For a bit of fun, I wrote my first post on the Medium platform leveraging ideas from my reading of The Economist and my previous post. Go on, have a read!
Author: elias (Page 3 of 26)
Ethereum, a newcomer this year on the Bitcoin scene caught my eye this weekend. What I like about it is that it’s talking about the future block-chain enabled world that has been introduced by Bitcoin, the true innovation of Bitcoin. If you know nothing about Bitcoin or want to get a update on the latest state of the industry, I highly recommend you read the white paper.
But the reason I am posting about this is because it talks about one of my other favourite new concepts for the future world: liquid democracy. And it combines it together, under the topic of Decentralised Autonomous Corporations (DAC’s), which I often hear in Bitcoin literature but I’ve only come to appreciate today how they would practically work.
In short, mind blown. Liquid democracy and DAC’s represent two of the most groundbreaking advances in the fields of governance in the last decade.
Scenario
Let me give you a scenario of how these three inventions: Blockchain, liquid democracy, and DAC’s would work.
Imagine an organisation such as a government district representing you or the local supermarket store. Now continue this thought experiment and that you and 999 other people are ‘stakeholders’: as a citizen that can elect a representative or you are a member of the organisation that can elect a board of directors, like how non-profits and as for-profits do as shareholders.
Every one of these stakeholders has a “key” and under the principles of DAC’s, if any one of the 551 of the 1000 stakeholders make a vote, it creates a binding decision on the organisation. That itself isn’t the remarkable thing: what’s mind-blowing is that it’s done automatically through “secure multiparty computation”, allowing real time decisions to be processed by computers reflecting the will of the stakeholders.
Now combine that with the concepts under liquid democracy, where these stakeholders can directly vote on any issue — but can also delegate their vote to someone. This concept is called “delegative democracy” and is like a hybrid of the concepts of direct democracy (where citizens get a direct vote) and representative democracy (where citizens elect a representative) — hence the apt term liquid as the direct vote can be delegated to a representative and reverted back to the actual voter in a very fluid way.
And finally, let’s tie this to the blockchain that Bitcoin has introduced to the world: a way to validate decisions.
So let’s say one day, you get an email from your community saying you need to vote on whether to allow a new super market in the area. Or a vote to determine if the super market should sell alcohol. Currently, these decisions are made by shareholders and citizens by their representatives such as management who are appointed by the elected board of directors or elected representatives.
But under the above scenario, you get a direct vote on the matter — along with your 999 other stakeholders. However, assuming you don’t want to vote, you can allocate your vote to someone else which generalise’s the concept of a board of directors.
Mind blown
If the above doesn’t rattle your brain with its possibilities from how Fortune 500’s operate to the federal government could transform the way they operate from dictatorships disguised as fake democracy where elections simply give the perception of democracy, then it’s because you need to better understand the concepts.
That the (Bitcoin-invented) Block chain is a like decentralised receipt book of transactions that can prove decisions without the need for lawyers, liquid democracy is a new way to make decisions that evolves our current concepts behind direct and representative democracy, and the principles behind DAC’s means we cut the need for people making decisions on our behalf as cryptography has invented a way to determine a group of people (who are pre-authorised) to make decisions in real time.
The significance of Bitcoin is not that it invented this future, but it inspired it as it’s a the first version of DAC in existence today. Where an entire financial system is controlled by the people, not a government or bank. Humans are replaced by computer algorithms and therefore enabling a decentralisation of power to the very people who are meant to have that power: you and me.
The economy. Government. How business operates. Whatever your views, I think we all agree something is broken. I’m going to propose a set of ideas that could at their fundamental level change how we perceive the world. (Warning: it’s going to help you read the linked posts to follow the thinking.)
Background
Let’s start with in 2009, how I picked my beef with capitalism:
Money, you see is just a way to sustain something. It shouldn’t be the end-goal of business, and it’s that point that fundamentally irritates me about capitalism. That being the whole focus on it being about returns on capital – not returns on humanity.
