How the need for a reliable monetary system leads to the discovery of blockchain through a series of catastrophic failures
If bitcoin isn’t answering your call, perhaps you should try another approach
I remember when we moved to our new offices. They were spacious, bright and squeaky clean, but they weren’t cozy. Going from point A to point B was always slow: sometimes you had to take the elevator, some other times you had to cross empty floors and in a few cases you had to cross the street to reach a different building. This happened with the coffee and vending machines. If you wanted a coffee, a doughnut or some gum you had to put on your jacket, take the elevator, exit the building, cross the street, take a new elevator, walk a bit, get your goods and carry them back making the same route backwards.
This was a nuisance and it soon became a problem. Many times you wanted a coffee, you thought about going, but in the end laziness got the best of you and you simply didn’t go. Seeing as the craving for coffee wouldn’t subside, we concluded that we had a problem, so we did what humans do best whenever there’s a problem: we invented social organizations to try and fix it.
The first one we called piggybacking.
Economic system number 1: Piggybacking
It consisted in waiting until someone would go for a coffee for themselves. Then you would tell them: “Do you care to bring one back for me?” At a first glance, the system could have worked, because it maximized the amount of coffees and minimized the amount of trips to the coffee machine, but it had some obvious problems:
- Some people were more comfortable than others “piggybacking” on their trips to their coffee machine. Some people never went for coffee and some other people felt abused. Yes, there were some free riders.
- The availability of coffee didn’t happen at the same time as the craving for coffee. In fancy economic terms, demand and supply didn’t match.
The six of us went from spying on each other to have some quarrels about who had gone for coffee more or less times. That didn’t bode well. We had reached our first economic collapse and we needed a better system
Economic system number 2: Rotation and barter
We joined to discuss our problem and agreed that we needed a system. This in itself was a great achievement, for we could have concluded that we didn’t need a system and we could go back to our previous ways. But we knew where that road ended and we didn’t want to travel it again.
We decided that every day one of us would go for coffee for the rest of people. It seemed like a brilliant idea at the time: no one would escape their duties and everyone would get coffee without hassle the majority of time.
This system worked for a few weeks, but then we began to suffer its limitations:
- As it already happened in the system number one, the availability of coffee didn’t match the craving for coffee. Yes, that thing with supply and demand.
- Sometimes people had inescapable duties, like meetings with bosses or great workloads that made them neglect their duties towards our economic system.
A new phenomenon appeared: the trading of favors. Some people offered to do menial jobs for their colleagues in exchange for trips to the vending machines and they kept score. But everyone had their own score so the whole system soon turned into an absolute mess where everyone claimed they were owed much more than they owed. No one wanted to go any longer to get any coffee for their colleagues and the system halted altogether.
We had reached our second economic collapse.
Economic system number 3: Fiat money
We had another meeting to analyze our problems and seek for solutions. We agreed that our main problem was the lack of consensus: everyone tried to increase the amount they were owed and minimize the amount they owed. We needed an unquestionable way to settle our differences. Then Sally came up with a very innovative proposal: IOU’s.
The idea was simple: everyone would print some IOU’s, basically a strip of paper with their face on it. Said IOU would be good for one trip to the vending machines, performed by the person whose face was printed on the strip of paper, and anyone could collect its value at any moment. They could be exchanged freely. The basic idea was something like this:
Ron: “Hey, Sally, would you help me with the spelling of my presentation? I’ll give you 2 strips for it.”
That meant that Ron was promising to go twice to the vending machine whenever Sally wanted it.
The strips even got their own name: coffeepons or simply pons.
Then a lot of interesting phenomena unfolded.
- Coffeepons turned into a true, all-purpose currency. Goods and services were exchanged incessantly. Spelling, translation, double checking, formatting and a lot of other services were bought and sold without effort. All of us became more productive.
- The trip to the vending machines became the less demanded service. In a certain moment of this golden age, our building got its own vending machines, but our economic system didn’t care. No one wanted to collect the real value of the coffeepons anymore, they just wanted them as a means of exchange.
- Ron printed too many coffeepons with his face. At first he got a lot of services for free, but soon everyone had many “Ron’s pons.” Sally, on the other hand, printed very few. The result was that a spelling check was worth 1 Sally coupon or 5 “Ron’s pons”. We had discovered inflation.
- At a certain point Ron suffered an attack. Some people sent him for a coffee repeatedly, and there were so many Ron’s pons that he got annoyed and stopped going for coffee altogether. This sunk Ron’s pons even more, at the ratio of 1 Sally’s pon for 20 Ron’s pons.
- Ron decided that he was not letting people play with his currency, so he changed the design of his coupons and said the old ones were worth nothing. In fancy economic terms, Ron defaulted.
That was a severe blow to our system, but it wasn’t fatal. The fatal blow came with a suspicion: Ron claimed that he had not printed so many coupons and the bitter doubt festered and grew in our hearts: was there a counterfeiter among us?
We don’t know the exact reason, but trust was broken. A few days later we experienced a total economic collapse, the third of our era.
Economic system number 4: Banking
A couple of weeks after our third economic collapse we still lived in the Middle Ages. We didn’t have a simple way to exchange goods and services and, while this setback didn’t affect our lives dramatically, it affected our productivity and our mood. We missed the good old times and we wanted them to come back. So we met again and discussed our problem.
Albert was the one who proposed a new system. It would be as simple as to keep a ledger. One of us would have a spreadsheet where he or she would write down every transaction between the rest of us. The thing would go down like this:
“Hey, Ron, I need some graphics for my presentation. Will you be a lamb and do them for 5 pons?”
“Ok, Albert. I’ll even throw a free template.”
Then Albert and Ron would go see Sally and she would annotate the transaction in an Excel sheet that only she would have access to. We agreed almost immediately that Sally was the perfect candidate to keep the ledger, because she was so committed and reliable. Of course she would have a reward for her job: she would be paid a 10% of every transaction.
What could go wrong here? In the beginning, nothing. Sally was really efficient and everyone trusted her. No one could forge any pons nor they couldn’t mint them, so the inflation was low. This golden age lasted for months, but then an insidious development took shape.
“Sally, can you send ten pons from my account to Ron’s,” asked Mary.
“I’m sorry, Mary, but you don’t have ten pons,” said Sally.
Mary didn’t have any pons and Ron didn’t have any pons either. Albert had some pons, but very few. Where were all the pons? How were they disappearing? Was Sally corrupt? Had she been hacked?
These were reasonable doubts. All the pons were in Sally’s account. Some people offered a reasonable explanation: every transaction was taxed by Sally, so when the economic activity increased, Sally’s account increased along with it. Everyone was working to maintain the banking system.
Some of us believed this explanation, but some thought there were more questionable methods involved, that is, they thought Sally was corrupt. It didn’t matter which explanation was correct: in the end, trust was shattered and our economic system collapsed for a fourth time.
Economic system number 5: Interregno
We tried to come up with a new system where everyone could have their own Excel sheet of balances and transactions, but it was short-lived. Balances never matched. Some keepers committed fraud and created pons out of thin air, introducing a serious problem of inflation. No one fully trusted anyone and the system was a joke. We probably needed a supervisor with access to all the ledgers, but how was that solution different from the one that caused our fourth collapse?
We were on the verge to give up completely when the company hired a new engineer called Satoshi. What he had to propose really changed our lives.