A Potted History of Money and Computation
10,000 Years of Consensus Protocols
This article is adapted from a brief talk I recently gave at the Utah Java Users Group.
8,000 B.C. — Sumeria
Believe it or not, quite a lot of stuff was happening in the financial world in 8,000 B.C. Most of it was happening in the Levant, which is the region of the world dominated by the two mighty alluvial rivers, the Tigris and the Euphrates. Sumerians had recently adopted the agricultural lifestyle invented by Mesopotamia, using Egyptian irrigation techniques that relied on the frequent flooding of the Levantine rivers.
One of the regular difficulties of life in Sumeria involved the constant work needed to repair and refit the various canals, reservoirs, and other works of irrigation, which were routinely damaged by violent river floods. As you can see in the picture, farmers throughout the fertile crescent had been living in various forms of mud and straw houses for some time. Anyone with a little wit who has lived through a flood can tell you without a doubt that such domiciles are not flood proof.
Neither is seed.
So, while the routine labor of fixing up irrigation works could be handled with a healthy application of elbow grease, there remained a larger problem. Farmers really didn’t have any place to store the surplus grain seed that they had produced over the previous year. You could store it in your home or some other similarly constructed outbuilding, but this invited banditry and would easily spoil in the event that a two-sigma flood exposed your seed to water.
Wet seeds sprout and once they do, then they aren’t seeds anymore, they’re plants. What you wanted was for that plant to arrive at a different point in the future. Having the seed convert to plant at a time determined by the wims of the river Gods is not a low-risk position for your farming portfolio in Ancient Sumeria.
To solve this problem, Sumerians invented the grainery. Shown is the Neo-Sumerian Ziggurat of Ur, which is located in Iraq. It’s now surrounded by an airbase, as I understand.
Your undergraduate Archaeology professor will assure you that Ziggurats were used primarily for murderous religious rituals. But, this seems wrong to me — the religion must have come later. Ziggurats needed to solve a problem in Sumerian society and the problem they solved was how to safely store surplus agricultural output in an environment that experiences incredible flooding throughout the year. This was the central challenge of Mesopotamian life circa 8,000 B.C.
Here is a reasonable rendering of what Ur might have looked like had you had access to a Helicopter in 8,000 B.C. All of that flat farmland surrounding the city could be a foot underwater at random times every year.
Something close to ninety (90) percent of the Sumerian population lived within the walls of the city. To feed them all and to keep the society growing, the region was dominated by the irrigated farmlands of the Tigris and Euphrates valley. They would have stretched for mile upon mile in all directions.
If you’re a math nerd and you want to understand why the population and the grain had to be stored centrally, an interesting problem is to estimate the population impact of floods parameterized on percentage of land affected and the caloric requirements if the population if the grain is decentralized.
Farm life in Sumer may have gone something like this. During the non-growing season — in the Levant it is too hot in summer to grow crops — farmers would live in the city, have access to society, participate in rituals and other activities and more or less act like normal middle-class Sumerians have always acted. When things cooled off a bit and it was reasonable to work again, farmers would return to the land, begin repairing their irrigation and prepare for the growing season and its associated floods. Following harvest, farmers would schlep their crops and seed back to the Ziggurat, where it could be kept safe from predation and floods.
Obviously, this system has a problem. In spite of what universal basic income advocates think, the reality is that if I bothered to schlep all that surplus barley to and from some remote farm, then I was incredibly interested in ensuring that I was the one that got to eat it. Or, at least trade it to someone for something my family could use.
Sumeria solved this problem by inventing money. Or at least, tokens. (It’s not lost on me that we are back to trading tokens, by the way. I see what you did there, Vitalyk.)
Modern children have such a good intuition with money that they often reinvent the Sumerian form in their yard just for fun, but unfortunately the adults in their lives won’t exchange it for goods and services. So much the pity for our children, but the problems of Sumeria’s early monetary forms are obvious and legion. Unless there is nearly infinite shared trust between participants in the economy, fraud and abuse are simply too easy to execute in a system dominated by simple clay tokens. Laura Valeri, a historian whose blog is worth following, has asked the question, “how can such a system could be stable?” But, I think the answer is obvious — the system itself wasn’t stable.The society was stable and so it didn’t matter very much, because Sumerians were trusting enough and the surpluses large enough that even an unstable system was workable.
If you’re at all surprised by this sort of universal social trust, read the military history of Sumeria and then you won’t be. Or go ask a U.S. Marine — he can explain it for the price of a few beers.
