Is ETH money? Is banana money? WTF is money anyways? In this talk, Cosmos researcher Sunny Aggarwal dissects the common notion of “money”: store of value, medium of exchange and unit of account, and goes back to the fundamentals of what money is. “Money isn’t a noun. Money is an adjective. Things have moneyness. It’s a spectrum. Some things are more money-like than others.”
“A more money-like instrument is relatively more tradable, or marketable, than a less money-like instrument.” — J.P. Koning
Direct link to slides here. WTFdao has edited the abridged transcript below.
I’ll be giving a talk today on Moneyness. A lot of these ideas come from this blog by J.P. Koning: Moneyness, and this course called Economics of Money and Banking on Coursera.
What is money. So we generally have these common ideas of money: store of value, medium of exchange and unit of account. I don’t think this is a very good classification because almost any asset can act as these things.
My favorite type of money is bananas. If you look at bananas, you can get pretty good store of value if you put them in the freezer. You can get two or three months out of them.
I can easily swap bananas with people. At lunch yesterday I had a banana, someone else had an apple, I traded it and got an apples. Now, we could have our prices in bananas, why not? Bananas are such a great unit of account that it is a unit of length on the internet. If you ever used the banana for scale.
Maybe it has something to do with social consensus, 100% of people agree that bananas are money. This just doesn’t seem right. Bananas don’t seem like money so what’s going on here.
If we look at the classification of different types of assets, you’ll notice that there’s no asset categorized as money. It’s because money isn’t a noun. Money is an adjective, things have moneyness. It’s a spectrum. Some things are more money-like than others.
Bananas have some moneyness, but they clearly don’t have very high moneyness. So what is moneyness measuring though? There are three different things, but some of them I think seem sort of orthogonal to each other. For example, land could be a great store of value, but intuitively it doesn’t feel like it has high moneyness. So, I’m gonna make the claim that it probably doesn’t have to do with the store of value. It has something to do with the medium of exchange, and the unit of account.
When we talk about units of account, one thing we should keep in mind is that there’s a difference between assets and unit of account. The dollar is a unit of account. It’s a measure. While we have a bunch of different assets, whether it’s Federal Reserve Notes, bank deposits, coins, euro dollars, money mutual funds, but these are all types of assets that trade at par with the dollar.
So maybe money is something any asset that trades at par with the unit of account that we’re dealing with. With that it solves our problem right? But wait a second, even money, even units of accounts, have prices. Money has price, and in fact it has, you know, a couple of different prices: par, interest, exchange rate and price level. But the key value is all of these prices of money are determined by supply and demand for money. And so, supply and demand of what? That didn’t solve our problem we still need a categorization of which assets are money or not, so we can figure out what the supply and demand are, so we can figure out what’s the price of money.
So, I’m going to make the claim that the moneyness of an asset has specifically to do with its property as a medium of exchange. This is a quote from J.P. Koning: “A more money-like instrument is relatively more tradable, or marketable, than a less money-like instrument.”
So, what this means is it has specifically to do with the liquidity and acceptability of an asset. Basically, I have this asset, how easy is it for me to get rid of this asset in exchange for something else I want. It might take a few steps or might be one step but that’s really what moneyness has to do: how marketable an asset is. And so, bananas, clearly not very high moneyness. Dollar bills, clearly high moneyness.
We can be even more precise than that, we can imagine that like the hundred dollar bill has actually a little bit less moneyness than a $20 bill. If you often go to the shore and sometimes they’ll say: we don’t accept bills larger than this amount. That’s showing that the hundred dollar bill does have lower moneyness because it’s harder to dishoard a $100 bill than it is to dishoard a $20 bill.
Gift cards, you know they don’t have high moneyness. They’re pretty good at store of value, and they’re very closely pegged to the unit of account, but they have very low marketability because they’re only accepted in certain places. Even within gift cards, an Amazon gift card probably has higher money than let’s say, a Target gift card, because it’s much easier to dishoard it in exchange for an asset that you want. Land, amazing store value but not very high moneyness.
So what properties give an asset high moneyness? Why do people want to use them as a medium of exchange: the stability, ease of transfer, liquidity, durability, and usefulness. That’s why commodities, generally, can be good money because they’re useful. They provide like an outside down on the market.
One way to learn what properties make for good medium of exchange is playing the board game Settlers of Catan, but changing the rules every now and then. For example, there’s this rule that if someone rolls a set of seven, and someone has more than seven cards in their hand, they have to burn up half the resources, half the cards in their hand. But if you make a special rule saying okay maybe that applies for everything, but wood. If wood is exempt from this rule, then what you did was you actually increase the durability of wood, and this, you’ll notice what happened to the game, people actually start to use that as the primary medium of exchange more and more.
I’d say ETH has pretty low moneyness. You are at Ethereum conferences, you can barely ever even use ETH to pay for stuff. Bitcoins maybe slightly more, Dogecoin maybe slightly less. But really why do these things have such low moneyness? Cryptocurrencies seem to have covered a lot of these desirable properties. But the one that they really absolutely just suck at is stability. Cryptocurrency cannot be stable. This is the brilliant part about fiat currencies which, is a whole another talk. I’m really against the idea of fixed-supply crypto currencies, you know if you have changes in demand for an asset, then the price is just going to start fluctuating like crazy.
