Chapter-by-chapter summary of Proof of Stake by Vitalik Buterin. Format inspired by Nat Eliason.
All solutions for incentivizing people to spend their time productively have historically fallen under one of just two categories: markets and institutions. With the invention of bitcoin, there is now a third: currencies.
In contrast to solutions built by markets and institutions, solutions using currencies are able to fund public goods and have a decentralized governance structure.
Medium of exchange: trade it for goods and services, e.g., I’ll give you 1 unit of this currency in exchange for a banana.
Store of value: preserve it until a good or service is needed, e.g., I’ll keep my 1 unit somewhere safe until I need a banana.
Medium of account: refer to it when pricing goods and services, e.g., to receive a banana I must provide 1 unit of this currency.
But there is actually a fourth: seigniorage.
Seigniorage is the difference between the market value of a currency and its intrinsic value. Vitalik also refers to this difference as the “ethereal value” of a given currency.
For example, when grain was used as a currency it had relatively little seignorage since if it were no longer used as a currency it would retain much of its value as something you could eat. The value of modern-day currencies, however, is entirely seignorage, i.e., if USD were no longer used as a currency it would lose all its value since you couldn’t eat it/use it for anything else.
Institutions like the U.S. Government use seigniorage to fund public goods — e.g., it only costs 17 cents to print a 100-dollar bill — but they do so at the cost of centralizing power into the hands of a select few.
Cryptocurrencies also use seigniorage to fund public goods but can do so without a centralized authority. In the case of Bitcoin, for example, its seigniorage (also referred to as its issuance), is used to fund the public good that is the Bitcoin network. It does this by generating income for miners that is in turn used to pay for the electricity and hardware needed for block production.
Cryptocurrencies make possible “a new method of social incentivization.” One that is able to produce a public good without requiring a centralized authority to operate.