Most non currency assets are cash flow generating financial instruments.
If analysts don't believe a company is worth a dime, it can show them wrong by being profitable and paying dividends.
Edit: I think my point is - even if no one else believes in a stock or bond, you can still profit by "being right". The same is not true for currencies.
I don't think this is very useful, since "yeah but without society there are no companies, money is nothing" doesn't take us very far! But hey.
But the whole point of a corporation is it is a legal entity, you don't need to trust anything for it to work other than other than.. idk the fabric of our society.
I think I read something similar in Sapiens.
This is my takeaway from the book The Case Against Reality.
This reminds me there always exists a path between the current society & a completely different one, and a short path to something completely different is to start from scratch.
A company exists and has valid standing not because people believe in it but because the law says it exists. It is easy to prove beyond reasonable doubt that a company exists (or not). That has nothing to do with whether people believe it is valuable.
How does a company make money? Why does it distribute that money to shareholders? Why can't someone working at the company just keep all the money? Why can't the bank just confiscate it?
The answer at all levels is the the threat of violence. Property rights (eg to the money) are enforced by the threat of state-sanctioend violence, for example the police showing up at your house and throwing you in jail if you don't comply with laws.
So why would the police show up and do that? Why would the courts enforce those laws? It's not just the threat of violence, essentially. It's the collective belief in that system.
I'm happy enough to put value in USD or imaginary-coin if I can swap my holdings in them for a nice house/car/jet. You don't really need "economic, military and even cultural might" - just for the currency to be accepted somewhere where you can buy real assets and for the supply to be limited so it doesn't inflate to nothingness.
Without that collective belief, owning anything is a huge effort to defend it against whoever else it might appeal to.
It's feels very similar to a game. A serious one at that, with real consequences. It does not have a clear winning and/or losing condition though.
Whereas for your house, no matter what its market value would be you still have the right to live there and prevent others from doing so.
Anyone who's lived through a massive societal upheaval, collectivisation, dictatorship etc can attest to this - your ownership of property only means anything in as much as it's protected. If the state fails, or if society's understanding of private property radically changes then your investment is only valuable if you can hold on to it.
Even in the private-property loving West the value of an individuals property can often turn out to just be the amount that the state decides to pay them when they seize it via eminent domain.
Societal contracts are just collective beliefs. When the number of people upholding a particular societal contract goes to zero it ceases to exist. Just as any other belief, it requires believers to exist. Unlike, for example, the space rock that some group of sentient organisms decided to call Mars.
If the value of _dollars_ goes to zero, the house doesn't collapse. The social consensus and enforcement mechanism that protects your right to live there probably does though
That is, the reason that you can call the cops when strangers take over your kitchen is because we have a very real police force, whose are permitted (even required) to use force in order to protect your property. Property may have started out as a collective belief, but the processes put in place over the last few centuries - especially the concept of Rule of Law [3] - have made it very real.
But ISTM that crypto works outside of these norms. From what I can see, it has no effective rule of law; no possibility for the creation of an effective enforcement body. There appear to be no consistently applied consequences of cheating, either intentional (eg, rug-pulls) or not. People seem to steal money using crypto scams all the time [1]; from what I've seen of it, the world of crypto seems to pretty much embody my personal, nightmare interpretation of anarcho-capitalism [2].
So while I agree that property is a collective belief in theory, in practice it has the rule of law, the legitimacy of the state, and the monopolisation of force supporting it. Crypto seems to have none of these things supporting it; I'm yet to be convinced that it is even, actually, property.
[0] https://en.wikipedia.org/wiki/Legitimacy_(political)
[1] https://web3isgoinggreat.com
In a sense, it sounds like a political party that splits in two. It’s not democratic; maybe it’s technocratic.
Personally I think the question of political legitimacy doesn’t make the notion of blockchain governance wrong; it just highlights that the system as constructed may have problems.
