The 1500 year old Bitcoin
Imagine you have a time machine, and you try explaining Bitcoin to tycoons of the Gilded Age or kings in Medieval Europe. That is a task too big even for Marty McFly! There is, however, one very unlikely place in the world where people would have understood you perfectly. Welcome to the island of Yap.
Yap is a tiny island in the Western Pacific, roughly between Guam and the Philippines. The ancient money of the Yapese people is eerily similar to Bitcoin in many ways: limited in supply, difficult to mine and it was using a public distributed ledger based on consensus. Understanding how the Rai of Yap worked brings us closer to understanding modern cryptocurrencies.
Money is ultimately a social construct. Most forms of money are actually not terribly useful if you think about it. You can’t eat gold; you can’t use a paper note as a weapon to hunt dinner for the family. But all societies need a universally accepted medium of exchange to facilitate trade, and this is why money was invented early in the history of humankind, in different corners of the world.
Money has to have a limited supply, or it gets inflated very quickly. It doesn’t make sense to use tree leaves as a medium of exchange for example — everyone would be a millionaire on paper, but in reality those leaves would suddenly be worth very little. Until recently people mainly used precious metals, because they are difficult to get, they have a limited supply, and they are relatively hard to counterfeit. Today, the scarcity of the money supply is managed through central banks with a variable degree of success (more on this in a future post).
But what if you live on an island which simply doesn’t have a good candidate for a medium of exchange? Seashell and fish scales were used as money by many early civilizations, but Yap sits right in the middle of the Coral Triangle — they have a virtually unlimited supply. Ultimately, money has to represent work, and going down to the beach to collect seashells is just way too easy.
Ancient Yapese, like most people in the Pacific, were excellent sea navigators. On their expeditions, they’ve found out that the neighboring islands (often hundreds of miles away) have something they don’t: limestone. It’s scarce in Yap, it’s hard to access, and it’s an insane amount of work to bring it back home. It’s an almost perfect medium of exchange! So they started shipping stones back to Yap on rafts and canoes. Some were reasonably sized, but the largest ones, representing true wealth, weighed more than 4 tons (8,800 lbs).
It’s hard not to see the parallels with cryptocurrencies. Many of them, including Bitcoin, are based on Proof of Work (POW): the effort needed to “mine” them. Today, this effort is electricity and computational power. Back then it was muscle power and navigational skills. Yapese miners were generously compensated, just like Bitcoin miners today.
The problem with these stones (or Rai, as Yapese called them) is obvious: they are simply too big. Money is supposed to be portable. This is the reason why we don’t use crude oil for example as a medium of exchange. It’s scarce, it represents work, but it’s insanely inconvenient to carry a barrel of oil to the grocery store. The Rai were even worse. They were not simply inconvenient; they were immovable. So the Yapese had to come up with a solution, and however unlikely this sounds, they discovered the distributed ledger governed by consensus.
When a Rai changed owner, people did not actually move the stone. The community acknowledged the change of ownership through public declaration and consensus. If everyone agreed that a stone was transferred from A to B, it did not really matter where the stone physically was. There was a legendary Rai which sunk to the bottom of the sea in a typhoon. The survivors testified to the community that the coin was indeed real and extraordinary in size, and it remained a valid representation of wealth, even if no one has ever seen it except for the sailors. Ownership records of all the Rai were passed down through generations, ultimately becoming a public ledger governed by consensus.
This is exactly how modern cryptocurrencies work. The Rai were immovable; Bitcoin is pure code. It does not matter where it is, or even if it exists in a physical form. When you do a Bitcoin transaction, it’s announced on the Blockchain. Once enough nodes confirm it, the consensus is reached, and the transaction becomes an entry on the public ledger.
It’s easy to dismiss the Rai of Yap as a lunatic idea — who would use gigantic stone coins as money? But the Yapese were entirely rational, and every time you open Exodus you use a pretty similar system they used for many centuries. It just looks better.
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