if that was the case, people would start saving the notes rather than spending them. Thus, their utility as a currency would be significantly diminished. This is because volatility is a negative characteristic for a currency. I believe this is a phenomenon that has always impacted bitcoin adoption. Namely, if your "money" is lacking the feature of stability (yes, back to stability again), it is not a desirable currency. This is true even when the instability trends consistently to the upside. Since a single "money" can not efficiently achieve both goals simultaneously. (to perform as both an asset and as a currency), we should seek to achieve the next-best thing!
Recipe for the superior form of "money" - Superior Money
We want our "money" to be like a shape-shifting creature from many sci-fi thrillers. Something that can change form and change shape easily, right-before-our-eyes. The "money" we use will have two forms...you guessed it: The asset form and the currency form.
Using technology (specifically blockchain) we can create a Superior Money with the following features:
Your money will have two forms. An asset form and a currency form.
You can convert instantaneously between the two forms.
The primary goal (financial objective) of the asset form of money is to appreciate
The primary goal of the currency from of money is to exchange or transact
Our "money" system works pretty well today. What are the potential benefits if we had this Superior Money?
M1 versus M2 Money Supply as of Dec 2021:
4.8 Trillion is the current M1 (checking accounts and cash)
14.8 Trillion is the current M2 (savings and money market funds)
No interest or very low interest rates are being paid to the consumers on the 4.8 Trillion consumers have deposited in M1. M1 is the money that you and I and our friends and families keep in our checking accounts in order to pay for stuff. The banks don't pay you any interest on this money, yet the banks are paid nightly interest on this same money. The interest on the money in M1 currently goes to a middleman (bankers). With blockchain technology, every consumer should be able to retain this interest for themselves. This is the consumers' money...
How much money are we talking about?
If we assume that capital yields a 5% annual rate of return, then there is approximately 240 billion US dollars (5% of 4.8 Trillion) to be transferred annually from bankers, to checking-account holders. So, if we find the cryptocurrency/blockchain that provides the two features of Superior Money, we can conceivably help re-unite 200+ billion dollars per year with its rightful owners. Working people. (This is my own rough estimate and these numbers include only the USA)
There are a lot of cryptocurrency and blockchain whitepapers out there. If you are reading this far into this blog, then you are likely the type of person that has read A LOT of whitepapers. Even after "doing my own research" on a lot of blockchain/crypto projects, I find myself not fully understanding all the nuances of each project.
The MakerDao ecosystem and crypto are very closely aligned with the theoretical definition of Superior Money that I envisioned while wandering the coasts and forests of America. I would do a dis-service to MakerDao if I attempt to describe the details of their ecosystem to you here. Visit their website (https://makerdao.com/) and do your research. The approach that Maker have taken in the real world is aligned with my current expectation of the future direction of money and banking. In other words, their project is focused on building a Superior Money.
Finally, one hopes that someday there will be a truly competitive market for money. A world-wide market where different forms of "money" compete for market-share based on merit. This freely competitive market for the most fundamental element of our existence is a pre-requisite to achieving the promises of superior money.
What do you think about "money"?
Feel free to DM me on LinkedIn if you want to geek-out on econ, music or movies. I have zero affiliation with MakerDAO.
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