In early crypto days there was a general feeling that the "power of math" (i.e. how hard it would be to break various hash/public key algorithms) is the enforcement body and the reason you don't need a government and a police force. Maybe smart people saw through that, or maybe the experiment just had to be done to see how this actually turns out in practice.
Your points are why I thought an official US crypto coin could work. But there is not that much net added value compared to what credit cards offer.
It has been translated into laws and social contracts backed by established enforcement that is sufficiently effective and has been demonstrated to the satisfaction and judgment of most people.
It's true that in the event of nuclear war, this could all evaporate --- but this probabilty is low enough for most people to reasonably ignore. Labeling this a "belief" is thus somewhat disingenous in the fact that it is reason rooted in logic and judgment and probability.
If you find yourself believing that our own social contract is the only logical & rational one, or at least the likely result of social progress, you might try reading Graeber and Wengrow's The Dawn of Everything. It covers a very wide range of alternatives that all made sense to the people in those societies at the time.
The "logic and reason" here has to do with the fact that the social contract is sufficiently real and functional enough to transcend mere "belief" in most people's lives.
So, the "long dick" of the US government that grand-parent was talking about. Society creates value.
The reason people are willing to give away their house/car/jet in exchange for crumpled is the existence of the market protected by that "economic, military and even cultural might".
Trust here is not in that the some big guns are protecting your cash, it is rather about you trusting that the next day/month/decade people will want that cash about the same as today.
That's because it also has use value (and land use value), etc. Crypto coins don't have any.
>Most financial assets are backed to some extent by real assets.
Negligibly so in modern economy.
I can be happy with a nice rock I found on the beach if I really love it and it's important to me. However, what we are taking about here is are assets which have a wider value on an open market.
If people suddenly stopped believing that living in your location makes sense, the value would drop very much. See ghost towns.
A different belief shifting, though, would change the equation dramatically: either a shift towards less exclusive property ownership (e.g. theoretically requiring any non-primary residence to be rentable or something crazy like that) or dramatically higher tax burden for non-primary residences. If the annual upkeep costs were to increase, the external value wouldn’t change much (it’s already pretty close to zero), but the intrinsic value for us would drop dramatically and we might consider dumping it.
The problem is getting stuck holding the asset for a long period of time. USD will lose 80% of it's value over the next 50 years. Tether likely will lose 100% in that time frame.
Right. I believe the point of the post you replied to is that while it may be "valuable to you", it also may or may not "have value" (which I interpret as being exchangeable / interesting to other parties), which requires common belief/faith that it has value (basically a circular definition). I could be misinterpreting one or both :)
It surely is, but this is just a semantic play on the word "value". You mean something like "personally important" in that sentence, the comment you were replying to was using it under its well-established economic definition.
In fact, your house is *not* valuable (in the economic sense) if there isn't a collective belief in it's equivalent in currency. Rather: it is exactly as valuable as the market is willing to pay, which is just a statement of the definition of "market value". That's what "collective belief" means in this context.
Examples have already been posted here. My house has a use value to me because I need somewhere to live. If I lived on a small island off Antarctica it would still have great value to me but perhaps no value to anyone else.
Money is a financial instrument that only has exchange value, unless you count say the use of bank notes for lighting fires or papering walls. It's value as money is entirely by consensus.
Notably not even the government that issues it actually sets it's value. Ask the governments of Venezuela or Zimbabew about that. Yes of course they can do things that affect it's value, like printing too much of it or defaulting on bonds, or consistently paying on their bonds, but the actual value is set by people. When someone sells a product or service they ask for a price, and if someone pays it then that establishes a value for the product relative to other products, and a value for the currency exchanged. What happened in Zimbabwe is people asked for an awful lot of ZB$ for things compared to how many US$ they asked for. Thats what set the value of the ZB$ (and to some extent the US$ of course).
Governments sometimes do try to manipulate currency values through currency controls, but what that actually does is constrain currency flows. If a currency control set a high price for a currency, it will just not be traded as much, only people willing to pay the premium will do so. Those not willing to pay it simply won't and those transactions and that economic activity will be constrained (or the exchange will happen on the black market).
