The last couple of posts were devoted to the complications arising from Proof of Stake coins which I argued serve little purpose other than as a digital equity and move corporate and governmental powers to developers from the bankers and industrial magnates of the real world. I have since been asked to give more details of Proof of Work and why it and it alone is different and can result in the creation of a commodity money. Fair enough, so here it goes…
Commodity money, as I have detailed in the past, is commodity that is naturally adopted by society to serve as a common medium of exchange, i.e. money. The ability of a commodity to serve as a money depends mostly on its intrinsic characteristics of divisibility, immutability, fungibility, and scarcity. But, what makes a commodity, say, different from a credit note, or a bill? Simply stated, a commodity is an asset or a thing (physical or virtual) that:
1) Required work to produce it
2) Had some initial intrinsic value
Let’s look at each of these in turn. First, it must have taken some work or energy to produce or to prepare it for use. That work or energy was consumed in a physical (or computational) process and the process cannot be reversed, or whose energy cannot be otherwise reclaimed. We innately understand this, as every commodity we produce in the real world is a product of human labour and work, requires energy, and results in an asset produced. Symbolically:
Work + time * efficiency ==> asset
Expend energy in producing useful work, put in some time, subtract waste losses, and out pops an asset, whether it be a gold bar, plutonium ore, or bitcoins.
The ‘birth by work’ concept is important because the producers of the commodity are 1 level removed from the politics of the commodity’s use as a money. The producers (or miners) of a commodity are simply interested in improving their ability to extract or mine the commodity and sell it into the market for use as money. In this way, the creation of the commodity money is pure as it first enters the economy through the free market, regulated and controlled only by the natural forces of supply and demand and price. Contrast this to fiat money which is regulated and controlled by ‘experts’ in an ivory tower, who believe that they have the magic formulas to make decisions for the economy, because they are smarter than the collective opinions of everyone else. (To those of you who believe this fallacy, I implore you to watch this: Why Socialism doesn’t work ). Astute readers will be thinking right now, “hmm… this sounds a lot like all the criticisms you wrote about previously with PoS systems!” and you would be exactly right. Essentially a PoW produced coin is a free market money, whose supply is controlled by the market, while PoS ecosystems are just digital forms of socialism. Centralized control of a rule-based system, no matter how noble in conception, will inevitably fail, as history has shown us.
The second important aspect of a commodity money is that it must have originally had some intrinsic value to it. As Ludwig v Mises describes in The Theory of Money and Credit, the value of a commodity money (or the price) derives from its previous value the day before, and the value it had the day before, on the value on the day before that, etc. If one could trace back until the origin of the first exchange of the commodity asset for something else, you will discover the value of commodity money comprised of only the value of it as a asset (consumable) alone. This initial intrinsic value as a commodity is what initializes the objective exchange value of a commodity money and as it slowly gains acceptance, it acquires value as a money. The relationship can be seen as:
commodity money value = value as a money + value as a commodity(intrinsic value)
Where the intrinsic value of a commodity money is more or less stable, its value as a money is what fluctuates greatly and rises as it is demanded for in its use as a money instead of as a commodity.
With bitcoin, and other virtual assets, we for the first time find ourselves lacking the language to properly describe the phenomenon of how a digital commodity money can come into being. The notions of work being the means to convert some atoms from one state to another (more useful) state don’t apply as nicely. But if we ignore the physical reality of the creation of a digital asset for a moment, and assume that it is done via some magical mining process akin to the mining of a physical metal, what then, is the initial intrinsic value of a bitcoin? This is the key sticking point that has prevented the acceptance of bitcoin by many of the hard money advocates and Austrian economists around the world. This is where I will likely draw a line between them and I, although we hold many of the same beliefs: I believe that the intrinsic value of bitcoin is in the utility of the blockchain. The initial value which bootstrapped the digital commodity of bitcoin into the mystical category of money was that it provided a measurable, quantifiable, utility. Which was this: the ability for the first time to have a shared database owned by everyone and no one, and have it maintained by trust-less parties acting all according to their own interests alone. The value of an immutable, incorruptible transparent record, is what that initial intrinsic value of a bitcoin represented. To own one was to take part in an incorruptible public record system, which is something that could certainly have been used many times in human history to solve many disputes, even wars (the corrupt Byzantine Empire may have fallen sooner, to be sure). The fact that the value of the token derives from the network in which it exists is the reason many detractors may call Bitcoin a ponzi scheme. Indeed this same feature is present in all crypto-currencies, where the reward in participating in the network is paid for by in-system tokens. The difference between them though, is that work is expended in their creation, and thus Bitcoin and other PoW tokens are commodities, and not equities. That being said, the digital commodity we call bitcoin is the only digital commodity to date to have reached a ‘money’ level of valuation and use.
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