Each week, I will be posting my notes from MIT’s Blockchain and Money course to keep myself accountable for my learning.
History of Money
Characteristics of “good” money are:
- Durable
- Portable
- Divisible
- Uniform
In the past, many countries were using non-metal money.
- Ethiopia used salt bars
- Nigeria used cowrie shells
- England used tally sticks
- Yap used rai stones
The common feature of these forms of money is that they were scarce in their local region. But relying on local scarcity meant the money was easy to be gamed by outsiders, hence the systems collapsed easily. About 2,500 years ago, there was an emergence of minted money, where an official emblem by the government was placed on a scarce resource. Then paper money came along due to scarcity of metals and ease of use. The first form of bankers in London were goldsmiths, giving paper receipts for gold and starting the idea of credit. Then private banks came along.
Although credit cards only started to be used in the last 60–70 years, more than a hundred years ago, the science fiction Looking Backward (1887) by Edward Bellamy first mentioned and predicted its use in the year 2000.
What is interesting is that the law could not keep up with credit cards. It took about 15 years after the wide and commercial adoption of credit cards that the main relevant laws were developed in the US. This is similar to how the regulators are struggling to establish laws around cryptocurrencies today.
The modern design of money can be summarised by The Money Flower.
Finally, a fiat currency has the following characteristics:
- It is a social consensus.
- It is a liability of the central bank.
- It relies on a system of ledgers and its integration into fractional banking system.
- It is accepted for taxes.
- Notes and coins are legal tender for all debts public and private.
What is a ledger?
Ledger is the principal recording of accounts. They record economic activities and financial relationships. There are different types of ledgers, such as transaction vs. balance ledgers, general vs. sub ledgers (hierarchy of ledgers) and single vs. double entry ledgers.
The modern financial system is built on ledgers.
Characteristics of a good ledger include:
- Immutable and consistent
- Timestamped
- Ownership
- Accuracy
- Description of transaction
- Comprehensive
A payment system can be defined as amendment of a double entry monetary ledger. For example, if you pay for a coffee with your card, it amends the ledger to increase your balance and increase the coffee shop’s.
You can think of this world as many different closed ledger systems. Bank A has its own ledger and Bank B also has its own ledger. If you are transferring money between two accounts in Bank A, Bank A can update its own ledger accordingly. However, if you want to transfer money from Bank A to Bank B, a balancing act would need to happen from the top ledger, which is the central bank. A similar challenge is faced when you are changing currencies. This problem of how to make distinct closed ledger systems operable will be explored further in a later lecture.
Next lecture will discuss Bitcoin and its design. Before that, a must-read is the original Bitcoin paper by Satoshi Nakamoto. It’s useful to keep in mind that prevention of double spending, establishing a consensus, reaching critical adoption and decentralisation are the key outcomes that previously failed cryptographic digital currencies failed to achieve.