In 2011, I said how we are measuring the wrong thing in society as progress. Why is it always about measuring more consumption (GDP), and not generating more ‘actual’ happiness like better health outcomes? Certainly the guy that invented GDP didn’t think of it how we see it now.
In 2012, a thought I had ended up resonating with a lot of people.
Success is when I can experience life fully (existence), can do whatever I want whenever (freedom), improving the world for others (impact).
— Elias Bizannes (@EliasBiz) March 21, 2012
…which I then expanded in a post and several months later I explained as a way to measure success.
Last year in March 2013, I asked a question around why do we need money — which linked it to my recurring theme round time and value. Specifically, “money purchases value, but money doesn’t create value (in the ultimate sense)”. Which furthered my thinking that making more and more money isn’t the goal, a pretty big realisation for me.
The five year test
What do I have to say now — after being an auditor for financial markets, a recognised intrapreneur at a big company, a manager in a startup, an investor at a venture capital firm, a foreign entrepreneur with no safety net in the world’s biggest (and most ruthless) economy that made money with no help and then lost it requiring help by outside investors to get back to where I started. Where I’ve run a business not only with traditional employee considerations, but an organisation where 40%+ of the 1000+ customers have come back to work as volunteers and run it, like short-term employees but with more passion. And might I add, has radically transformed my views about what motivates people
In short, I now feel like i’ve seen enough where I can apply business academia to real world experience. And so do I read back on all my posts in the last five years and think differently on the fundamental concepts that underpin our society?
Surprisingly, I seem to agree with my thoughts even more.
Today I met up with an old friend Dr Donnie Maclurcan who mentioned how he recalls my first post (the first link) and around that time had begun his own journey that will lead to a book called living in a Post-growth society released next year, which you can read in summary in this recent Guardian piece. Donnie has a very strong view that we need to rethink corporate structures as being the fundamental thing that needs to be changed and his view being they are non-profit. I challenged his ideas with my actual experiences, such as the incentive of an entrepreneur or needing capital when it’s not available by banks, which brought out two interesting points.
The first is actually linked to my freedom dimension of success, where I say you need to define how much money you want to make in life and draw a line. Otherwise, you sacrifice the other dimensions in life. It’s a personal decision, but let’s say for arguments sake you could make you current annual salary (or double) on a recurring base. If you were to make that every year — you could maintain your current lifestyle. And if you could maintain your current lifestyle, but have more time — you could have a better life, right? Why would you need more money? To buy something shiny and feed your ego?
But the second one that I found intriguing, was how do you motivate private investors to want to ‘invest’ in a non-profit. And his idea was that once the non-profit makes, say $1m a year it needs to pay back the loan with a 300% interest rate. Thinking this through, this is what owning equity does as a best case scenario. I know I think every day about how I pay back my investors with a return on their capital, beyond paper valuations and actual cash dividends (that is, when I’m not worried about meeting payroll and operating expenses).
A vision for the future
Assuming you’ve been able to follow the thoughts above, here I’ll attempt to finally patch them together on a new type of capitalism. A type that keeps the current system but fixes it at the fundamental level with better incentives.
- Make all companies non-profits with entrepreneurs who create them guaranteed a permanent salary for their work as the reward. (Like owning equity, except it’s not equity.) This fixes the incentive issue for the people who initiate the value creation.
- Private investment can still occur in enterprises, but instead of owning equity, they are simply considered debt with a high interest rate. This fixes the issue of the incentive issue for capital to fund ventures.
- It’s no coincidence that in silicon valley, one of the most forward thinking places right now when it comes to the global economy (meaning, new jobs and new industries are being created more so than anywhere else) that the predominant instrument used in startup financing is called “convertible debt” — which means, it’s debt and if it doesn’t convert, it turns into equity (which in practice, is what happens).
