The Future of Money Is Programmable With Open Architecture
Cryptocurrencies are the first step towards democratizing money.
“The universe looks more and more like a great thought rather than a great machine.” — Sir James Jeans
In 1902, James Jeans put forth a theory in astrophysics that today seems applicable to economic theory. Jeans suggested that there is some radius of a cloud of interstellar dust where thermal energy per particle equals gravitational work per particle. At this critical length, the cloud does not expand or contract. Perhaps more significantly, Jeans suggested that if a cloud lacked the necessary thermal energy, or pressure, to counteract the gravitational force, then the cloud would begin a process of runaway contraction. While this analogy might not be clear at first glance, the idea of “runaway contraction” is something that can be easily understood in the context of economics. In economics, we fear runaway contraction like the plague. More precisely, we fear runaway contraction in economics, because we know what it leads to — The Great Depression.
By extension, “the gravitational force” in this analogy would be a summation or confluence of symptoms or conditions that effectively cause the degradation of the quality of life. In other words, the gravitational force, or economic entropy, is the natural force of economic deterioration. Perhaps it can best be understood by the value of a car being driven off a dealership lot. Likewise, after a building is built, it will begin deteriorating. After a road is paved, it will begin deteriorating. After a shirt is sewn, it will begin deteriorating. All things have life cycles. Some are longer than others, but in general, once something is created, it begins to deteriorate.
Suppose we were to create a new society on Mars. Also, suppose that the environment on Mars doesn’t produce any usable materials. We can only use what we bring. We might bring enough materials to build 10 great buildings, pave 10 great roads, and sew everyone matching outfits. The moment we have built 10 great buildings, 10 great roads, and sewn everyone matching outfits will be the peak of quality of life on Mars unless new usable materials are introduced. From the moment those things are created, they begin to degrade. And, that is the gravitational force.
The “thermal energy” or “pressure” counteracting the gravitational force of economic deterioration is the creative force applied by humans to survive and thrive. This is the force applied by humans to constantly improve the quality of life. If the gravitational force is the deterioration of wealth and value, then the thermal energy or pressure necessary to prevent runaway contraction is the creation of wealth and value. Perhaps more precisely, it is human creativity and productivity that counteracts the gravitational force of economic deterioration.
So, what does this have to do with the money? Money is a good thing. It allows us to function as a society. Money allows us to do many things. It allows us to compare the value of any product or service to the value of a sandwich. The deli down the street charges five dollars for a sandwich, and the painter charges $200 to paint a room in my house. So, the value of a freshly painted room will be roughly the same as 40 sandwiches. Money also allows us to store value at a very low cost. If we had to barter, we might have to store crops or materials that could be traded, and that would mean we would need to store these materials, transport them, and market them. This would add considerable costs to every transaction. But, the ability to store value is good for more than just reducing transaction costs. The ability to store value allows us to think about the future. We can save value at a very low cost, and we can pivot very easily and very quickly. Instead of being constrained by the nature of our assets, we can easily develop interests, businesses, knowledge, and ultimately more value to individuals and society as a whole. Money is a good thing.
Money has some very unique characteristics (standardized, widely-accepted, easy to carry, etc.). Perhaps the most important characteristic of money is that it is divisible. We can give the deli a 20-dollar bill for our sandwich and they will give us back 15 dollars and a delicious sandwich. The divisibility of money allows us to be precise in our transactions. For individuals and businesses, this precision allows us to reach economic equilibriums in day-to-day commerce. The deli owner can optimize his profit. The customer can compare two different five-dollar sandwiches and decide which one is better. The divisibility of money allows value optimization and market competition to thrive. The divisibility of money also allows for efficient public finance. For example, if a small town needed to tax its citizens in order to maintain the town’s infrastructure, then a sales tax could be implemented in a way that only marginally increased the price of sandwiches. The small sales tax, while negligible to the deli owner and the sandwich eater, would accumulate a substantial amount of money that the town could use to maintain its infrastructure.
Money is simply a representation of value. Everything in the universe has a value. Things can have positive value or negative value. For example, sandwiches have a positive value, and diseases have a negative value. We pay to have sandwiches, and we pay to not have diseases. If we wanted to, we could assign a dollar value to everything we know. So, if everything in the world has value, does that mean that the amount of money in the world is equal to the sum of all of the positive value plus the absolute value of the sum of all of the negative value? No. Friendship has a very high value, but it is often given to us for free. Volunteers provide value, but we don’t pay for their services. The environment provides value, but most of the time we don’t pay for it. So, how do we know how much money should exist in the world? This is a great question.
“The importance of money flows from it being a link between the present and the future.” — John Maynard Keynes
The theory put forward by James Jeans is absolutely relevant to the future of money and by extension our development and adoption of cryptocurrency. The nature of cryptocurrency is a lot like the cloud of interstellar dust that Jeans describes. Cryptocurrencies use decentralized control, and the blockchain associated with that decentralized control is ever-growing. However, unlike the current system dominated by central banks and banking corporations, cryptocurrency would never allow runaway contraction, because it is programmable with open architecture. This actually makes cryptocurrency, at least in theory, less vulnerable and more resilient than our current digital currency system that has centralized control.
Neha Narula discussed what the future of money might look like and how we might get there in a TED Talk in 2016. Neha Narula is the Director of the Digital Currency Initiative at the MIT Media Lab. She first describes the current state of digital money saying, “Our access to digital money and our ability to freely transact is being held captive by these gatekeepers. And there are a lot of impediments in the system slowing things down. That’s because digital money isn’t really mine, it’s entries in databases that belong to my bank, my credit card company or my investment firm. And these companies have the right to say no.”
“We’re about to enter a new phase of money. The future of money is programmable. When we combine software and currency, money becomes more than just a static unit of value, and we don’t have to rely on institutions for security. In a programmable world, we remove humans and institutions from the loop. And when this happens, we won’t even feel like we’re transacting anymore. Money will be directed by software, and it will just safely and securely flow.” — Neha Narula
Neha Narula goes on to explain how today’s cryptocurrencies are just the first iteration of a process that will lead to a programmable and democratized monetary system. Imagine a world where a Great Depression is simply not possible because we have programmed safety nets into our monetary system that are triggered automatically. We wouldn’t have to wait for policymakers to decide where to inject a stimulus or decide which companies to save. It is conceivable that the future of money could create unprecedented stability in our economy. Likewise, imagine a world where hyperinflation is not possible because the program simply doesn’t allow it. If we can program our monetary system using open architecture, we can make it so those bad actors, natural disasters, terrorists, and the likes cannot negatively impact our monetary system and by extension our economy.
Today, the centralized nature of our money is vulnerability. Banks are targets for cyberattacks, and there isn’t sufficient oversight to make sure banks act in the best interest of their customers and the larger economy. Neha Narula concludes her Talk saying, “Cryptocurrencies are the first step to a world with global programmable money. And in a world with programmable money, I can pay anyone else securely without having to sign up or ask permission, or do a conversion or worry about my money getting stuck. And I can send money around the world. This is a really amazing thing. It’s the idea of permissionless innovation. The Internet caused an explosion of innovation because it was built upon an open architecture. And just like the Internet changed the way we communicate, programmable money is going to change the way we pay, allocate and decide on value.” Cryptocurrency could solve more than just money problems. Cryptocurrency could also enable us to do things like rent out our data to large companies securely. As a society, programmable money could enable policy proposals like a Universal Basic Income. Cryptocurrency would enable a frictionless economy where the gatekeepers are no longer relevant. Our future monetary system will be democratized by the adoption of programmable currency with open architecture.