3,500 B.C. — Sumeria
Over time, Sumeria became rich and powerful and as every wealthy civilization has ever done, it attracted people from far and wide. And, as a result, eventually the trust broke down and was insufficient to make the token-based trade system efficient. It’s too bad for us that our neo-token economy didn’t take 4,500 years to require major technical upgrades.
By 3,500 B.C., something else was needed and the thing they invented is one of the most civilization defining technologies of all time. Back in the day, it looked like this.
The tokens shown on the left are much of a muchness with those shown above, but they added a pottery “envelope” pictured on the right to contain the tokens. The impressions on the outside serve to mark the contents, so that the “value” of the envelope could be assessed without breaking it.
For the most part, when historians talk about these envelopes, they are described as being one-sided. That is, they are counterfeit resistant because (a) they must be passed around unbroken and (b) they are “harder to forge than tokens.” However, this seems silly. It’s not harder to convincingly forge the crude pottery envelope than to forge the tokens inside. So, if you didn’t trust the token system, you sure as heckfire weren’t going to trust some ugly envelope system. Instead, I believe the envelopes were the first double-entry accounting system for commodities options.
Here’s roughly how the protocol would have worked.
Farmers could drop off grain at the local Ziggurat, where the local “priests” would store your grain in sizable pottery jars of various sorts. They would then make two sets of identical tokens and seal them into two identical envelopes with identical markings. Farmers were likely allowed to observe the entire process, which may have been ritualized (here’s your religion). Over time, Sumerians introduced the idea of “signatures” which allowed the farmer to apply hard-to-forge data into the pottery using finely carved cylinders that could apply an impression to wet pottery.
The envelopes could then be traded around town, assuming you were careful with them, and the following year when you needed seed grain, you would return to the Ziggurat where your envelope could be matched up with the priest’s envelope, they could both be broken open, the contents could be matched against each other, and you — oh farmer of yore — could take delivery of your grain.
This protocol makes the Sumerian envelope the world’s first forward option. So as it turns out, Sumerians were the world’s first accountants and options brokers. Noble achievements, indeed.
They also later invented writing, which is less noble because it still doesn’t pay the bills to this day. (Stay in school kids and learn your maths.)
An Aside on Coinage
Within a few hundred years of the envelope system, the Sumerians would also invent coinage. The earliest known pressed coin is made of bronze and dates to somewhere around 3,000 B.C. Coins would have been useful for day to day trade within the city itself. They’re light, durable, easily stored, and we still use them today for all the same reasons. But, just as modern man doesn’t store his wealth in sacks of American quarters, the ancient Sumerian probably didn’t want to have to deal with giant sacks of bronze. Besides, their wealth was stored in grain and the grain was at the Ziggurat. The “utility” of a secondary system for daily exchange is one source of the persistent “medium of exchange” mythos, which I discuss in additional detail below.
Sumerian Consensus
I like this story about Sumeria because it distills the historical case of money to a deeply practical situation the ancients faced. I also like this story because it speaks to the issue of trust, which leads directly to the idea of consensus. And that’s my main thesis: all money is a form of consensus and any form of consensus that is strong enough to attract users will become a sort of money.
The problem of ancient Sumerian farmers was that in the token economy of yore, graft and fraud were as common as they are today. But, at some point everyone decided that enough was enough and I want the actual amount of grain I deposited, thank you very much. If I show up with my tokens, I expect to receive the same amount of grain that I deposited the previous harvest, less reasonable fees. I don’t expect to get half as much as I put in.
The envelopes provide a system that solves this problem by limiting the number of outcomes associated with the exchange. To review:
- Farmer breaks his envelope — he has nothing to present and therefore gets nothing, the grain going to the Ziggurat staff as overage.
- Ziggurat staff break their envelope — the farmer gets everything claimed by his own, the grain coming (presumably) out of the Ziggurat’s own inventory.
- Neither breaks anything — the farmer gets whatever the envelopes say he should get, the grain coming from his own deposits.
In the default case, you expect the envelopes to remain unbroken and for the forward option to be exercised at expiry and for the farmer to take delivery. In the cases where something goes wrong, the person responsible for the mistake takes the loss. This system is incredibly fair, simple, and reliable.
If everyone in Sumeria agrees to this protocol, then there is a very strong form of consensus on the outcome of the transactions. Everyone in Ur knew how to evaluate their own financial position at any given point in time and what risks faced them between “now” and the next growing season.
Over the course of the next 5,000 years, nothing much changes.