There can be coercive pressure of course, such as Russia requiring companies to hold Rubles, but you could hold a gun to my head and force me to hand over my house at a discount or for nothing. That says more about the use value of loaded guns than about the exchange value of my house. Governments have the ability to take value rather than exchanging it, but even that has it's limits.
The house you and others have mentioned is an easy one. That whole concept of ownership is reliant on an entire system existing and enforcing those "rights". It's the threat of violence that prevents someone from showing up, "claiming" your house and kicking you out.
Enforcement is an interesting factor. Laws can guarantee rights to enable and protect free exchange, but they can also coerce behaviour as I touched on.
In more or less free markets what laws do is provide guarantees that increase trust, which has the main effect of reducing costs. You don't need to personally audit the books of a company you invest in, because the government mandates that it's done for you to a set of standards which eliminates some risks (not all, just some). You don't need to personally research if the products you buy are safe or of a basic level of quality if the government mandates standards and enforces them, and if you have a right to return goods if you find a problem with them. This makes the goods themselves a little more expensive, but the overall costs and risks (which translates into costs) to consumers are much lower.
It's the ability to demand and enforce tax payments in that denomination - with the consequence of not doing that being you will lose property and liberty.
Obtaining the denomination to settle the tax then becomes the discounted option, since the other option is far more expensive.
That alone makes the currency worth holding, since you can always get rid of it to somebody with a tax bill to pay.
As we have seen with Russia that power extends wherever the denomination is used. The US government has 'taxed' Russia anything it holds denominated in US dollars - completely unilaterally and wherever it was held.
But I think a broader statement is that the "long dick of the US government" is the collective expectation for the behavior of major world governments. On the other hand, it's worth noting that US currency is not absolutely stable.
This is false in the general case. An asset means a useful or valuable thing, person, or quality. If something is useful to me, such as food, hydration or shelter, trust is irrelevant. In fact, something can have value to me (perhaps even objective value), even if there are no other agents/persons.
Even where there are other agents/humans, no trust in an asset is required in some cases. Suppose we all can independently verify the use and quality of something (we call this measurement). If that thing has some definite utility to us, the value each will assign may differ, but that thing's value is not dependent on the subjective valuation (Say a morsel contains 15 Joules and I can harvest 9 Joules and you 11 Joules, the value we each could assign differs, yours being greater than mine, but is objectively derived, being based not on trust nor subjectivity. Subjective meaning based on or influenced by personal feelings, tastes, or opinions). Granted, we can not preclude the possibility that someone, somewhere providing a subjective value to this thing, merely that somethings have value, potentially to many of us that is objective and intrinsic in and of the thing itself.
Trust in every asset is, indeed, escapable.
That simplifies too much. There's also the fact that all taxes on income, capital gains, and consumption must be paid in this currency.
It has a very real value, in that if you don't pay using this then people will come and lock you in a cell.
It's not just a collected belief.
I also believe that the government will by force not allow its own currency to be replaced within its borders.
That's a belief in a trusted third party, not a collective belief.
The only thing that maintains the value of any asset is the demand for it.
Where that demand comes from may or may not be belief.
Water has value because there is a clear demand for it, not because anyone believes in it.
As long as there is someone who wants an asset, it has value. Belief is but a cog in the machine.
The issue with most crypto tokens is that its demand only exists within the closed crypto ecosystem in the form of liquidity, not in the real world. This makes is much easier to shake belief.
Having a reliable long term income stream attached, an actual use for the asset and/or a supply which shrinks in relation to the fall in demand is a much more sustainable source of demand.
> So what actually makes the US dollar work as a currency is that it is backed by the long dick of the US government. This is a combination of economic, military and even cultural might.
