Value as Energy: History of Exchange & Friction
The timeless act of exchange, whether goods, products, values, thoughts, or ideas, has been facilitated by ephemeral mediums throughout history. Value can be seen as the human expression of stored energy, and currency the medium for transmitting that energy.
To contextualize the impact that the continual digitization of information and value will have on our increasingly globalized society, we can examine the history of exchange for trends and common threads.
Without monetary systems, value was often stored, exchanged, and measured in commodities necessary for life, such as salt, grain, and cattle. Bartered transactions impute a high transaction cost on every exchange. Barter requires negotiation, the individual assessment of supplies, needs, and wants, and the communication of the ideal pairing of goods to be exchanged. On top of mental and temporal costs, differing regional languages create barriers to the exchange of information and value. Without any form of accounting or universal symbols, trade networks remained local and exchanges took place infrequently by today’s standards.
Nearly ten-thousand years ago, prior to the development of writing and mathematics, the Sumerians created the first programmable derivatives in clay. In order to manage the newfound surplus in agricultural products generated by the first agricultural revolution, they created a system in which each “token” represented a single unit of a specific commodity such as a head of cattle, jar of oil, or bushel of grain, one-to-one. By tokenizing commodities, they were able to negotiate and trade easily with people of other languages, without having to carry supplies. The clay tokens facilitated exchange and widened the trade networks of the Sumerians as the universal shapes crossed language barriers and simplified a tedious process.
Clay proved to be an ideal medium because it can be programmed with relatively low skill or effort until dried, at which point it becomes immutable. They acted as physical and mnemonic devices to track, store, and organize economic data, serving as permanent records for past and future transactions. These tokens were sealed inside a clay ball with marks impressed on its exterior displaying its contents which represent formal agreements.
“Tokens and bullae worked as bills of lading which accompanied shipments of goods. This system gave both [parties] an opportunity to double check the order, especially in the case where materials were transported over larger distances.”
— Tonje Niemi
More than six thousand years after the creation of clay tokens, the first documented evidence of the use of a shell of a sea snail as currency appeared in China. The name of a species of Cowrie, the Monetaria Moneta, suggests nature’s role as the producer of currency within that economic system, as it translates to ‘money mint’ in Latin.
By enabling a universal price for goods across many regions, cowries reduced the transaction friction even further than clay tokens, expanding trade networks in the process. Because what was considered valuable in one region was also considered valuable in another region, they could trade without relying heavily on language. Value also became more portable, cheaper to maintain, and more durable. Where tokens represented bills of lading to be followed up by a bulky commodity, these shells contained their own prescribed value.
The earliest gold coins, minted in modern day Turkey, demonstrate the first reshaping of precious metals into easily manageable units, branded for authenticity. Precious metals like gold function well as stores of value, but as a medium of exchange they present many challenges. Pricing by weight meant that in every transaction one needed access to a scale to measure value. Weighing, cutting, adding, subtracting, and verifying all introduced transaction costs in terms of time and effort. The newfound ability to visibly count and assess value alleviated the economy of the burden of measuring by weight.
Fiat is issued by an authority, often the central bank of a nation, and is not directly redeemable for a commodity. As a result, the value resides in the faith and credit of the issuing body. Although the centralized production of money presents many risks, it enabled currency to become lightweight as the concept of value became more intangible and faith-based. It allowed us to use objects such as zinc coins, paper bills, and even numbers on a balance sheet to transmit value, further reducing the friction energy faced in its transmission.
The first demonstration of what has come to be known as blockchain technology, bitcoin is the result of crossing cryptography, time-stamping, game theory, and distributed networking to create a peer-to-peer digital money system. As Andreas Antonopoulos explains, mining is a process in which a distributed network of independent computers “compete to find solutions to a mathematical problem while processing bitcoin transactions.” This lack of a central coordinator in both issuance and processing makes it a highly resilient and uncensorable network, eliminating costly intermediaries required to process fiat.
Typical international transfers of fiat must go through multiple banks and can take up to five business days to complete. A bitcoin transaction can be completed in less than an hour for around 50 cents, and development of the lightning network has the potential to drop this cost even lower. This ability to transmit value anywhere in the world in under an hour makes for reduced friction in terms of time and cost, despite the early stage UX.
Alternative cryptocurrencies have been developed in the years since the creation of bitcoin, and despite much valid criticism on merits of immutability, store of value, and censorship resistance, there exist a few benefits and emerging signals from which to draw from. Some of these networks can transfer value in seconds for a tiny fraction of a penny.
(It is worth noting that bitcoin operates using a decentralized proof-of-work system which is highly secure and as a result involves a higher cost and length of time to complete a transaction compared to others that rely in part on centralized coordinators to operate.)
There is much to be developed in the space, including scalability and simplifying user experience to minimize mental transaction costs, but the internet itself began as a confusing, laborious network and developed into a seamless experience.
Throughout history humanity has moved from useful yet bulky objects to convey stored energy, to intangible and ephemeral concepts, each innovation reducing the time and cost involved in every exchange.
What happens when economic friction approaches zero?
(Note: this is an exploration into the trends and themes around mediums of exchange, value, currency, and potential futures. Speed of transaction has no correlation with price, and this is not meant to be an examination of the space as investment vehicles or stores of value. Nor is it a broad claim that today’s asset ecosystem can currently support this, but a hypothesis that the future may, whether it is the digital assets we know or new innovations of tomorrow.)
Part Two: Velocity of Propagation
Part Three: Live Value Streaming
References
The History of Money, NOVA. 1996.
Denise Schmandt–Besserat, How Writing Came About, The University of Texas Press, Austin 1996.
Schmandt-Besserat, Denise. (1978). The Earliest Precursor of Writing. Scientific American.
Denise Schmandt-Besserat, Tokens: their Significance for the Origin of Counting and Writing. University of Texas, Austin.
Tonje Niemi, Near Eastern Tokens. Master Thesis, University of Bergen.
Bitcoin: Andreas M. Antonopolous. Mastering Bitcoin.
Daniel O’Keeffe. Understanding Cryptocurrency Transaction Speeds. Medium, June 5 2018.
Lightning Network https://lightning.network/