1635 AD — England
In 1635, my forebear Christopher Foster sailed from London to the Americas aboard the Abigail, a ship that would deliver colonists to Eastern Seaboard a dozen times in as many years. In the early Americas, trade was difficult, and communities had limited access to money. For the most part we used “pieces of eight,” because the Spaniards had ridiculous amounts of silver thanks to taking over the Aztec Empire. Lowly Anglos like us got stuck taking over New York and Massachusetts, which had no gold, no silver, and lots of winter. Fortunes would change, but not for a century or so.
Back in England, there were a variety of monetary systems in play. Like the Ancient Sumerians, the English street trade was performed largely in coins. But, coins are a pain for representing large values and the King needed a way to manage various contracts, so that he could collect taxes on them.
By the 18th Century, Anglos were using an accounting technology called tally sticks. Specifically, they used a protocol variant called “split tallies.” These wooden boards were glued together and then carved with various grooves and notches to indicate the value of the deposit. They were then split into two parts — the long end called the “stock” and the short end called the “foil.” The stock was stored at the Exchequer in Parliament, where the government had control of security. The foil, you took with you.
As you can see there is some writing on the foil. This would have been duplicated on the stock, naturally, and would have provided ways for the contract’s counter-parties to specify various terms that were non-standard. E.g., the “NN” notation in the image above might mean “non-negotiable,” in which case the foil could not be traded to others freely. It might have to be exchanged for some other instrument and then traded.
We still have a “stock market” today, where people trade their interest in various contracts and corporations. In the 18th Century, one can imagine that such a market was much more literally a market, where individuals might come to trade their foils with others in an exchange of goods and interest in future corporate profits.
Interestingly, the meaning of the word “foil” seems have come from this particular use case. Iago is Othello’s “foil,” which we take to mean that as a character he is the interlocking dramatis persona that makes the story whole. The current use of “foil” to mean thin sheet metal that can be molded to the shape of a something seems to derive from the second form, rather than the original stock-and-foil meaning.
Let’s observe that the mechanism of consensus here is almost identical to the consensus system used in Sumeria. As I mentioned, nothing much had changed.
October 16th, 1834 A.D. — England
In the early 19th Century, the Napoleonic Wars consumed the European powers. Britain had lost control of one of its prized colonies — the U.S. of America — but it’s powerful Empire had not yet gone into full decline. In 1805, Britain defeated Napoleon’s Navy at Trafalgar, but the continental war continued for another decade. By 1820, the British people had tired of the monumental debts and associated taxation required to keep the Empire afloat. I’m sure modern Americans can relate.
By 1834, things had begun to change. Prior to 1826, the Bank of England had been the only join-stock bank in the country, but when the laws were relaxed a number of such banks had been established outside of London. One can imagine that things at the Bank of England may not have been so great.
Historians report that on October 16th, 1834 a pair of Irish lads were instructed to “dispose” of a great number of stocks that were stored at the Exchequer. In most sources, it is left implied that these stocks were no longer needed. I think a more likely story is that by 1834, the Crown and the Bank of England were broke, having spent the previous several decades fighting various insane foreign wars. Unable to clear their debts, which had quite literally been “piling up,” the Crown in 1834 did what the U.S. government did in 2008 — it engineered a dramatic intervention.
To wit, the King burned down Parliament and blamed the situation the on the Irish.
To this day, if you get a raw deal you are said to be “stuck with the short end of the stick.” This turn of phrase makes no sense if the foil is an asset. It does make sense if the matching stock has been burned to ash by the Crown. In the dry humor of the English people, one can imagine no one bothering to write down what everyone tacitly knew to be the case — the fire was an intentional bailout of the Bank of England.
1900 A.D. — America
Much is made of the gold standard for American money, which in the minds of many laymen extends back into the mists of time and was presumably brought to these shores on ships like the Mayflower and the Abigail. But, as I’ve mentioned before, in the early days we mostly used Spanish money. The Spaniards actually had hard money to trade and in the 17th Century, the British Crown had very little. So, British money was in short supply and mostly Americans traded in Spanish silver.
It wasn’t until March of 1900, that the U.S. Congress passed a law establishing the “gold standard.” It wouldn’t last very long, but it was a nice try.
…the dollar consisting of twenty-five and eight-tenths grains (1.67 g) of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard…
Since we’re playing in historical conspiracy, it’s worth asking whether or not something had changed towards the end of the 19th century that made American legislators feel they might have access to sufficient gold to maintain the dollar’s price peg to 25 and 8/10ths grains. The American gold rush had been in the 1850’s, after all.
In fact, gold production spiked at the end of the 19th Century to levels that had not been seen since the beginning of the California gold rush. After WW2, gold production would drop again until the 1980’s. I have no idea where all this gold was coming from, but in 2016 the United States produced 209 metric tons of gold, which is worth 7.62 Billion USD. Not bad, but I suppose not enough to deal with the 4 Trillion USD budget our government enjoys.
