What if they devalued the foot?
The case for crypto - Part II: Why do we work?
This multi-part foundation for crypto starts with the sentiment from which arises the development of Blockchain technology. Here I address a property of money that precedes the academic triad of a store of value, unit of account, and medium of exchange.
Money is an incentive to work.
Building on a sentiment against a monetary/financial system subject to the whims of a Ruling Class unwilling to enforce the rules on themselves, I am going to simplify for the benefit of a notional unbanked companion talking over coffee on a cold morning when we can see our breath. I choose coffee as a metaphor because the crux of what wealth is and how it is created can literally be felt as the comfort of a hot mug of coffee held in your hands on a cold day.
When we understand that wealth is the difference between the value of a useful thing and the value of the underlying raw materials from which it was made, we can start to understand that this value requires some unit by which we measure it. The potter acquires a lump of clay, then molds and fires it into a coffee mug. Perhaps the clay was $0.50. If the mug ends up priced at $5.00 we can see that $4.50-worth of wealth - measured in U.S. Dollars - was created by taking the raw materials of the earth and making something useful.
Wealth is created in one way, and in one way only. People take the raw materials of the earth and make useful (or desirable) things others want to buy.
The first place to which that wealth will be applied is shelter. Let’s imagine our potter is unbanked. The sale of each coffee mug will translate immediately into shelter for some amount of time. To appreciate this, let’s recall that the price of shelter - like all prices - combines two units of measure: the Dollar and the (square) foot. Now let’s imagine we need to explain the process of ‘devaluing the Dollar’ to our unbanked potter. Since she is unbanked, it will likely be difficult, if not impossible. So let’s devalue the other unit - the foot.
If we arbitrarily decide the foot will no longer be twelve inches, but six, and we devalue it by one inch per year over six years, we can quickly calculate that rent will quadruple because an area that was once measured at one square foot will become four. So let’s take the potter’s work, for which she is paid in Dollars when we buy her coffee mug, and measure it by days of shelter instead. While her rent is priced in dollars per square foot, it is paid by the month. We’ll divide 365 days by twelve months and boil this down to days. As we start, with the foot being twelve inches, one month’s rent buys 30.42 days of shelter. In six years the same amount of dollars will buy a paltry 7.61 days. (Before long our potter is living in a tent, so she might as well set it up on a ritzy street and hang an “Occupy...” sign on her encampment.)
RENT/SQ FT: $1.25
INCH/FOOT SQ FT RENT DAYS
Year 0 12 1,000.00 $1,250.00 30.42
Year 1 11 1,190.08 $1,487.60 25.56
Year 2 10 1,440.00 $1,800.00 21.13
Year 3 9 1,777.78 $2,222.22 17.11
Year 4 8 2,250.00 $2,812.50 13.52
Year 5 7 2,938.78 $3,673.47 10.35
Year 6 6 4,000.00 $5,000.00 7.61
What should be truly shocking to the market/finance professional who understands some of the underlying math is it only requires an annual inflation rate of 8.33% to effect an equivalent devaluing of the Dollar. The point of ‘devaluing the foot’ as a thought-exercise is to show how shocking present circumstances really are. The point of looking at this from within the thought-world of the unbanked potter is to appreciate how inflation basically steals her labor. And all of a sudden the interior logic of the “Occupy Wall Street” movement (and similar movements elsewhere) looks very different - or at least should.
The flaw in the thinking of typical market/finance professionals arises from an abandonment of Adam Smith’s foundational Theory of Moral Sentiments - something he wrote well before The Wealth of Nations. This is a social (as opposed to religious) theory of morality in which a sympathetic observer sees what one party does to another and reflects on whether they would be OK with being on the receiving end of the same. (If not, that thing is ‘immoral’.) Self-awareness is essential for nurturing this Theory of Moral Sentiments in economics. And that self-awareness is essential to understanding Bitcoin. When today’s market/finance professional weighs in on why Bitcoin is not money (or not an asset or an investment) it isn’t that they’re wrong as much as it reveals a basic lack of self-awareness. They have neither lived the life of the unbanked, nor reflected on how those living that life are experiencing the ravages of inflation. The unbanked actually know more about the economy than the professional class right now because that knowledge is being forced upon them by the immediacy of the theft of their labor.
The Blockchain, Bitcoin, and ‘Proof of Work’
Understanding crypto as (potential) money requires we understand that money is first an incentive to work. In light of today’s systemic theft of labor, the sentiment underlying the development of Blockchain technology is the need to replace the unwillingness of the Ruling Class to even have rules governing the money supply with the immutable laws of mathematics. This requires participants in the Blockchain devote equipment and energy to the maintenance of the Blockchain. This maintenance - validating transactions by solving a complex math problem - is what secures the integrity of the data on the Blockchain.
The incentive for devoting equipment and energy to the Blockchain is Bitcoin, which can be then used as a medium of exchange to obtain and record ownership of things on the Blockchain. With each transaction (the adding of a ‘block’ to the ‘chain’) all participants are competing to solve an emerging math problem. The first to solve it is the participant which gets to add the block and is awarded Bitcoin. The work of the other participants then serves to establish consensus. The fact that all participants have a copy of the results of this work makes it computationally impossible for any one player to forge a record such that ownership of things is corrupted.1
This incentive structure is called ‘Proof of Work’. Bitcoin as (potential) money corresponds to this first property of all money - the incentive to convert one’s labor such that it can be used to obtain other things.
Finance/market professional have observed that Bitcoin will not ‘work’ as money because of its volatility. The first answer to this is the price volatility of Bitcoin is seen in its pairing with fiat currencies (like the U.S. Dollar). Remember - price always combines two units of measurement. The price volatility of Bitcoin in U.S. Dollars is an indictment of the mismanagement of the Dollar, not of Bitcoin. But to understand the origin - and thus the meaning - of the indictment we must never lose sight of the underlying sentiment. The Blockchain exists to render the Ruling Class obsolete and transform financial records from today’s opaque corrupted form into a new, immutable form. Bitcoin as money is - before anything else - the incentive to perform the needed work.
In my next installment I’ll address the problem with ‘Proof of Work’ and how Ethereum's new ‘Proof of Stake’ solves it.
Disclaimer: I am a cyber security professional, not a financial advisor. I hold no licenses in the financial sector. I have relatively small positions in ETHE and GBTC which hold Ether and Bitcoin in trust on behalf of shareholders. I am weighted toward ETHE for reasons that will become clear in this series of essays. It will also become clear in these essays why I believe crypto currencies are not an investment. This does not mean there is no case for owning crypto. It just means the current case has nothing to do with traditional investment theses. In any event, do not - under any circumstances - make investment decisions on the basis of anything I write.
If one party controls over 50% of the computers participating in a Blockchain, it is technically possible to forge records, but not in a way which can remain undetected. Switching from one corrupted Blockchain to another would be trivial in that event. In my next installment I will explain how Ethereum 2.0 has positioned its Blockchain to be preferred in this respect.