Why this is such a big thought, is because it removes the need of “owning equity” which to Donnie’s point is the fundamental problem in our society. I’m not entirely convinced on this, but consider this:
- As all companies are non-profits, the destruction of value that can occur in the public markets is no longer and companies can instead focus on re-investing profits into things like R&D, customer value, and employee satisfaction. Like Bosche, one of the word’s biggest “big business” non-profits does.
- Because there isn’t this focus on the mythical “shareholder value”, we can see companies doing what USAA does (one of the biggest banks in America with the best scores across all companies for customer and employee satisfaction) which is talk about “member value” or their customers.
- If you think about it, the entire point of a business should be to serve its customers. Not its employees or its shareholders (though they have a duty to them), but the people who purchase the value created by the business. And so by changing this tone from the top, we will see a complete re-think by companies on how they operate. We’ll see better run companies.
Let’s now extend this to government just to complete the circle. Why the hell do we measure our progress in society with how much money we spend each year, and not what our average life expectancy is? Our length of life and our health quality I think is a more important measure for society than how much money we spend, which is why we have this materialistic culture that leads us to be on a treadmill of chasing the wrong things. If we no longer focus on profits, then we also need to match that with no longer focussing on consumpsion.
- Make life expectancy our number one measure of success. GDP growth, unemployment rate — ok cool, I care about that because money matters. But why don’t we make average life expectancy the number one measure? Can you imagine how this could transform our society if politicians suddenly were accountable for our livelihoods?
- If I sound like a hippy, let me throw this thought at you: one day, when the population growth stagnates and starts declining we are going to have a crisis in our society because we measure “growth” of the economy which is fundamentally dependent on population growth. What are elections going to be fought about then? Let’s drop population size growth and instead focus on population quality growth.
Go ahead. Tell me the thoughts in this post are crazy. And yes, maybe they are — but just maybe there is something about this being the future. I love capitalism and like democracy, want to keep those systems — but we all agree they are flawed and we can fix them.
In the case of capitalism this is doing it fundamentally at what makes is so powerful: around incentives. If we can rethink some fundamental definitions of what progress is in life, society, business, and government — we may actually create a better life.
(On a related theme: this 2012 post will get you thinking on how we fix democracy at the fundamental level but that’s for another day.)
I just read this great article on leadership quotes. Go on, read it. Which brings me to share one of the first lessons I learned of what leadership is.
In my high school, cadets was a major part of the school’s tradition which basically meant we dressed up in army clothes and got to roll around in the mud every so often. Our cadet unit did an expedition in the Australian outback which was a 40 kilometre trek and we had to travel with our backpacks (filled with camping gear, cooking utensils, etc). In the cadet unit, there was a platoon and each platoon had corporals all responsible for a half dozen cadets in ‘sections’ in addition to the two sergeants and a commanding officer.
This particular platoon had to make its way up the hills in the intense heat, along with an embedded ‘commando’ corporal from the commando platoon who considered himself a ‘leader’, which he was. As corporals, you would assume that they would lead the charge, which is what the commando corporal did. It was, after all, important to have someone navigate where we were going and something the ‘section’ corporal would have done normally,
As the front of pack role was taken up, not to be made redundant in his role as the ‘section’ corporal, he instead kept an eye on his guys, so would shuffle through the line that was made. It would tun out that as the day progressed, one of the cadets was lagging. Slightly overweight, but also by no means because it was easy to carry 10-20 kilograms on your back in this heat and up a hill, he was practically at breaking point. Not allowing it to be a discussion but with great relief, this section corporal had him hand over his backpack who made it up the hill with both of their backpacks so the crew could make it up the hill quicker and by dusk.
Observing this taught me an important life lesson: leadership is about being the last guy in line. Leadership is not about walking in front of a group of people; it’s about helping the fat guy that’s behind everyone and holding back the group.