The brilliant thing about fiat currencies and the Federal Reserve System, was it was a system where if the demand increases the supply of the currency can also increase. If the demand decreases the supply of the currency also decreases. This is how the Federal Reserve System maintains stability of your prices, it’s a really good system. And that’s why, the assets that the Federal Reserve creates are generally considered high moneyness.
Now, that we have an idea of what money is and how properties get moneyness. So, how can we create something that can increase the moneyness of all assets and I’d say that there is a protocol that does it. It’s called Interledger, it was created by Ripple a couple years ago. Really has nothing to do with Ripple per se, they just put a lot of funding behind it but it’s a really cool protocol. I will put it in comparison to Lightning Network.
Lightning has this process where you have these complex HTLCs to send payments over a multi hop payment system. Lightning barely works there’s a whole bunch of issues with it. There’s like a DoS attack you can do on Lightning, where you can prevent anyone from ever being able to finish payments and it doesn’t cost you anything. You can check out Dan Robinson’s talk “HTLCs Considered Harmful” if you want a better understanding of why Lightning doesn’t work.
Interledger: how about we do something called micro-streaming payment, Alice wants to send Bitcoin to Eric, she can send like one Satoshi at a time, Eric will send an Ack. Then she starts to send the next Satoshi then Eric sends an Ack. This process can continue where she said one by one. And the key here is if anyone along the route, let’s say Carol is malicious, she can run away with some of the stuff. So unlike HTLCs it doesn’t provide all the security, but at the end of the day she can run away with one Satoshi, or one way. If you’re willing to accept a little bit of trust in the system, only on your direct counterparties, then you know you can create a much more efficient system than Lightning in this way.
Interledger also makes it very easy for you to do currency swaps. So let’s say Alice wants to actually pay in Bitcoin, but Eric wants to receive in Ether. You can have a market maker in the middle like Carol. Alice will send Bitcoin to her and Carol will send ETH to Eric at a pre-determined quoted exchange rate. And so you can keep this process going and basically until the payment completely finishes.
On top of Interledger you can build these integrations on many different base layers. People have built it on Bitcoin Lightning channels on Ethereum Connext channels, you could do it at the base layer of a fast enough blockchain. People have even built it for things like Venmo with PayPal, so I could be paying you in Bitcoin, and you could be receiving in Venmo. This is very similar to what the credit card system already does. When I’m here in Japan and I swipe my credit card. I’m paying in US dollars but the merchant is receiving in yen because there’s someone in the middle who is making that market for us.
What Interledger does is it’s basically an open payments API that basically allows us to do that similar UX but with any sort of asset including many digital assets. So, what we want is, if we use Interledger NOT as a medium of exchange asset, but as a medium of exchange protocol, then we can really start to digitize more and more assets. So we can digitize security tokens, digitize bills and bonds, digitize Bitcoin and Ether. Then we can start using Interledger to pay and do all that.
But wait there’s a problem. If there’s no asset that’s acting as the default medium of exchange. What are we using as the unit of account now? There’s a cool thing that goes on in Chile. It’s called the UF (Unidad de Fomento). It’s an Index outputted by the Central Bank, every day. That’s basically based off of inflation, over the last one month, and all the long-term prices in Chile, are denominated in UF. So, if you’re buying food prices will be in Chilean pesos. But your rent, your mortgage or car payment, all of these things are denominated in UF. It is a fictional unit of account. It’s not actually based on any real asset. And so the term for this is called dictionary money.
In this world we can get to a point where central banks are basically standard setting institutions. What they’re doing is they’re basically setting indices which prices are based off of. Currently they have a mandate to maintain stability of prices by manipulating the supply and demand for the medium of exchanged assets. If they didn’t have this mandate, they can focus all their efforts on you know, analyzing the economy as well as possible so they can output indices that are used as good dictionary units of account.
J.P. and I have gone back and forth on this topic quite a bit. He has this whole thing about why you know this kind of makes sense but what happens why don’t people want to use lottery tickets as money, even if we had Interledger. He claims that you know people have hopes and dreams in lottery tickets and it’s considered a high volatility asset, there’s a mental cognitive overhead to pay in high volatility assets in the same way that there’s a mental overhead to micro payments. He says that people are going to put stuff in buckets of high volatility and low volatility and only want to pay with the low volatility buckets.
I told J.P. that you came up with the moneyness idea you’re making the same mistake when it comes to volatility. Yes, we have like different types of assets, but you know there’s a range of volatility of different assets. So what to one person is a low volatility asset may be a high volatility asset to someone else. We can also change what makes up low volatility assets. I would claim that in a world where the liquidity, acceptability and moneyness of everything was high enough, there’s no reason you’d ever want to hold Federal Reserve Notes instead of treasury bills, so I can still kind of shift what things make up people’s portfolios.
I don’t have time to explain Rodrick’s Trilemma, but I think this system can help move us in a place towards higher globalization. Thank you.
Please contact@tzhen on Twitter for corrections.
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