What many people call fiat is in fact partly a proof of violence consensus algorithm. Practically applied it means the sovereign will create a demand for its currency by imposing taxes denominated in that currency on its subjects and then threatening or using violence against parties that don't pay those taxes. However, that alone is insufficient to maintain the value of a currency. Mr. Mugabe of Zimbabwe surely had no philosophical aversion to using violence to maintain the value of the Zimbabwean dollar, but the collapse in his country's productive capacity rendered that moot.
Thus we can see that another major part of what makes the US dollar work is that the US economy that the US government has the power to tax is extremely large, productive, and well-diversified.
I agree: ultimately government is a collective decision on who gets to do the violence.
As for Zimbabwe, the primary difference it and the US is reach. More generally speaking, we've seen currencies collapse when people have lost faith in their value and what happens is people instead use a different currency (eg the US dollar) because they have more confidence in its value.
You throw this kind of claim without providing proof. Unfortunately, it's a claim I have seen made before (e.g. https://www.financemagnates.com/cryptocurrency/news/top-10-e...) and it doesn't hold any level of scrutiny. Although you embellish it and exaggerate it even further.
This kind of number typically assumes that a smart contract owns the ETH that it contains. Which is not true by the very nature of the smart contract, what it can do with the ETH is programmed in its code and the users depositing the ETH on it are the ones that decide what to do with it.
Then it looks at the accounts that have the most ETH (https://etherscan.io/accounts), aggregates together all centralize exchange accounts, assumes they also own the ETH. Do some quick math and publish a misinformation article ready to be shared by anyone whose confirmation biases are triggered. Bonus points if you can then exaggerate the numbers further without providing any figures and keep the misinformation going.
Some numbers...
There is currently 39 M ETH locked in DeFI smart contracts (32% of circulating supply). https://defillama.com/chain/Ethereum?currency=ETH
There is 13 M ETH locked in the staking contract (11% of circulating supply).
There is 2.5 M ETH locked in L2s (2% of circulating supply). https://l2beat.com/
So that's 45% of circulating supply not owned by any single entity.
This means that you cannot look simply at total ETH issued from the genesis block as you will be overestimating the amount of ETH in circulation by the total amount of ETH destroyed through base fee burning. Currently around 2.4M ETH has been destroyed in this manner.
The figure I gave above (~120M) includes all other ETH. I.e. All ETH that exists. Including ETH that perhaps has been forever lost due lost keys or sent to wrong addresses or addresses that nobody has the keys for (e.g. https://etherscan.io/address/0x00000000000000000000000000000... or https://etherscan.io/address/0x00000000000000000000000000000...)
So for all intents and purposes circulating supply is total supply.
It actually does. If the backing is real, the user knows he will always be able to exchange his coin for $1. If the price on an exchange goes under $1, the issuer of the coin can buy it back, making a profit. If the price goes above $1, the issuer can sell. It's a trivial algorithm. Of course, it only works if the backing is real.
Unfortunately having billions in cash is a huge temptation to invest them and make even more profit. That's what Tether did. And now, if their commercial paper is under water, they are insolvent.
Trust keeps bank runs away, arbitrage keeps the peg tight (feeding into said trust).
The benefit of these: it mimics in person interactions and describes a simple process.
But The trade off is that they only work if they grow slowly and organically, which seems to be contrary to what the crypto space is trying to do.
> However, since Trustlines is designed to be implemented on a public blockchain, making transactions requires the use of a native cryptocurrency to pay transaction fees.
But this one part seems wrong. With such a design there should be no need for global consensus. :(
Now Charlie gets $10 dollars as credit (not the same as cash) from Alice (mediated through Bob) and wants to buy $10 items from David and Eve. He shows the letter saying that Alice is good for the cash. Without a distributed consensus method, how can David or Eve confirm that they will be able to go to Alice to collect the cash? How can they even know that Alice has the cash in the first place? What if something happens to Bob?
The only way to do this without a blockchain would require something like Paxos, but Paxos only works if the participants are selected a priori. Every new participant would have to be vetted by everyone else, or everyone else would have to follow some central authority that can grant access to the system. If you are going this route, you are just re-inventing a credit cooperative.