In my restaurant waiter days as a teenager, I learned the best kind of waiter is one that is invisible: filling your water without you noticing, clearing your plates without you asking, reading your mind before it has a chance to be processed by you as needing it done. That’s what the best kind of leader is my eyes: like what glue does or like what inspiration provides, it’s invisible but the essential reason why things are happening.
Put another way, be gluey. Be a leader in function, not name.
Bitcoin has conflicted me. I see brilliance and world-changing potential. But its pricing instability leads me to believe it will never stabilise until it has some sort of secondary value to prevent confidence crisis and create predictability on the value as a currency. But maybe that’s the wrong question to be pondering?
In January 2014 (when I actually wrote this post but didn’t publish it) I realised that two of the innovations created by BitCoin is the blockchain and the proof of work, are useful beyond currency. For the uninitiated, every single transaction that used BitCoin is documented in a public ledger that everyone in the world can see. The proof of chain is a process that motivates ‘miners’ to validate the transaction in the blockchain. Together, you have a decentralised trust system that no central entity every needs to mediate in.
But the realisation I had was that Bitcoin is not a currency: it’s an asset. And that asset, is that it is the world’s first global decentralised system that can validate transactions.
Now imagine I sent a bitcoin transaction between two accounts that I owned, say that were valued as 25, 122,013 satoshi’s (about 1/4 the value of a Bitcoin) — numbers that can also be interpreted as Christmas day 2013.
Now go back to my assertion: Bitcoin is the world’s first global decentralised system that can validate transactions. And how many transactions occur, including non-financial records of receipt such as dates or domain name looks ups which are actually IP addresses.
Bitcoin might not be the world currency because it’s protocol isn’t fast enough for real time money spending (it takes 10 minutes to validate a transaction) and its unstable as a store of value. But when you think about it a global receipt book, I hope you now get how this is game changing.
If the entire computing revolution is based on binary code — 1’s and 0’s — so long as something can be boiled down into a number and there is value in validating it, then Bitcoin will have place in the world.
Due to unexpected events, I’ve had to spend five weeks in Australia in the last six months. I’ve also by no means had time for holidays with a backlog of work so it’s made me wonder how practical a dual location life is.
For one thing, its completely redefined my view on being away from my family and friends. While not without some issues on my business, the upside has been my aging parents are happier, I’m more connected with old friends (and family, which makes me happy), and less home sick. Meanwhile I can continue to chase my ambitions in America.
Why would you want this?
- Because we can now. Flights are quicker and cheaper. They say in ten years time, Sydney to London will take 4 hours (currently 24 hours). But even then, today it takes 14 hours Sydney to San Francisco; and 10 hours SF to London. With inflight wifi becoming standard (increasingly on domestic flights now, and I’ve done it once before on a international flight over the Pacific ocean so only a matter of time), it’s no longer wasted time.
- Work is becoming more flexible. For example, smart engineers and designers I know just contract now, and small businesses give you flexibility when it doesn’t hurt the business — like how my old employer Vast had a virtual team for many years to attract top talent. Even our StartupHouse team is currently spread across three continents right now (and it’s a real estate business!) not to mention the entire StartupBus leadership team live in as many cities as we have people. While face time is crucial, I have to say from a business point of view, I’ve unexpectedly discovered having such strong networks in multiple locations opens up opportunities not to mention increased satisfaction from the team in the job.
- health care is becoming more globalised where medical tourism is a very real trend. I’ve heard of people I know getting plastic surgery in Thailand; eye laser surgery in Singapore; jaw bone surgery in Bulgaria — all because it was cheaper. Actually just this week, I was getting medical care in Australia for a quick checkup and prescription, which ended up being way cheaper without insurance than what it costs in the US with insurance.
- Education is becoming more flexible, with remote study for adults and what we are seeing with kids being brought up on iPads is just the start. The success I’ve been hearing about AltSchool (where two former colleagues of mine are now working there) is another example how technology is enabling us to have more flexible and higher quality education
Of course, this isn’t a life for all people. Most people are quite happy to stay in the one location and for reasons of work can’t be flexible. But for those of us like me, with the travel bug or with global ambitions in business or with family spread across the world or with a multi-geography upbringing — the advances in technology are now enabling us to have a richer fuller life we desire.
