Demurrage And The Token Economy
In this article I hope to explore how money and interest distort our normal perception of value as it is present in nature and how it can relate to token economies.
It starts with Silvio Gessel, from Wikipedia:
Silvio Gesell (German: [ɡəˈzɛl]; 17 March 1862–11 March 1930) was a German merchant, theoretical economist, social activist, Georgist, anarchist, libertarian socialist,[1] and founder of Freiwirtschaft.
Noting the long list of adjectives to describe him, I’ve got to say I love him even more now. If you haven’t heard of a Georgist or a libertarian socialist, then go check it out!
Silvio (I already feel personally acquainted) noticed that when given a real commodity, let’s say oranges, we would prefer to receive them in small batches rather than in bulk. The reason for this is simple: ALL things in nature depreciate with time. They either decay, corrode or simply go out of fashion and need constant care and investment to maintain their original value. Going back to the oranges, if I get a truck of oranges they might rot before I can sell them or find any use for them. Getting them 2–3 at a time instead would be much more profitable for me in terms of not having to make any effort (investment) in order to maintain their value. I can just eat them and enjoy myself.
Theoretically, there are two things that do not depreciate with time; one is a human, fictional creation and the other is natural: e.g., currency and land. We are not going to talk about land today; but, you can buy land and, in the long run, you can be sure its value will rise while you sit back and enjoy yourself (since it’s scarce and the population is always growing). Speaking of land, don’t forget to check out what a Georgist is. In my perception, currency has the same trait as land (let’s keep fiat inflation out of the discussion but concentrate on the social and philosophical aspects). We can deposit currency in the bank and it may even grow with time due to the effect of interest. So as long as there are no revolutions, the currency is simply there in my bank account and I don’t need to invest in order to maintain or increase its value.
The effect is that, contrary to the oranges, I would always prefer to have the bulk of the currency now! It is worth more to me now; for any currency which I don’t get now, I will not gain interest in the future while the oranges are worth more to me in the future. So when we trade oranges for currency we are not making a very fair trade — by trading a perishable product for a non-perishable one. Currency is worth hoarding while the oranges are not. So if currency is a veil for barter (which it is not, though that’s a common perception — ask Prof. Steve Keen or Michael Hudson) it is not doing a very good job at it. We now prefer the fictional non-perishable value of currency to the real value generated by long term investments.
“Only money that goes out of date like a newspaper, rots like potatoes, rusts like iron, evaporates like ether, is capable of standing the test as an instrument for the exchange of potatoes, newspapers, iron and ether. For such money is not preferred to goods either by the purchaser or the seller. We then part with our goods for money only because we need the money as a means of exchange, not because we expect an advantage from possession of the money. So we must make money worse as a commodity if we wish to make it better as a medium of exchange.”
— Silvio Gesell, “The Natural Economic Order”
So Silvio proposed having currency with demurrage, i.e. a negative interest rate on currency while you hold it, thus giving it a perishable or decaying quality just like any commodity or human creation. This would have us quickly use to purchase goods or invest it in long-term, real, value-creating businesses. It would deter companies like Apple from hoarding billions while some people can barely get a $1 loan. Such currency was tried in the famous Worgel Experiment. Here’s a description and critique of it: (https://mises.org/library/free-money-miracle)
How is all this related to token economies?
Demurrage is but another tool for managing your token economy in a smarter way. It can be used to closely simulate tokenized assets that depreciate with time. When the value of the token is highly speculative it can be used to encourage spending or investing in the platform instead of hoarding. Some platforms declare that with time their token will become a medium of exchange, this can help like Silvio Gessel said:
“we must make money worse as a commodity if we wish to make it better as a medium of exchange”
But isn’t it immoral? It’s someone’s money that is loosing value…
Without getting into the morals debate, if participants know the currency rules and the rules can’t suddenly be changed like central banks change them today then it is perfectly fine. That’s where the blockchain comes in — enforcing rules. Will participants see how demurrage aligns with their own selfish interest? Once we have more understanding that the value of a token stems from the underlying network, we will see more and more monetary tools governed by AI or self governance to drive specific behavior from the network participants: investors, users and service providers in favor of growing the network as a whole keeping an optimal balance and every one happy. Utopian? What do you think?
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