You and Nakimoto are stranded on a deserted island with nothing but your notebooks and pencils. Luckily you each have dual PhD’s in cryptography and macroeconomics, so everything is going to be OK – you will survive by your wits alone.
Nakimoto points out that you are both broke and getting hungry. Since there is no efficient medium of exchange on this island, trade is limited and there is poor resource utilization. He suggests a plan to save you both from starvation…
You agree to create a clever new cryptocurrency called NitCoin.
NitCoins are very complicated (PhD4), but have some interesting properties…
- They take a lot of work to produce (counting nits is time consuming)
- You can verify that your islandmate didn’t cheat by going to count one of his trees yourself
- Once a tree is “mined”, it can not be mined again
- It takes a long time to grow new trees and arable land on the island is finite so the supply of new NitCoins is bounded.
Convinced that this NitCoin scheme has all the properties of a useful currency, you both spend the next few days counting nits.
You reconvene at the beach where you first landed, both newly minted NitCoin billionaires.
You both then collapse and die.
What is the moral here?
Currencies do not have value in and of themselves.
But what if there was an extra person on the island named Joe, and me and Nakimoto convinced Joe to accept our NitCoins for the fish that he caught while we were counting nits? Huh? Now we have a currency!
If Joe trades his valuable fish for your valueless NitCoins (that is, he trades you fish in exchange for you guys writing some useless numbers that you made up in your notebooks), then he is an idiot and will also soon be dead.
What if Joe also has a notebook and we teach him how to copy the numbers from our notebooks and check that they obey the rules we made up? Now we have a currency!
The more time Joe spends coping and checking your the numbers in your notebooks, the sooner you will all die from lack of fish.
What if 50 people are stuck on the island? 500? 350 million?
Fundamentally it does not matter how many people are on the island (or planet), except that the more people you have the more idiot Joes there might be in the crowd.
But if I can keep the idiot Joes working hard and then trading their production for my coins, then my coins have value!
Semantics here. When I say something has value, I mean it has value – not that you can use it to trick someone into giving something of value. Three card Monty is another way to trick someone into you into giving you value. Are the cards in a game of three card Monty a store of value?
So what should I do if I ever find myself in this situation?
You and your crypto/econ mate should both start creating value (food, shelter) and trading the things you have made with each other. Soon you will both end up doing what you do best and will both have as much food and shelter as possible given the constraints of your abilities and the natural resources available on the island (which BTW, you should quickly allocate between yourselves using a random lottery).
But how do we trade with no money?
You offer something you have for something you want. Quickly you will both find common denominators of value to make this more convenient, but the moment that Nakimoto tries to trade you a NitCoin for your coconut you should walk away.
Without currency we will be stuck in a productivity trap! How do we make capital investments that will yield future productivity improvements? Didn’t you read Sapiens?!
You can still have a vibrant credit-based capital creation system. “I know you could spend the day today picking 10 coconuts, but if you instead spend the day helping me to build a ladder, then I promise I will give you 20 coconuts the tomorrow!”
Note that all real credit is based on trust and risk. Nakimoto must trust that you will actually be able to pick at least 20 coconuts tomorrow, and that you will actually give 20 of them to him.