A few nights ago I woke up in the middle night not knowing where I was. It was pitch dark, I couldn’t breathe. In shock, I jumped out of my bed and found a door before realising what had happened. Gasping for air, all I could think was “Bitcoin liquidity crisis”.
Freshly jet lagged into a summer Australian night that I was still acclimatising to, I probably was impacted by the humidity, dehydrated and still confused from all the travel. But the fact I was thinking of the Bitcoin liquidity crisis, I’m going to call this a premonition of what’s to come.
According to Former US Federal Reserve Chairman Alan Greenspan, Bitcoin is a bubble. I agree.
What makes it a bubble, is unsustainable prices and to which Greenspan says no ‘intrinsic’ value. This is where I disagree, but does point to a real challenge with any crypto-currency.
Fact: There are 116 Bitcoin startups on AngelList https://t.co/XymdehGT5P. I think we’ve got the wallets and exchanges covered, folks.
— Erick Schonfeld (@erickschonfeld) December 6, 2013
While the innovation right now is on establishing exchanges which create a base level of liquidity, Bitcoin suffers from one critical weakness in its design. Fixable I might add, but critical.
Secondary value
On a base level, the creation of exchanges will solve the liquidity problem: more banks, more currencies, faster conversions, lower fees — will allow more people to convert their government-backed fiat-currency into Bitcoins. This will help in developing the maturity of the currency.
But it doesn’t solve the confidence issue that will impact ultimately its liquidity. This is because Bitcoin or any other crypto-currency has no secondary use if the value falls. It’s going to collapse when the social compact loses confidence. Greenspan is wrong in saying Bitcoin’s doesn’t have any intrinsic value because the algorithms developing the hashes’s are the result of mathematically complex equations ‘mined’ by a global network of brute force computing. But he is partly right, in that those outputs in the algorithm’s don’t have any secondary value. Unlike gold which has been used as a form of currency as well as a metal for jewelry, Bitcoin’s cryptographic puzzles currently don’t have a secondary use aside from validating the blockchain.
Arguably you can say the same about any other fiat currency: if a government and society didn’t think the USD has value, the pieces of paper would be useless. But unlike the USD, Bitcoin does not have a government guaranteeing the value of the currency.
Long term this won’t be as big a deal, because if you look at the USD, no one questions the liquidity of the US government. Though with a lack of confidence, the same issues would happen if everyone in the world cashed in their Greenback (and yes, the US government wouldn’t handle that crisis and the world would lose confidence). This issue however will hold back the initial foundation of the system as it will be the basis behind a liquidity crisis due to confidence.
Which is partly why we need a Bitcoin bubble: it will lay down an infrastructure that will be a sunk cost that will result in future use “because it’s there”. But if we could invent a way to give Bitcoin secondary value by finding a way to leverage the block chain to give value elsewhere in the world (possibly the mathematical puzzles become a source of validation for the world?) then this would inject much needed confidence in the system to make this a true global currency.
I believe there is one true lesson that matters for anyone running a business in whatever space you find yourself in. A skill that if you learn the manage techniques in executing them, are transferrable to any business. Thee core concept is called “working capital”, and although they teach this as a basic accounting concept — the meaning of it is not something you can learn, but simply feel have to feel as a CEO founder.
Have you ever had to worry about not being able to pay payroll next month? Have you ever had to raise financing to *continue* (not start) the operations of your business? That’s what I call the working capital burn. And while the tech press is littered with “acquisitions”, the truth of the matter is that the majority of businesses that get acquired knew their future was limited and/or their working capital was running out. An acquisition is a failure in the ability (which may also mean fatigue, not just lack of skill) for an entrepreneur to expand their working capital.
