We’re watching our favourite TV show, and mid-laughter, I randomly hand you a blank piece of paper. What would be your reaction? Shock? Confusion? Mild irritation?
But what if that piece of paper was a £50 bill?
Yeah. Now we’re talking.
It’s said to make the world go round.
But what makes one piece of paper more valuable than its counterparts, for example, sticky notes? What makes it legitimate? More importantly, in this day and age where money already exists, is there a need to reinvent the wheel?
Could there be something else?
Keep reading for a peek into the past, present and future of money.
What is money?
We need to fully explore where it comes from and how it works to understand this basic concept.
Follow along closely.
Way back, when our ancestors needed something, they traded actual items. Do you have a bottle of oil? Great, I’ll trade you for my three tubers of yam. This was called trade by barter; it went on for a while.
So why disrupt a system that was working and was the most logical thing at the time?
Well, the problems had begun to outweigh its benefits. We, as a people, had outgrown this method. One of the problems was the double coincidence of wants.
For this plan to work, you had to have what I wanted and vice versa. It’s not difficult to see why this was no longer sustainable because what if I didn’t want your tubers of yam? But even if I did, are three tubers really equal to what I want from you? It isn’t easy to accurately divide.
Not to forget that we’d also have to physically meet up, maybe in a market square, to find one another in the first place. And if you’ve ever had to shop for the perfect pair of shoes, you’d know how frustrating it is to find exactly what you’re looking for.
There had to be a better way.
So as humanity progressed, barter was replaced by other items. Items we considered more neutral. In pre-colonial Africa, for example, people used cowries, beads and bottles. In other parts of the world, even leather was used.
But eventually, this was also no longer sustainable.
It was almost impossible to scale up as demand kept rising. It also didn't help that it wasn't universally admissible. For example, traders from India wouldn't accept cowries because it was abundant in their land. To them, it was an unlimited commodity and, thus, worthless.
See, for money to be worthwhile, it needs to be the following:
Limited in supply
This last point is vital because let me tell you a secret:
Money is whatever the majority of us accept it is.
If tomorrow, enough people in a specific community agree that the grass becomes their form of money, it does.
Our current use of money is based on trust, but that wasn't always the case.
When paper money eventually came into the scene, made from the barks of trees (I guess money does grow on trees), it was backed by other valuable items in reserves, such as gold. This is because paper money in itself has no intrinsic value since it’s literally just paper. Gold, on the other hand, is valuable because it’s naturally scarce. But it’s also heavy. So how about we use paper as its representative instead? Remember how one of the traits of money is portability?
This was one of the ways the government came in by printing paper money via central banks. They also acted as a constituted authority with the gold reserves and a ledger that recorded how much cash was in circulation.
But something interesting happened as our economy and civilisation blossomed.
The exchange rate of the notes to these metals became unstable. Because the market value of the metals was not fixed, the redeemable value of the notes in circulation was volatile over time.
This also became unsustainable.
There had to be a way to manipulate the demand and supply of money so that it would be somewhat stable in value for trade.
A new method had to be devised. Again.
Maybe the government could, instead, back the cash flow simply based on their word. They could stand as authorised middlemen, vouching for the credibility of what these papers meant, with only a small percentage of the circulation supply backed by metals.
That could work.
This constitutes fiat currency or regular money, operating in a “fractional reserve banking system” as we know it today.
Fiat means decree or to be authorised.
This system has now further “weakened” from paper money, being fractionally backed by metals, to e-money (in our bank apps), being fractionally backed by paper money in physical bank vaults and fiat. Essentially, nothing backing nothing.
The catch, then, is that governments have the power to influence our financial status at will. Because there’s no real asset reserve backing, more money can be pumped into the economy from thin air (by expanding the loan books of banks) with no transparency, which reduces its value. That’s one of the basic laws of economics.
If the supply (of a thing) increases and demand stays the same, the price (or value, of money in this case) will go down.
Especially in third-world countries with little to no checks and balances to ensure accountability. This means the value of our savings could easily reduce over time. And isn't that the case now?
But I guess we have no choice. This was the way. The only way.
Well, until an anonymous 9-paged document came along.
What if there’s something better?
On the 31st of October 2008, a white paper was uploaded on Beyoncé’s internet by an anonymous Satoshi Nakomoto with a concept so unconventional that it just could work. It was borne out of a seemingly passionate dissatisfaction with the status quo, so it’s a bit technical. I’d still encourage you to look at it for yourself, though.
But in a nutshell, here’s what it proposed:
How about digital currency?
Indeed, if we no longer needed town criers thanks to WhatsApp or foldable paper maps thanks to mobile GPS, what if we could also trade using technology?
But for money as a concept to work in our modern times, we needed the government and banks to create and destroy paper money while maintaining private ledgers for record purposes.
So, what if instead of the monopoly on the ledger that could be manipulated by “higher authorities”, we could all have access to (and contribute to maintaining) a master digital spreadsheet, thereby outsourcing the need to trust a central keeper, hence decentralisation? Decentralisation also means transparency in the supply process, allowing the public to be involved.
What if this public spreadsheet still maintained the transactor’s privacy and used unique digital signatures that are verifiable and impossible to forge instead of physical IDs?
Enter cryptography — that was the missing link to this otherwise far-fetched idea.
This is a computer science term for the study of secure communications techniques that allow only the sender and intended recipient of a message to view its contents. Ever noticed the word “encrypted” on your WhatsApp?
With this, a private/secret key and public key can be generated that is unique to each transactor and a unique hash to each transaction. Using complex computer code, even the slightest alteration to this will make it useless.
And because these transactions are encoded digitally in a chain of blocks linked to one another irreversibly, called the blockchain. This makes up the public ledger.
A lot of oversimplification went into this definition, but this blockchain concept is a big deal. It also solves something called the “double-spending problem” that has plagued the transfer of digital assets for decades.
At its core, cryptocurrency is simply a cryptographically secure store of value or currency that can be transferred ‘trustlessly’ between parties, thanks to a blockchain as the ledger system. Now, we can trust the maths rather than trust people or institutions.
So, why is there a lot of confusion surrounding this concept?
A lot of the noise sets in because of cryptocurrency’s dual role as a speculative asset, thanks to its volatility. Essentially, it can also be a form of ‘investment’. And that’s not really everyone’s cup of tea.
But remember how we abandoned the gold standard as a monetary system due to the volatility of the metal price? Does the volatility of many crypto-assets today, therefore, mean a failing of instrument as money?
That's a question we’ll delve into another day.
From barter to Bitcoin
Personally, I’m not sure what I find more curious – the concept of using complex computer code and the consensus of the public to ensure secure transactions, the need for no singular central authority to record them, or the fact that we still don’t know who Satoshi is/are, till this day. But love or hate it, you have to admit it’s a clever concept.
And it seems to be gaining traction with an estimated 300 million and counting users worldwide so far, trading and storing their wealth either independently or with different platforms such as Busha.
Money has come a long way since its barter days, and it has a history of evolving. So it’s fair to ask:
Is money in its final form, or is cryptocurrency the next logical step in its evolution?
The history of money is still being written.
We just happen to be living in it.
This is very helpful. Thanks🤲🏾
This was such a good read!