This article is generated thanks to the efforts of the big thinkers and enablers as well as the efforts of the 99% of the World population who holds 50% of all the wealth we know that exists on Earth.
Foundation of Isaac Asimov — Specifically Psychohistory
Shelling Out: The Origins of Money by Nick Szabo
Money, blockchains, and social scalability by Nick Szabo
Consensus Algorithms, Blockchain Technology and Bitcoin by Andreas M. Antonopoulos
I will start by summarizing what each of the content above is to make it easier for the reader.
Asimov is considered to be the pioneer of science fiction. He started publishing parts of his Foundation series in newspapers starting as early as 1942. In his Foundation series ,he lays out a concept known as Psychohistory. Psychohistory, in short, is the interpretation of historical events with the aid of psychological theory. In the Foundation series, we experience how a math Professor named Hari Seldon tries to develop an algorithm that feeds on historical events and psychological reactions, the goal of this algorithm is to make educated forecasts about the future. Hari Seldon travels around the galaxy to get as much historical data as he can gather.
Shelling Out by Nick Szabo is an article published in 2002. This article talks about the history of money. It starts with barter, costs of barter and proceeds with how we learned to value things and how we got rid of the extreme costs of valuing things by using common trade medium called coins. In this article Nick Szabo continous by explaining the weakness of fiat money and how fiat money can be further improved. His explanations lay the foundation for Bitcoin, a genuine p2p digital cash system.
On money, blockchains and social scalability, Nick Szabo mainly talks about the Dunbar Number. The theory of Dunbar’s Number is that 150 is the number of individuals with whom any one person can maintain stable relationships with. In this article, Nick Szabo tells that humanity managed to overcome the Dunbar’s Number with the invention of the Internet. It is correct, we can maintain more stable relationships thanks to the help of Internet, specifically social media. The different number of people we can interact and hold a stable relationship increased so much. Just think about the combined number of different people we have in your Facebook, Instagram, Linkedin, Reddit, Youtube and countless platforms that lets you interact socially. However, while doing that we have altered the meaning of friendship and stable relationships. By just looking at each other’s pictures and with minimal interaction we can call someone on our Instagram list a friend. We get to assign them as friends because they share their private life with us but we ignore the fact that it is so easy to show how you want to show yourself as while using these platforms. So yes, the number of contact increased but so did our take on what is a stable relationship and what is not did.
And finally, I want to thank Andreas M. Antonopoulos for his efforts in spreading the word and explaining what bitcoin his. In the video, I mentioned he manages to explain how the consensus mechanism works in such a way that I as a person with no programming skills can understand what truly happens in the blockchain and why it is so valuable.
There are tens of different communication and interaction methods. One I can personally understand and interact with is scaling. It becomes so much easier for me when I think of something on a small scale and then try to somewhat simulate it on a bigger scale both using horizontal and vertical scales. Vertical scales can be thought of increasing the magnitude of the operation, and horizontal scales for me is basically extended the operation to a further timeline.
Proportions are very critical for understanding and simplifying how things interact with each other. We will take a look at two different types of proportions.
Direct proportion: as one amount increases, another amount increases at the same rate times a constant
Inverse proportion: when one value decreases the other increases at the same rate times a constant and vise versa.
Direct proportion example: If cost increases, the price also increases
Inverse proportion: If speed increases, time to travel the same distance decreases
By understanding the interaction between things one can easily grasp mathematics and Physics. Formulas represent bunch of things that depend on each other, they just have different constants.
So what this preparation will do is to help us see how the world is evolving, where it is going to and how blockchains will be a major part of life.