Working capital is a deep concept that incorporates a lot of skills in order for it to successful function. It means fundraising and revenue; it means cost control and hiring. Working capital management is one of the three core functions any CEO — big or small business — that s/he needs to be responsible for outside of setting the strategy and building the team. But the truth is, it’s something everyone in the businesses needs to be responsible for — it’s just the CEO is the only person who has a true picture of the operations.
One of the sad things about the recent financial crisis that has had many economies go into deep recession, is that thousands of businesses went bankrupt despite existing for many decades in some cases. And the reason, was because the banks stopped lending when even $20k may have been enough to boost the working capital of an existing business to continue its operations. Because you see, working capital is not something you solve once you graduate from being a startup — it’s the thing you need to think about from the first day of starting the business and the last day of ending the business.
When I hear of a CEO who is hiring staff faster than the revenue growth of the business, I shake my head. When I hear of a person giving me advice on how to run my business about investing the businesses’s cash in a certain direction despite more short-term challenges being apparent — I dismiss them because they clearly have never had to *feel* the stress of the working capital burn. When I have people claim “profit” is bad even in non-profit organisations, I can only put my hands up in despair because they don’t understand that business has costs — many of them indirect — which you need to always be thinking about and building up the cash reserves on seemingly unrelated activities.
The working capital burn is a thing that all entrepreneurs that have experienced can relate to, and why they can connect despite decades between them in age and a world of difference in terms of what business they work on. And I have to admit, despite my six years of tertiary education and three years work experience to become a chartered accountant where working capital was just one of many accounting concepts I had to learn; it wasn’t until I started my own business that I *felt* the working capital burn and really understood it. Which is why before I can trust anyone in a position of authority for a business I run or a business I invest in, I look to see if they not only get working capital, but if they’ve felt the working capital burn before.
One of the StartupBus teams this year was interviewed by Y-combinator. They were turned down. Why? According to the team, it was because they were not a billion dollar company. This is something I’ve warned StartupBus teams before when they pitch investors so it doesn’t surprise me. But there’s a lesson here that I hope all entrepreneurs understand.
Professional investors are in the game to make money. Their motivation is to generate a multiple on the fund they have raised.
Why is that a problem you may ask?
Well, who cares if a company makes a billion dollars? Apparently from sounding cool that you built something like that up, as a founder, you will be so diluted through multiple rounds of funding that you will probably have a 5- 30% equity stake in the business, depending on how capital intensive the business is and how many co-founders you have.
A VC however, not only makes money on a billion dollar exit, but they get to brag about it to limited partners and to attract new entrepreneurs, which helps them raise new funds and get new deals. The way it works in venture capital is that it is all about the brand and communicating your successes. Any investor that doesn’t admit to not knowing what they are doing are full of shit. Because billion dollar exits come in two forms: entrepreneurs who successfully played a game to take advantage of the current market (ie, an acquisition today that had it not happened may not have become a sustainable business) or fundamentally disruptive businesses that no one saw coming. I can think of many examples of the above, but I’ll hold back as my knowledge of various companies are not mean to be public — however, all that matters is the point that billion dollar exits are either due to a confluence of market factors or a fundamentally disruptive business model. You can’t predict for that. Which is why the safest strategy, as an investor, is to back a proven entrepreneur who knows how to make opportunities like that happen.
While investors look for the 15 deals that generates 96% of the returns in a year, let’s bring this back to the entrepreneur only making $300m. Put another way, a billion dollar business is more like a $300m business for you financially speaking (assuming you have 30% of the entity, a best case scenario). But if you are a $300m business pitching a VC, you probably won’t meet the investors cost of capital (ie, their fund is $300m+) and so therefore they don’t get the returns to justify their capital. Putting that into context, a billion dollar startup that a founder has a 30% equity stake in and a $333m startup that a founder has a 90% equity stake in — is, financially speaking, the same. And what I mean by that, is the people who will make that “billion” dollars (the founders) will need to work three times harder for the same return…meaning by raising financing, the market problem that needs to be serviced needs to be three timeS bigger so that people sitting in the backseat (the investors) make just as much money out of it.
