Ideal monetary policy
Power abuse is the problem that we encounter every day in many forms:
censorship on social networks, video hostings, and media. I like the theory that your mind is made from the content you consume in the same way your body is made from nutrients you consume. If you eat lots of fast food — you’ll feel sick. Similarly, if you consume some low-quality content — your mind might feel dizzy. On social networks all content is created by users and consumed by users, host corporations only facilitate infrastructure but get a disproportionate amount of benefits of the network. Now think about it: people who control algorithms on all these platforms don’t have an incentive to care about your mental health — their incentive is to maximize profit. Clear incentive misalignment.
You might start an argument that despite social and telecommunication networks being natural monopolies — if you feel like you’re in 1986 — you can simply stop using them. Nobody forces you to use all this, yet. But what you can’t stop using — is money. This network has the same phenomena of power abuse in the extreme.
Monetary systems problems
As we showed in a previous article (link) — majority of fiat currencies in the world aren’t good currencies at all. At least for regular people. They lose a huge part of their value year after year. For example, in 2020 inflation of
Lebanon 88% (link)
Argentina 42% (link)
Turkey 19% (link)
USA 5.4% (link) Not to mention that 38% of US dollars in existence were printed in 2020 alone.
Alternative number (link). So much so, the people might accept it as a status quo and might believe there might not be a reliable alternative. But have you ever thought why exactly money loses its value?
Inflation
The process when the currency loses its value over time is called inflation. The value of a currency is determined by the market equilibrium between supply and demand. While it’s a very complex topic, and there are many reasons such as external demand for exported goods, taxes, domestic demand, international commodity prices, one of the most important factors is the money supply. In essence, the more money gets printed — the less value each unit of currency has.
Governments print too much money
Why would any government willingly print too much money and devalue its currency? While there are legit reasons such as to make export competitive, it’s the simplest way to extract value from every currency holder. Additional taxation is complicated, needs to reach a consensus, and to force millions of people to pay. Print 10% of the existing supply of currency and extra billions of dollars from everyone’s pocket — just a few clicks away in the central bank.
Simply put, governments cover their mismanagement and fail by printing more money and covering these losses. However, printing more money beyond increased demand for the currency — is stealing from the pockets of all currency holders.
Social contract is broken
It might look too abstract when you think about the macro-economy. So imagine you did a favor and helped someone. You spent a lot of time and effort which is equivalent to $1000 of work. This someone is very thankful and owes you goods and services for $1000 as well. Fair, right? You’ve helped and done good work for this person and now this person owes you the same amount of goods back. Fair and everyone agreed. But in a few years, this someone tells you they owe you only half of that. And in a few more years only a quarter. How do you like this? Is this fair? I bet you’ll be furious. However, this is exactly what happens when someone is in the society you live in. Which agrees to calc this “I owe you” debts in special papers called currency.
How did that happen, that we all agreed on such an unfair “I owe you” game? Well, we didn’t. That happens when society delegates the right to issue currency for their representatives in the form of government, and these people just abuse the privilege for personal needs. Power abuse this is.
Banks make it even worse
In addition to such a fundamentally unfair system that screws you over time and steals your hard-earned value, it’s very complicated to use. Regular citizens don’t deal with central banks directly, they use private banks. Banks try to charge you for everything — every transaction, maintenance, exchange and give very high interest to the least financially secure group of people who borrow money via credit cards. And they’re trying very hard to encourage everyone to borrow money every time even without need in hope that in difficult times you might be late to pay in time and charge you a crazy 30% APR and even more crazy penalties. In 2020 US banks charged Low-Income Americans $12.4 billions in overdraft fees (link)
And above all these crazy unfairness banks are organizations, which legally privatizing profit and socializing losses (link). What? Yes, you read this right. That means when banks earn money — bankers take it as a personal profit. If banks lose money — everyone pays for it. How did we end up in the world where this is the law?!
To summarize the problems with current monetary systems, I see two fundamental issues
1) governments are the ultimate beneficiary of the monetary system
2) because of this governments prints too much money
Could this work better?
If we hypothetically imagine that we had some sort of “root-level” access to the particular government, what could be done differently?
I argue that we can have a fundamentally better system if we flip money system controls upside down:
1) central banks are controlled by every citizen in a democratic and fairway
2) all benefits of the system is distributed equally for every citizen, not to a few
This solves numerous problems.
This makes taxation the ultimate way for the government to get resources to operate. Therefore it’s necessary to reach a consensus and follow a social contract. Because the beneficiary is every citizen — this gives universal basic income. And the last — inflation. There has to be a consensus among people on monetary policy and I bet Argentinians won’t vote on losing 40% of their savings every year.
There are, of course, many problems even with this approach. One of them, that the monetary system is too complex to be understood even by every citizen, so eventually it might be corrupted by those who understand it. Also people who have a lot of money / power will use it to manipulate the “vote” in their own interest. However this is a fundamental problem of democracy, the only reliable solution to this is education. Perhaps Naval Ravicant’s position is that universal basic education is better (link) than simple UBI but easily can be done on top of this system.
Overall, while this might sound good in theory, is it even remotely possible to implement such a system?
Cryptography is more trusted than humans
At the end of the day, even if we somehow were able to build such a system — someone had to enforce these rules. And this someone might abuse this power exactly as many governments abuse current systems.
Yes, I think we can if this system would be enforced not by humans susceptible to all human sins but soulless but strict and beautiful rules of mathematics and cryptography.
We already have a live experiment of Bitcoin and Ethereum which proved that it’s possible to build a monetary system using cryptographic primitives.
Open source-monetary system for everyone
We believe, if we implement central banks completely on a blockchain, we can achieve this.
Democratic control of central banks can be done by tokenizing the system and issuance of non-transferable tokens via decentralized KYC. One token per person. All decisions can be done via DAO voting. It won’t be practical to vote for every money print therefore in practice it would be logical to achieve consensus for particular monetary policy, target inflation of 1% per year (a necessary evil to make the economy work and incentivize people to invest the money instead of hoarding cash or keep it in banks at the low-interest rate) and major government spendings.
How to achieve that?
If such a system is possible to build and an absolute majority would benefit from it, won’t current beneficiaries be upset and try to prevent it?
I bet they will! So do you think it possible to build such system? We have idea how to built it step by step which would benefit everyone, including the government, but want to hear your opinion on that. If you’re interested, please join us at (link) discussion.
Special thanks
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Updates:
- The possibility of open-source financial system are based on the assumption that decentralized KYC would be somehow solved in the future. At least on a required level of temper-proofness because decentralization is never black/white — there’s always a whole spectrum, like Bitcoin/Ethereum consensus. It’s certainly not impossible to design somewhat decentralized KYC eventually unless formally proved an impossibility. it might be based on existing already issued centralized IDs by the government. A few months ago I spoke with guys from worldcoin (Sam Altman is cofounder) who were solving this via KYC on consensus blockchain layer with retina scan hardware device with snarks and network of trust
- Josh Nash worked on Ideal Money theory, it worth to take a look http://personal.psu.edu/gjb6/nash/money.pdf and prinston_lecture