Let’s start with a small example and in this case our example is a small village with a population of 100. In our village, one person owns ¼ of the land. Lets name this person A. Rest of the land is shared by 99 people, let’s call each of these people 75/99 B. At t=0 A, the person who owns manufactures ¼ of the all goods manufactured in our village. At the beginning of t=1 with some extra cash compared to others (He has 33x income compared to an average 99%’er). This gives him advantage and he can now invest in higher technology and better seeds as well as better fertilizers. So at the end of t=1 he now produces 27% of the whole production thanks to his more effective ways of farming. Now he even has more disposable income. At the beginning of t=3 he again plants the best seeds, feeds them with fertilizers and so on, but as a twist let’s say there is also draught in t=3. A can now dig deeper wells and access to more water to keep his business’ running but some of the 75/99 B people can’t do this and they end up selling their land. Guess who buys the land. A, who has his disposable income is now the new owner of the land that 75/99 sells. He starts t=4 with even more disposable income even though he did some investment and bought the land, better seeds, better fertilizers and even more land. (because t=3 was a dry year and people who couldn’t afford to access water sources had lower yields. This resulted in lower supply in food but we still have 100 people in town, keeping the demand stable. This increases price per unit, thus making A even richer. ) Expand this cycle horizontally and reach t= 100, you will see that A will own over 50% of the land. Expand this vertically and look at this from a global point of view you see where this system is heading to. This sounds scary right? It is scary, In November 14th 2017 Credit Suisse revealed a report which shows that ‘Richest 1%, owns half of the wealth in the world.’ This gap between the super-rich and the remainder of the globe’s population is the highest it has been. So I believe the current distribution of value is faulty. It is pretty much similar to Proof of Stake. POS is a category of consensus algorithms for public blockchains that depend on a validators economic stake in the network. So in POS, rich becomes richer. The World operates as a combination of POS with a hint of an unfair proof of work, we are all born into parents and somewhere in the world which we can’t choose. Our parents as well as the place we are born in have a stake in the system and they use this stake to take care of us and to nurture us. Well if you are born into some multi-millionaire parents in the United States you start your life with high stakes. Lets say your parents have couple of real estate in New York and their all income is generated with the rent they receive. You literally don’t have do anything in your life other than keeping them and accumulating more with the income you can’t even manage to spend. You have your stake and you choose to distribute your stake for some goods and services. For example you have a dog walker that you pay, you distribute some of your stake to him for his services and this is where Proof of Work comes into play. Proof of Work helps distribution of stake.
The problem with a dominant proof of stake with little alternatives (fiat currency at the moment) is that fat stakeholders do not have to add value to the system in order to keep the life they want, they are happy with how the system works and only are focused on expanding their stake by little effort or non-value added activities. By doing even so they can manage up to top up their stake in the system. Where on the other hand a big number of people claw their way in work hard, produce real value and just manage to get by.
In the paragraph above the key point is the dominant proof of stake. If you are an emerging proof of stake, then you need to have high stakeholders add value to the system in order to not disappear as a proof of stake mechanism. Bitconnect which was a scam was an emerging proof of stake mechanism and we all saw the results. Nobody did anything for the coin itself other than false
marketing and unsustainable payments for a while. As it is a zero-sum game and became unsustainable, Bitconnect founders closed the shop and disappeared.
So the current situation of the World is:
We have the derivative market which is estimated to be in the range of 544 Trillion to 1.2 Quadrillion dollars. I am omitting this completely as they are zero-sum trades with winners and losers on each side.
The whole real estate in the world is 217 Trillion Dollars, however, the global Debt is also 215 Trillion dollars. I will assume the real estate as the collateral for this debt, so also omitting the Global Real Estate and the Global Debt from the equation.
The Global Wealth Report 2017 compiled by Credit Suisse reports that the global wealth is 280 Trillion Dollars.
Then we have gold which is worth 8.2 billion dollars, and approximately 8 billion dollars worth of fiat currency led by the USD and 270 billion dollars worth of Cryptocurrencies. These are the top 3 liquid currencies that will be talked about.
Oil which also is a proof of stake (at least for Saudi Arabia spends 5 Usd per barrel to extract it, however, since it is kind of scare it has a high value) plays a big role in making fiat currencies the dominant currency. The highest valued source in the world is still oil. With the current price/barrel, 1.78 billion barrels total oil reserves is approximately worth above 120 Trillion Usd. (including the 80 billion barrel reserve Bahrein discovered). Oil is also a consumable product and it is not very suitable for storage. There is over 2 Trillion Usd worth of barreled oil trade every year.
Why oil plays a big role in Fiat’s dominance is the result of some historical events.
Historical events that lead to this are;
Bretton Woods agreement: It is the landmark system for monetary and exchange rate management established in 1944. With this agreement, the world was taken off the gold standard and from then on there was a US dollar standard. World Bank and International Monetary Fund were also established and their role was to monitor this new system.