If something happens to Bob, too bad. Both Alice's and Bob's IOUs are void because Bob can neither pay up nor demand payment. Both Alice and Charlie are sad because they knew Bob, and their ability to trade was more valuable than the current balance.
You can remove Bob from the scenario and the problem still stands. Say that Charlie gets the IOU directly from Alice, David and Eve are left with duplicate IOUs. Alice has trusted Charlie with $10, not $20, so she can not re-pay both of the creditors. If you say "David and Eve should not have trusted Charlie then, so too bad if they lost each $10", consider the systemic issue if the double spending is made against with thousands of participants.
Without a way to control for double-spending, everyone can mint IOUs freely and any credit note is essentially worthless. And if remove the idea of IOU and try to make all transactions "cash-based", you just turned a fungible-currency into a non-fungible one (are these $10 coming from Alice-the-good-creditor or are they coming from Dick-the-double-spender?)
Without any transitive property, "Charlie gives his own IOUs" already exists. It is called "selling on credit". No crypto required. Shop owners have been doing that for centuries with pen and paper.
Alice wants to buy an apple from Charlie. Alice gives an IOU to Bob, Bob gives an IOU to Charlie, Charlie gives the apple to Alice.
And - sure, everything crypto does could be done with pen and paper and a phone line. But here Bob's computer can agree to do this without Bob's involvement.
Another thing, if you want to make transactions like the one you described, you don't need to pass IOUs around, you just pass money. Alice gives the IOU to Bob, Bob gives her money and then she can buy from Charlie, David, Eve or anyone else.
What is the scenario you're imagining of Alice attacking Charlie?
What you want to do is an digital version of Hawala. Hawala works, but there is a reason it is not automated. You can not scale it and it gets very easy to hit liquidity bottlenecks.
I think your ideas are in the right place (if you look at Raiden's off-chain side payment channels, it works somewhat similarly with what you are attempting to design) but can we agree to the fact that if they were feasible to be done without BFT mechanisms, it would have been done already? It is not like people want to use blockchains.
What are these liquidity bottlenecks? Feel free to reply with a link or a keyword if this is common knowledge.
One thing I like about this model is that you can have regular fiat money on top if Charlie gets his IOU from the US government and Alice gives one of US government IOUs back. But it can now be a single network for all currencies where anyone can start issuing their own money.
> can we agree to the fact that if they were feasible to be done without BFT mechanisms, it would have been done already? It is not like people want to use blockchains.
I'm not sure. Would anyone be able to profit from it? Developing the software and educating people is hard, especially with p2p things.
Re: profiting from the Blockchain, you are going at this backwards. You don't need to make it profitable by the tech. What we want is to have a global payment network that can make transactions cheaper than (and equally faster/secure as) Visa. If that were possible to do without blockchains, the market would pay handsomely.
Hello jmyeet! Unfortunately, I believe this statement, as you have given it, is untrue.
I hear it often, as it is continually and frequently asserted by crypto enthusiasts (and I am not suggesting you are one of those).
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For assets, value is grounded in utility (whether to do some useful function, generate some feeling, etc).
Asset price, on the other hand, could be almost anything depending on supply/demand and may be affected by beliefs at times.
It's important to disambiguate price and value. I can buy a superb pair of shoes from a desperate seller for $1, but that doesn't make their 'value' $1 to me or other people. Value can be personal, it can also be societal i.e. averaged over many people.
Indeed if price and value were the same thing, there would be no buyers or sellers, because you would have little reason to go to the effort of swapping two things of identical value to you.
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For currency, specifically, national currency where you are living in that nation - the value (and relative price) of a unit of a currency is grounded in taxation enforced by, well... force, by the state.
Taxation generates continual demand for units of currency regardless of individual or collective beliefs.
And in trust in the currency, again, is enforced by... force, by the state. Which prevents unlimited supply (by random people), again, regardless of individual or collective beliefs.
