Stranded on a Deserted Isle with NitCoin

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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…

  1. They take a lot of work to produce (counting nits is time consuming)
  2. You can verify that your islandmate didn’t cheat by going to count one of his trees yourself
  3. Once a tree is “mined”, it can not be mined again
  4. 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.

FAQ

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.

7 comments

    • bigjosh2

      Agreed! Dollars are worthless if you have no expectation of being able to potentially redeem them for value. Same goes for poker chips and pesos. A currency’s only currency value (as opposed to collector value or intrinsic value for physical specie) is the potential ability for you (or the next owner) to eventually trade it in for value.

  1. jjclune

    Agree with the thought experiment’s result. But what if instead of creating NitCoins, they created FoodCoins, ShelterCoins, WaterCoins that are redeemable for food, shelter, and water respectively? Sure they don’t need to do so immediately because they trust each other to do whatever it takes to survive but it would make it easier to trade than physically carrying around large volumes of water to trade. It would make it easier to settle trades, keep track of loans, trade services.

    If they didn’t have notebooks and pencils, they could alternatively convince each other that a seashell jewelry would make for a good common denominator for all trades (of course you should be weary of the first person pushing that idea especially if they control the supply). Maybe island resources are plentiful and you just can’t help yourself from wanting some shiny seashells.

    • bigjosh2

      Ok, so it is just me and you on the Island. I spend my summer growing food for the winter. You spend yours calculating a FoodCoin. First day of fall, you show me the magic FoodCoin number you calculated and and offer to transfer it to me in exchange for 1/2 my food. I ask “So this magic number is an IOU form you to me, and next fall you will let me redeem it for 1/2 of the food you plan to grow next summer?”. You reply, “No! It is not an IOU! It is currency! Next summer I will calculate another FoodCoin and then offer to transfer that one to you again for 1/2 of your food! Then you will have 2 FoodCoins and be the richest FoodCoin holder on the Island!”. Then you die.

      Do not confuse a cyrpto coin for an IOU. Read some of my other articles on this and LMK if any questions!

      • jjclune

        Haha yes that’s true. I thought my comment was more clear, because what I meant to describe was a ledger for property titles for food/water/shelter that’s already produced which is a little different from an IOU for future goods that depend on the creditworthiness of the issuer (island equivalent of a security token). In any case this whole thought experiment is a bit flawed by the tiny population that needs no government, and there are a lot of ways to die with or without monetary systems and survival doesn’t even require the ability to count or communicate with each other.

        I read your “How a Bitcoin is not a Dollar” article and fully agree with the post and your comments, proof of work is a profound waste of time/energy and bitcoin has no intrinsic value. My only question at present is why did you say “I’d argue that gold does have intrinsic value. It is a very useful metal if you are stranded on an island.”? Thanks for your insights!

        • bigjosh2

          I meant to describe was a ledger for property titles

          Ledgers are useful, but I do not see any case where a distributed blockchain ledger like bitcoin would ever be more useful than a more traditional ledger. At some point you need to trust the mapping from real-world assets to entries on the ledger and a block chain does not change that. The only reason this does not come up with bitcoin is that there is no asset in the first place!

          this whole thought experiment is a bit flawed by the tiny population that needs no government

          Looking at smaller versions of a problem is a great way to understand it since it is easy to overlook important points when looking at the bigger versions. Does the thought experiment change when there are 3 people? 12? 100? 1000? 10000? 100000? Ultimately an economy is based on people exchanging things of value, regardless of the number of people in that economy.

          “I’d argue that gold does have intrinsic value. It is a very useful metal if you are stranded on an island.”

          If you are planning on making a good life on this island, material science will be your friend! Gold is a ductile, conductive, and (probably most important on an island surrounded by salt water) non-corroding metal.

          • jjclune

            Good points and well said.

            I agree there’s a need to trust the mapping from real world assets to entries on a ledger, decentralized or otherwise, and this is a challenge that could hold back applications of public blockchains to real world physical assets. I suppose digital assets, intellectual property, company ownership etc have easier mappings but those things don’t pass this island test either.

            I do think the thought experiment would change significantly with 100,000 people, such as the increased likelyhood of young/sick/elderly needing assistance, aggressive leaders using threats of violence, emergence of a government/taxation, stronger drive for counting systems and a common denominator for trading/taxation, whatever that unit is: gold, rice, seashells, etc. However it’s too complex to use a 100,000 person population as a thought experiement so not worth discussing. Perhaps the island test with just 3-4 people is a more useful than 2 people since there can be a alternative traders and an intermediary.

            Materials science is a friend and underecognized hero of the real world too haha. Sure materials properties have real value. There are a host of materials I would prefer to gold on an island initially, but given enough time and creativity I could see gold’s value rising.

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