The US at the beginning of the 20th Century had exited Reconstruction and was self-assured, rich, and successful. Out of the hard-scrabble Westward expansion of the 19th Century, the American people had formed an integrated nation high in social trust and economically successful. The paper dollar was good across the nation, a situation that seemed on its face to be a major improvement over the variegated currency regime of the mid-19th Century. Lincoln’s greenback was hard to counterfeit, easy to transport, backed by hard money, and good for clearing all your tax liabilities. As far as I can tell, there was broad consensus that the dollar worked and was strong, and so people used it happily.
Whatever you think about subsequent changes to the American monetary system — the founding of the Federal Reserve Bank, the exit from the gold standard, and other modern innovations — in 1900, American money was solid.
2000 AD — America
By the year 2000, everything had changed again and nearly every ledger was stored on computers. We have known for more than 1,000 years that written ledgers work as well as money, excepting their security properties. If I trust my counter-party, I’m as willing to trust their computerized ledger as I am to take their Sumerian tokens. And 20th Century America was high trust if it was anything.
America had converted from a metal-based monetary system to one based in debt. And the nature of money as a consensus mechanism had been replaced with the following sorts of abstraction:
Money is a debt ledger with three sub-functions: 1. Store of value 2. Means of payment 3. Unit of account. Cryptocurrency’s performance advantage over incumbent forms of money is (a) strongest and most obvious as a monetary store of value; (b) stronger for some, but far from all, payments; and (c) differentiated as a unit of account for a few select purposes…
I cribbed this definition from this recent paper by John Pfeffer. It’s an excellent paper and well worth the read. I think Mr. Pfeffer gets much of his analysis right and the last few pages are well worth the time.
But, I think that Pfeffer has, in the case of money itself, missed the forest for the trees. Or, as Nicholas Taleb likes to say, “he’s lecturing sparrows on how to fly.” The money and the ledger consensus are exactly the same thing. The use cases described above are just use cases, they aren’t technologies. They aren’t algorithms or protocols. You can’t “implement a store of value protocol.” That doesn’t make a damn bit of sense.
All of the examples of money I’ve shown above are both protocols and technologies. The gold dollar is a protocol — you acquire a printed dollar and it’s the counter-part for the gold stored at the Treasury. If you appear at the Treasury, the presumption is that you can acquire the gold. This doesn’t store value, per se, but what it does is ensure a reliable outcome for a financial transaction in which you have personal interest.
Nothing about “unit of account” or “medium of exchange” is something you can implement with any technology from clay to computers…unless you have consensus first.
The definition of money is actually much simpler.
Money is any technology people can use to reliably clear transactions with predictable outcomes and risks.
Using that definition, it makes sense to talk about “hard money” when the consensus is very strong and “soft money” when it’s very weak. We can talk about “good money” when deflationary trends dominate the inflationary ones and “bad money” when inflation runs rampant.
We can talk about “stores of value” because you can price all your assets in a money like this, which makes any asset that can be traded using that technology an asset that stores wealth. It’s a “medium of exchange” when lots of people have access to the technology and are happy to exchange goods and services for it. And, it’s a “unit of account” when you need to pay taxes in the stuff.
The U.S. dollar isn’t money because of any of these things, it’s money because we all agree it is. And the reason we agree is because Abraham Lincoln explained to 350,000 Southerners that they were definitely not allowed to disagree. We don’t want to go through that again, but we should be clear that winning a war is an excellent way to establish consensus.
Jan 3rd, 2009 — Undisclosed Location
Block #0 is mined on Bitcoin. The only transaction was Satoshi issuing himself 50 BTC. I imagine his was the only machine mining the network at that time. Soon thereafter, I would become aware of Bitcoin, but to be honest I wasn’t very interested. It wasn’t until quite recently that there was enough consensus to participate. And, unsurprisingly, it was an early adopter of the technology that drug me into the cryptocurrency “market.” As are all men, I’m far better at retrospective than prediction.
But over the following years, the raw consensus system that Bitcoin implements began to gain traction. To wit, people created wallets and exchanged coins and setup miners and helped to create a large proof-of-work network. In the early days, I think most people did this just for fun. Certainly, the Dogecoin moon mission suggests that many didn’t take the entire exercise all that seriously even as recently as five years ago.