Which means absolutely nothing about the problem you are solving in the world. The fact the entire silicon valley ecosystem is influenced by the investor industry, at a time when the costs of doing a startup have dropped dramatically — is a misalignment that will change one day.
If an investor says your business isn’t biggest enough, it means 20% of your hard work isn’t high enough to meet their capital hurdle of providing a certain return to their limited partners which will impact the investors future fundraising. And sadly, this fact is lost on a lot of entrepreneurs who feel they need a sense of validation despite having identified a real market problem. Which ironically, I think is what separates the true disruptive entrepreneurs from the rest. They are the ones that say “fuck you, I’m going to make this work”. And they end up disapproving the assumptions the investors falsely asserted when rejecting the teams’ vision because fundamentally disruptive businesses are never obvious from the outset.
Bitcoin fascinates me. Whether it’s the future of currency itself I don’t know, but it will pave the way for the future so it’s worth studying.
There are two reasons that people claim make Bitcoin flawed.
The first is that it’s based on ECDSA (Elliptic Curve Digital Signature Algorithm) which consists of a private key (a secret number known only to the person that generated it), a public key (a number that corresponds to a private key which is calculated from the private key but that is very difficult with current computing to reverse engineer to predict a private key), and a signature (a number that proves an operation took place that used a hash and the private key). Values can be determined without the private key ever being disclosed, so that a bitcoin can correspond to a public ledger to prove the authenticited of ownership — for example, an algorithm can determine with the public key on a signature to determine it was produced by a hash and the private key, without needing to know the private key.
And so the critique goes, if someone can build a sufficiently powerful quantum computer, Shor’s algorithm will enable someone to steal bitcoin’s at will as they can crack the secret of someone’s private key. But basically, it’s practically impossible for this to happen. I’m not crypto expert, but I’ll leave this for others to digest further.
The second critique is due to the known limitation that bitcoin will one day cap at 21 million units. If bitcoins go missing, we will never be able to replace them — such is the case with physical currency today which goes out of circulation (but a central authority issuing it can reprint them). And inherently, Bitcoin is considered to be deflationary — the problem with deflation is the decreased price level of goods and services. Meaning, because it’s got a future guaranteed scarcity it will get scarcer and lead to deflation so therefore it’s doomed.
This is what I want to explore further because it’s worth clarifying some fundamental assumptions about the world.
What is value?
Let’s start with a functional definition of value. “Value is energy applied to resources where the perceived utility of the output is more than the inputs.” That definition implies there are three sources of value in the world: energy, resources, and outputs that have used the application of energy on resources and becomes a transformation. And the utility of a transformation, is different from say energy and the resources that went into it, simply due to perception of it. Basically, value is at core about utility.
Resources are finite: we only have a limited amount on earth that we can use. And most of it is not usable, as we don’t have the capacity to extract the resources in a usable way. Energy on the other hand, by the human definition, is unlimited — the sun sends 1.KW for every square metre of the earth surface for free. But what limits energy is the ability to capture it, store it and transport it — so therefore energy has value. We need energy to function: animal and plant life need it to function, and we need it to extract resources as well as apply it to transform resource into new products.
Is energy in itself valuable? Well, only if we use it: if a plant sits in the sun, it’s free — as does a human who will get Vitamin D that helps it function. Just because it’s free though doesn’t mean it doesn’t have value: it’s just the price is low. Humans also need other vitamins to survive, and it requires the expenditure of energy to acquire future sources of energy — that energy could be valued as time to hunt down animals for example.
Do resources have value? If it’s utilised, it has value — and the more it’s used, the scarcer it becomes for other uses which is why it gets regulated by price when there are competing seekers of the resource. Like energy, the question isn’t if there is value: the issue is what is the price of that value. It’s how to price that utility to regulate its usage.