According to Bretton Woods agreement, a dollar was worth 1/35 of an ounce of gold and the US government had to store an ounce of gold for every 35 dollars printed by the Central Bank. As US government also had to trade an ounce of gold against every 35 dollars when requested by other countries.
However, in 1971 there was a big stagnation in the U.S. Stagnation by definition is a state which development stops. While the development stopped, inflation didn’t stop thus resulting in losses in USD value. Usd had to print out money but they couldn’t manage to back every 35 dollars with an ounce of gold. So Richard Nixon devalued the dollar against gold, first to 1/38 of an ounce to than 1/42 of an ounce. Since Dollar was in a devaluation trend people started to claim their gold against the dollar, devaluing USD even further. In March 1973 with the approval of G10 Bretton Woods was completely abandoned.
After abandoning the Bretton Woods agreement the United States had to increase the demand for the United States Dollar and at that time the Middle East was boiling. There was the Yom Kippur War and Opec Countries placed an embargo on the United States for assisting Israeli’s with military aid during the Yom Kippur War. The embargo caused oil prices to quadruple in the United States, resulting in soaring inflation and a stock market crash.
In order to reverse this crash United States had to take some actions and eventually an agreement was signed increasing the demand for the USD again.
The Saudis agreed to price all of their oil sales exclusively in USD.
The Saudis would be open to investing their surplus oil proceeds in US debt securities.
In return for the above-agreed terms, the United States would buy Saudi Arabia’s oil as well as providing military aid and equipment Saudi needed. Soon after other Opec countries followed Saudi Arabia soon after and oil was priced using USD by the majority of oil producers.
By pricing all the oil sales exclusively in USD, United States managed to build up the demand for the dollar.
By 1977, Saudi’s had accumulated about 20 percent of all Treasuries held abroad.
So there is an Opec exclusive Oil-Dollar trade going on for over 40 years. Recently, the biggest oil importer in the world is challenging the Dollar dominance in oil contracts. In 2016 China was the top oil importer in the world and it is upping its imports on a YOY basis.
China and India’s imports are over a quarter of World’s crude oil imports. Recently, India also is increasing its oil purchases from Russia (As Indian companies have stakes in Rosneft and Rosneft bought 98% of India’s Essar Oil). What China and Russia want to do is to do oil deals in RMB backed by gold, ultimately dethroning USD.
This will cause a huge clash between fiat currencies lead by Dollar and gold-backed currencies lead by RMB.
In the future, and this being the not real far future, I see a big race for alternative currency. The race seems to be between Fiat and asset backed currencies. There is a huge demand to Usd cause of dollar denominated debt and a constant demand caused by petrol deals. However the constant part of the demand may shift in case there is a more reliable settlement tool. Stable demand shifting also devalues the dollar and makes it easier to pay already accumulated debt. China wants to get on the playing field by offering gold backed RMB, but China not being able to broadcast its gold stocks in real-time and get it verified is a big issue. Since auditing it is hard, it requires trust. Trust has proven to have substantial costs over time.
While all these happens the tool most suitable for this keeps adding blocks on top of blocks. Bitcoin is the easiest to audit asset, has the mobility and can be used as the settlement layer needed. You can make what you own in Bitcoin public in a matter of minutes with digital signatures. It can even be time locked to prevent transactions until a certain date. Bitcoin is stable. One knows at what block the difficulty change will happen. One can determine how many blocks will be generated with the given hashrate and difficulty levels. One knows how many bitcoin will be generated with each block. One knows at what block the inflation adjustment will happen. One can easily figure out the total value of Bitcoin was transacted in each block. If you owned 1% of all the bitcoins issued at block 630 000, without increasing or decreasing what you hold, you will know that you will have 0.9334% of the supply by block 840 000.
Resources:
https://www.thebalance.com/bretton-woods-system-and-1944-agreement-3306133
https://www.quora.com/Why-is-oil-priced-and-traded-in-U-S-dollars
https://history.state.gov/milestones/1969-1976/nixon-shock
http://www.jewishvirtuallibrary.org/middle-east-terrorist-incidents-1968-1973
https://tradingeconomics.com/country-list/gold-reserves
The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets by Columbia University’s David Spiro.