Thus, both supply and demand for the units of currency are set by the state, and supply/demand is what it takes to generate a stable price and mandatory use.
I note you mention trust, and 'backed by...' and 'might'.
However, discussing currency in terms of only trust and not in terms of taxation, misses half the argument. Both halves are essential for the argument to make sense.
Absent a mandatory minimum demand, control of supply of currency (and trust in that control) is meaningless.
In computing terms, you can see taxation + limited supply as a technique to 'bootstrap' an initial price for a currency without needing any shared or individual beliefs at all. It also underwrites the price in the long term, again, without any need for beliefs.
None of this is to say that a currency can't have its price/value shifted around by collective beliefs once bootstrapping / underwriting is in place. Of course it can. But what maintains, inescapably, a certain minimum price (your own words: maintain, inescapable), is enforced taxation.
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Going back to the price of assets. Well, you can believe all you want about, say, oil, and your whole country may have a collective belief, or even the planet, but since there is X units of oil needed and Y units of oil in supply, the price will be set by ongoing auction as always, or you can freeze/be stuck in your garage/factory shutdown. Supply and demand. Beliefs can affect supply and demand, of course. But supply and demand are primary, beliefs are secondary and they sit alongside necessity and physical reality.
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(Finally - again without wishing to imply you are a crypto enthusiast - a lot of crypto enthusiasts seem to imagine that mathematics has a similar 'force' to states, 'there can only be X coins', ignoring that a) chain algorithms/limits can be changed by widespread consensus b) no one is forcing anyone to use the crypto at all i.e. no physically enforced taxation c) it's trivial to substitute a chain with a duplicate chain (again consensus), as e.g. dogecoin proved rather effectively. They also invariably neglect the issue of needing 'mandatory demand' via taxation. I would speculate this is because the essential need for tax in currency systems, completely undermines the ponzi's disguise as a currency.)
(I use the word 'ponzi' casually here; technically ponzis are zero-sum, whereas crypto is worse - negative-sum, especially for the environment).
You don't need to trust gold or bitcoin. They are verifiable. Don't trust, verify.
Also, the US dollar doesn't work very well, so you're redefining reality. They're constantly abusing that trust and creating way more money than would be necessary or moral.
In scenario where financial system collapses only real currency is skill - if you can make food from something available locally or be helpful like being a medic.
Why would I trade a chicken that I can eat for piece of gold when I can trade chicken for sewing my wounds after being bitten by a stray dog.
Even in failed states gold maintains value. For example in Somalia’s recent past, not only was gold still fully exchangeable but the existing Somali currency continued to work with counterfeit currency filling the vacuum.
What stops gold exchange is not non-existent government but any particularly strong and draconian government that decides that alternative forms of money are a risk to the regime (e.g. North Korea).
The only thing that maintains the value of any asset (or currency) is the collective belief in that asset or currency. Put another way: there is an inescapable component of trust in every asset.
Crypto in any form doesn't solve the trust problem other than a very narrow slice because as soon as you interact with anything outside of the blockchain, you're adding trust. Even on the blockchain, all the math in the world doesn't avoid the trust problem (eg it's been estimated that over half the Ethereum are owned by less than 10 entities).
Even backing a currency with gold (or any other asset) doesn't solve this problem. Additionally, it's not even correct. In years long gone the US government just maintained a peg between the US dollar and the gold price. Any reserves (which were never 100% anyway) are irrelevant to this. You don't need them. You just need sufficient capital to maintain the peg. Even if you had 100% reserves you still have to trust the government to honor redemptions and not to change the peg. If you have sufficiently deep pockets, you end up not even having to spend much money because no one challenges your peg.
So what actually makes the US dollar work as a currency is that it is backed by the long dick of the US government. This is a combination of economic, military and even cultural might.
So going back to algorithmic stablecoins, it doesn't matter how much you have in reserve. It doesn't even matter if there's new money entering the system (as this article claims) to maintain the peg. If people lose faith in the "stable" coin, it's finished.