Cryptocurrencies are belief systems

Making fun of hundreds of new cryptocurrencies launching every month is understandable. People are confused by all diversity of cryptocurrencies (bitcoin, litecoin, ethereum, ripple, etc.) because historically there was never a competition among currencies. All we’ve ever known or used in our lives is just one currency: the one the government issues. Imagine telling someone who had grown up reading the New York Times in the early 1990s that in less than two decades there will be hundreds and thousands of publications covering the city. He would have laughed at you. Today, the same person would be consuming news on Twitter or discovering new restaurants on Yelp, and catching up on celeb-gossip on Instagram.

I am late to the party of blockchains and if you’re in the same boat as me, I’ve compiled these resources for you to get started. As I read and think more, I’m increasingly getting convinced that blockchains represent a major innovation in human society. Perhaps as big as language, printing press, radio, TV or the Internet. The reason for my enthusiasm is because for the first time in human history, blockchains allow different belief systems of all types to compete with each other without permission from any central authority.

Capitalism allows many types of belief systems to compete with each other. When you buy an iPhone, by paying money, you’re expressing your desire and belief in the value of that object. When you go to church every Sunday, you pay with your time to express belief in its value to you. Each new startup is a belief system about a certain way of making the world a better place. Customers express their agreement or disagreement by paying or not paying money.

As long as you have free markets, competition makes customers happier because they can discover and adopt belief systems that align with their values and preferences.

But, in the pre-blockchain world, not everything is on the free market. You cannot choose the nation-state that you’re born in, you cannot choose to not believe in certain laws and you cannot choose to the currency. All these belief systems are mandated to you by institutions.

The problem with this lack of choice is that you are at the mercy of decision making by large institutions. Incentives in systems drive behavior. So, if politicians want to get the second term, they vote for printing more money to let everyone afford a home, this drives interest rate to zero, causing the mortgage bubble of 2008. If the recession caused by that impacted you personally or professionally, you were pretty much helpless. Social problems are wicked problems, so the choices made by institutions are compromises, and they always do collateral damage.

Moreover, just like institutions tend to control information, institutions also tend to control money because purchasing power is the ultimate expression of beliefs.

In contrast to whims of human institutions, cryptocurrencies encode the rules of engagement upfront into a protocol. Transparent and accessible to all. If the bitcoin protocol says that there will be not more than 21 million bitcoins ever in existence that statement is mathematically proven to always hold. You do not have to trust anyone in keeping their word or doing as they promised. It just happens.

I’m also starting to think of cryptocurrencies as words we use in a language. If you to me ‘roses are red’, you don’t have to trust me that my understanding of ‘roses’ and ‘red’ is same as yours. You just know that the I’ll understand this statement as you wanted to convey. As a society, we’ve agreed what objects represent roses and what wavelenghts represent red. Similarly, if you use namecoin, you don’t have to trust someone else in executing your desire to register a domain name. The protocol guarantees that if you give the appropriate amount of namecoin (set by market), your domain registry will go through. Nobody can stop that. Not even government.

In the pre-blockchain world, when you register domain on GoDaddy, your trust is mediated by the human blockchain of contracts, lawyers, judges, politicians, constitution and just like any human system, it’s error-prone. In the post-blockchain world, your wish is guaranteed to execute due to shared, de-centralized and consensus-building protocols. Just use the appropriate cryptocurrencies, and what you want to get done is guranteed to get done.

In reality, cryptocurrencies are better than languages because you misunderstand words or their meanings. Language is ambiguous. But cryptocurrencies are built on the laws of mathematics that do not allow any ambiguity.

Don’t make fun of cryptocurrencies, let them compete

Matt Levine from Bloomberg is fundamentally mistaken in his column: The Blockchain Is Not the World. He makes fun of BananaCoin which is a cryptocurrency by the export price of 1kg real-world banana. He says:

The rest of the white paper is similarly silly, though I particularly enjoyed this bit: “Bananacoin is being developed as an easy to use token with an understandable fiat equivalent (in the form of 1 kg of bananas). It does not require specialized knowledge in cryptography or blockchain technology”

Matt, that is the point. Bananacoin is exactly right. Just like we don’t need to know about linguistics in order to communicate, we also don’t have to know innards of cryptography to use our knowledge or love for bananas to associate with a belief system about bananas. And unlike investing in a Banana plantation company that may go into making fertilizers, BananCoin will forever be linked to prices of Banana. Blockchains guarantee that and it’s a good thing.