Theoretically, you could say the current available energy in the world that can be used and the current available resources are what is value in the world, as well as the products created through the transformation of resources with energy. Value is what the total utility in the world is. And if there are no competing uses of those pieces of value, then prices are practically nil: but once there is competing needs for limited pieces of value like resources, that’s when we see the price increase.
And that is, why fundamentally, all value is tied to scarcity: the scarcer the value (supply) and the higher the demand, the higher the price. This is fundamental economic theory which is the study of how to best allocate limited resources in an world that is based on the assumption of unlimited wants — which theoretically, makes sense. What breaks down is that interpretation of the theory.
For example, it’s fine to say there are unlimited wants in the world — but that’s a assumption that says there will always be competing demands for resources so therefore everything needs a price. Which again, is fine: it’s just this assumption of an assumption needs to assume a more fundamental assumption: a price of zero doesn’t make something less valuable than the same resource which has a price of more than zero. If you can buy a diamond for $1 but it normally would be valued $1000, that doesn’t mean it’s less valuable fundamentally: it just has less competition and so therefore less cost to acquire.
What is currency?
Arguably, you could say the sum of value in the world is all the stored energy, available resources, and transformations in the world which has utility. The world’s currency system should be tied to that: if you could exchange all the value in the world, it should be equal that.
Currency should be a way to store value and transport it. The energy I applied with my time which created more perceived value than the energy itself in the form of knowledge, I want to store for a future use where I can exchange that for something of similar value. Therefore, a currency needs to have a consistent form of pricing (to make value comparable) and it ideally has a stable means of being valued (ie, storing it a year ago should theoretically be valued as the same as storing it today).
But the hard thing about utility is that it’s hard to measure at the one point in time –even though we know there is a fundamental fixed amount that can be used in the world. But that’s why the assumption that a currency should have a fixed supply makes perfect sense: the price mechanism of currency adjusts for changes in utility (assuming the supply of currency doesn’t degrade, which is another factor why modern day currency can adjust in value).
Bitcoin’s fixed supply
Which brings us to the question: does Bitcoin having a fixed supply make sense? Yes.
But what about the risk of “deflation” in the world due to a fixed supply? Well, it’s not that value in the world goes does — it’s just the pricing of that value might go down.
The above discussion I hope answers those questions.
And what about if there are missing bitcoin’s in the world, which creates a supply constraint on this new currency? Bitcoin’s are divisible up to 8 decimal places which means one bitcoin has 100 million components (yes, they have a name: called a “Satoshi”). Ignoring the clear economic incentive to not lose Bitcoin’s, lost coins get lost in the noise and this divisibility allows it to adapt. With 21 million final bitcoin’s divisible by 100 million, that means 2.1 quadrillion units of currency or Satoshi’s. To put that in comparison, in 2009 there was approximately 8.3 trillion US dollars in the world or 0.0083 quadrillion cents. If one cent was one Satoshi, that would be 2100 trillion US cents or 21 trillion US dollars.
Some say the value of the US economy to be 188 trillion dollars (different from GDP, which simply accounts for spending in one year). Assuming the US economy in 2009 accounted for one quarter fo the world economy (based on GDP), we can assume the world has a price on the value in the world of about 750 trillion US dollars or 0.8 quandrillion.
If the total *value* of available Satoshi’s in the world one day equals that amount (One Satoshi equals 0.35714285714 US cents or 750 trillion divided by 2.1 quadrillion) — then who cares if a few bitcoin’s get lost along the way. What we have now is a currency that does what currency is meant to do: store value for the exchange of value in society.
About
Hi - my name is Elias Bizannes, tweetfully known as @EliasBiz where I tend to post more. I've been blessed with not just one but two unpronounceable names: I pronounce them as E-lee-uh(s) bi-ZAH-nis
Need to write a bio about me? Use the one here
