(This article is continued from part 1. Both articles are my interpretation of the ideas discussed by Amaury Séchet and Tobias Ruck on their recent podcast. To watch the interview itself, you can find it here.)
Throughout human history, we have witnessed the same cycle play out over and over again. A civilization arises, forming an economy built on sound money that can’t be printed out of thin air, and then as the population and economy grows, the society inevitably transitions to using a form of debt-based money.
This happens because while typical forms of hard money like gold or silver can be excellent at being a good store of value, they are not so convenient to use as a medium of exchange. This is why some form of debt-based money becomes necessary. Money that is both easy to carry around as well as easy to divide into smaller denominations.
Initially this transition to a better medium of exchange can have a positive impact on an economy. There is much less friction when it comes to transactions, and better liquidity leads to increased trade and improved market dynamics.
But there is a tradeoff. Such a system has always required a central authority that backs the value of this debt based money. And inevitably what happens is that at one point or another, the central authority will find itself in trouble, and resort to printing money out of thin air hoping to make their problems go away. This then leads to higher inflation, prices go through the roof, until the entire economy eventually collapses, people go hungry, and the civilization falls apart.
What makes cryptocurrencies so revolutionary is directly related to what Amaury calls the arc of money, because crypto finally gives us a way to break the same cycle humans have undergone for centuries. As a species, there’s no doubt we are shaped by the technologies we have at our disposal, but one technology we almost never think of as a technology, while potentially being the most important one of all, is the technology we call money.
Maybe the reason we rarely think of money as technology is because it hasn’t changed in such a long time. Sure we might have gone from using dollar bills, to credit cards, to Venmo and Apple Pay, but the underlying money we make our payments with has pretty much remained the same. Money that gets issued by a central government, led by people who at any time can act as a central point of failure.
Every form of money humans have ever used has suffered from these same limitations. We either had hard money that acted as a good store of value, or debt-based money that acted as a good medium of exchange, but never both. And if you think the US dollar has been good at both, take one look at how much a dollar purchased thirty years ago compared to today.
But what if we could have a new form of money that could do what no other money has done before? What kind of world could we build if we no longer had to deal with the normal boom and bust cycles usually associated with the arc of money? Well, that’s exactly what I hope crypto can help us find out. For the first time we have a technology that has the potential to act as an excellent store of value as well as the best medium of exchange the world has ever seen. A technology that allows us to no longer have to rely on governments to run our monetary systems by replacing it with one that is trustless and decentralized.
But there’s still a long way to go before crypto can claim such things. For now it’s still mainly used for speculation, and while I hesitate to say crypto can survive without the speculators, I believe it will only thrive when the amount of people using crypto exceeds the number of people merely speculating on its value.
Because in addition to being a good store of value and medium of exchange, there is a third property that must be fulfilled in order for something to be considered a good form of money, and that’s as a unit of account.
Just as it’s impractical to pay for things in gold, it would be impractical to price goods and services in something that undergoes significant changes in value from one day to the next. But that is exactly how cryptocurrencies behave at the moment, and the underlying reason is because there are way more people speculating on crypto rather than using crypto.
“People that use crypto as money have a stabilizing effect on the ecosystem. People that use crypto as a speculating vehicle have an amplifying effect on the price variation.”-Amaury Séchet
To expand on the above, think about the miners and traders who earn revenues in crypto but have to pay their bills and taxes in fiat currencies. When crypto prices rise, these individuals benefit by having to sell less of their crypto to cover expenses, causing less supply to hit the market, resulting in even higher prices. But when the demand drops and prices go down, these same people are forced to sell more of their crypto to pay their bills, causing supply to go up and prices to drop even further.
On the other hand, people using crypto as money have the opposite effect. Rather than amplifying price movements, they have a stabilizing effect on the price. Because for people using crypto as money, when the value of their holdings go up, they will feel wealthier and want to spend more, not less. But if the purchasing power of their crypto falls, they will feel poorer and tend to reduce spending until the situation changes.
This is why in order for crypto to succeed, we need more people using it as money rather than merely speculating on it. People who leverage the technology not just to create new online casinos or ponzi schemes, but to build innovative new businesses, experiment with new governance models, and help to create more value in the world than we ever thought possible.
That’s how crypto becomes the lifeboat.