But, proof-of-work is an excellent system and in spite of various forks and network effects that probably undermine the general security of the system, the consensus algorithm itself is strong and growing stronger. It’s a really good form of money. It’s faster and more reliable to transact than a Sumerian forward option made of pottery. It’s less subject to central bank intervention than a tally stick at the Exchequer or a U.S. dollar denominated bank account. And, you can hide the stuff steganographically inside a picture of your mother and take it across the border on an unencrypted laptop. If you want to understand why BTC trades at a 300% premium in Zimbabwe and Venezuela, that is your reason right there.
I don’t think it makes sense to predict the value of Bitcoin in the future, insofar as all available evidence suggests market prices are a kind of random walk.
I do think it makes sense to predict whether or not the consensus will continue to strengthen or not. And, in that case, I think the answer is “yes, for some time.” As long as the miners have an incentive to process transactions honestly, then the consensus can grow stronger even if the fees increase. Fees are friction, but friction doesn’t destroy money, lack of consensus does. Fees can be accounted for. But, burning down Parliament is a black swan event that leaves many market participants “holding the short end of the stick.”
Eventually, proof-of-work consensus systems need to get replaced by a more energy efficient form. We’ll see whether that is going to be Ethereum, RChain, Ripple, or whatever. But, BitCoin will last quite awhile, I think.
Winner Take Most
Going all the way back to Sumeria, we observe that economies want multiple currencies. Mostly, people want to make daily trade in coinage and larger trades in some more reliable class of money — shillings vs. tally sticks. But, people will use whatever’s to hand if they need to.
The U.S. Government has done a remarkably poor job over the last 50 years in managing the monetary system. Whether you believe Steve Keen or the Austrians or the gold bug at the end of the bar, every system that involved central control of the ledger without strong consensus has eventually wiped out the wealth of its people. The system we’ve been on since the mid-century is one that slowly and inexorably drains the wealth of every individual participating in the monetary system.
Our desire to force a USD economy on everyone in the world has led to a dozen wars and facilitated continued hostilities in resource-rich parts of the world like the Middle East. Russia and China finally appear tired of these antics and are in the process of creating a direct Ruble-Yuan exchange market based on gold. Good for them. If they still trade USD for oil as of 2018 — a proposition that I actually doubt — then it’s probably a stability play and not because they need to.
The full exodus from dollar accounts is now merely a matter of time. And to be honest, I think Americans will be fine with that. As a Gen Xer, I remember being taught to feel pride in the “strength of the dollar.” I haven’t met many millenials for whom the phrase “a strong dollar” makes very much sense, though. Their dollar fortunes were wiped out before they even got started. And so, adopting Bitcoin or Ethereum will not be painful for younger Americans. As a group, they hold almost no dollar denominated assets and they will inherit almost none from their parents.
The real question is where they will go and how many cryptocurrencies will be viable. Personally, I don’t think consensus forms around a large number of protocols. Part of the way this consensus thing works is that everyone relevant has to understand it. If there are a dozen different protocols and they all work differently, then people will tend to collect their assets in the underlying money that they transact in most often. Their friends will feel pressure to adopt that asset, their children will inherent those assets, and through renormalization effects the intolerant minority will apply pressure on the community to adopt their preferred “standard.” As long as the currency we choose has good security, a decentralized network, and is resource efficient enough to have a workable fee structure, then I think it doesn’t matter much which ones we settle on as standard currencies.
Nashtradamus
I will make a few closing predictions about the shape of the market, just for fun:
- We will have a “slow money” system whose ledger is very, very secure and very, very decentralized. Nearly everyone will want to own a “slow money” mining machine, whatever that means.
- We will have a “fast money” system where transactions clear instantly and for low fees. It may not be very secure or very decentralized in most cases, but it will be good enough for transactions up to the value of a used car.
- We will have a “smart money” system in which we express derivatives contracts similar to Ethereum and its market cap will exceed that of the other money systems by >1,000x. Of all the systems, this one has to be the most secure, but the “mining” operations may be performed primarily by people who own and operate their own business. The regular Joe doesn’t sign a lot of contracts, but the average business signs a ton of them. This is decentralized enough to be secure, but centralized enough to be fast and efficient.
- The adoption cycle for these monetary systems in the West is based on the demographic demise of current asset holders — the Baby Boomers — and not based on the up-take from younger generations. The younger generations are already using these currencies “natively,” but Boomers don’t see it because they’re not hooked in.
- The Tether/Bitfinex scandal is an opportunity to be anti-fragile, but people who have a basis in BTC that’s above $15,000 are going to be unhappy for awhile. If it turns out the Tether is underwater, then it’s better to figure it out now and deal with it. Badly run companies are supposed to die. You’re supposed to keep your long-term hodls in a hardware wallet, not leave them in exchanges. And you should have convex investment strategies.
