Seashells in Ancient China

According to archaeological findings, seashells were used in various forms, such as cowrie shells, as early as the Shang Dynasty (1600-1046 BCE) as a medium of exchange for goods and services. The seashell was believed to have medicinal properties and was considered a symbol of wealth and power. Initially, seashells were collected from the coast and it was considered valuable as it was rare and could not be found inland

As their popularity grew, seashells became a standard currency, and people started collecting them en masse. The rise in the supply of seashells caused inflation, which led to a loss in their value. This eventually made seashells impractical as currency, and they were replaced by metal coins. Historians believe that the first metal coins were created by the Zhou dynasty (1046-256 BCE) as a response to the inflation of seashells, and their use became widespread in China and other parts of the world.

Salt in Ancient Rome

Salt was one of the most essential commodities in Ancient Rome and was even used as a form of currency. The Roman soldiers were paid in salt which was known as "salarium argentum" (salt money), and is also where the word “salary” comes from.

Salt was used to preserve food and was essential to the Roman diet. However, as the Roman Empire expanded and salt production increased, the value of salt as a currency decreased. In addition, the government imposed fixed prices on salt which did not reflect its actual value. This caused a shortage of salt, leading to the creation of a black market where salt was traded at a much higher price than the government-fixed price.

Eventually, in order to resolve the problem of salt being overused and undervalued, the Roman government abolished the use of salt as currency and introduced a new currency system based on gold and silver coins. This change also provided a more stable and standardized currency.

Wampum Beads in Native American Cultures

Wampum beads held significant cultural and economic value in several Native American cultures, particularly among tribes in the Northeastern region of North America. Wampum beads were traditionally made from shells and served as a form of currency, but their value extended beyond mere exchange. These beads were intricately woven into belts and strings, carrying historical, ceremonial, and symbolic meanings.

In Native American societies, wampum beads were used for various purposes, including trade, treaties, and as a means of recording important events. They represented wealth, status, and spiritual significance within the communities. However, as European colonizers arrived in the region, the introduction of new trade goods and the disruption of traditional practices had a profound impact on the value of wampum beads.

Over time, the increasing availability of European trade items, such as metal coins and textiles, diminished the demand for wampum beads as a medium of exchange. The colonization and forced assimilation of Native American communities further eroded the cultural significance of wampum beads. Eventually, the use of wampum beads as currency declined, and they became more valued for their historical and cultural significance than for their economic utility.

Rai Stones on the Island of Yap

Rai stones were enormous limestone discs that served as a unique form of currency on the island of Yap in the Federated States of Micronesia. These massive stones, often several meters in diameter, were quarried from distant islands and then transported to Yap. The value of a rai stone was determined not only by its size but also by the story of its acquisition and ownership.

These stones were not physically moved during transactions but rather their ownership was transferred through an oral tradition. The stones were typically left in their original location while the community acknowledged the change in ownership. In a way, this oral tradition of ownership transfer resembled a sort of distributed ledger in that the community was keeping a mental note in regard to the ownership of each stone. Nobody could claim a rai stone was theirs if the rest of the community thought otherwise, and therefore they could not use it as theirs in order to transact.

This system of symbolic exchange allowed rai stones to function as a medium of value and facilitated trade and commerce within the community.

However, the demise of rai stones as a currency came when an Irish-American trader named David O'Keefe arrived on the island in the late 19th century. O'Keefe introduced modern dynamite to the Yapese, which enabled them to mine rai stones way more efficiently. This led to an increase in the supply of rai stones, causing their value to decline. Moreover, O'Keefe flooded the island with newly mined rai stones, which brought about inflation and destabilized the economy.

As a result, the Yapese community gradually shifted towards using more widely accepted forms of currency, such as the US dollar, for day-to-day transactions. Today, while the rai stones still hold cultural and historical significance on the island of Yap, they no longer function as a practical means of exchange.

Glass Beads in Western Africa

Glass beads played a significant role as a form of currency in various parts of Western Africa during the pre-colonial era. These brightly colored beads, often imported from Europe, were highly valued by local communities for their aesthetic appeal and cultural significance. They served as a medium of exchange in trade transactions and were also used for ceremonial and social purposes.

The use of glass beads as currency, however, faced challenges that ultimately led to their demise. One of the main issues was their susceptibility to counterfeiting. The increasing demand for glass beads prompted some individuals to produce imitations, diminishing the trust and value associated with genuine beads. Moreover, the influx of large quantities of glass beads through European traders disrupted the local economies, causing inflation and undermining the stability of the bead-based monetary system.

As European colonial powers expanded their influence in the region, they introduced alternative forms of currency, such as metal coins and paper money. These new currencies were more widely accepted and had inherent value, making them preferable over fragile and easily counterfeited glass beads. Over time, glass beads lost their prominence as a medium of exchange and were gradually replaced by more durable and universally recognized currencies.

Fiat Money in Zimbabwe

Fiat money refers to a currency that is not backed by a physical commodity like gold or silver but derives its value from the trust and confidence placed in the issuing authority (read: The Evolution of Money: From Barter to Bitcoin). One notable example of the issues associated with fiat money can be found in the case of Zimbabwe.

In the late 20th century, Zimbabwe went through a period of hyperinflation, which resulted in the rapid devaluation of the Zimbabwean dollar. The government printed money to finance its budget deficit, leading to a huge expansion of the supply of currency in circulation. This excessive money creation, coupled with a decline in production and economic mismanagement, triggered a cycle of increasing prices and decreasing purchasing power of the currency.

During this time, the Zimbabwean dollar experienced a staggering loss of value, rendering it practically worthless. Prices soared, reaching astronomical levels, and the economy spiraled into turmoil. One great example of the absurd inflation that hit the economy was the need for a 1 TRILLION(!) Zimbabwean Dollar bill to be printed.

The hyperinflationary episode in Zimbabwe serves as a cautionary example of the consequences of the unrestrained expansion of the money supply. It highlights the importance of sound monetary policies and responsible management of the money supply to maintain stability and preserve the value of a nation's currency.

Lessons Learned

Throughout history, the use of various forms of soft money has taught us valuable lessons about the challenges associated with relying on currencies lacking intrinsic value or a stable foundation. From seashells to salt, from wampum beads to Rai stones, and from glass beads to fiat money, these examples demonstrate the vulnerability of soft money to issues such as inflation, counterfeiting, and loss of confidence. They highlight the importance of a reliable medium of exchange that maintains its value over time. While soft money has faced inherent limitations and eventually faltered, the search for a more robust and dependable alternative has persisted. This brings us to the emergence of cryptocurrencies like Bitcoin, which aims to address the shortcomings of soft money and provide a decentralized, transparent, and secure medium of exchange.

Now, let's explore how Bitcoin overcomes the problems encountered by soft money throughout history and represents a potential solution for the future of currency.

Bitcoin Fixes This…

Soft money, defined by various historical examples such as the rampant inflation caused by excessive demand for seashells in ancient China and the destabilizing of glass beads in West Africa, has consistently suffered from weaknesses related to its supply and its value preservation.

In contrast, Bitcoin introduces a groundbreaking solution through its immutable protocol and capped supply. While soft money, like seashells, salt, or glass beads, faced challenges when overused or counterfeited due to limitless production, Bitcoin's hard cap of 21 million coins prevents such issues, ensuring a safeguard against inflation and manipulation.

Imagine if, in the past, there was a rule saying we can't make more seashells or beads past a certain amount. That's what Bitcoin does – it says, "No more than 21 million coins will ever exist." This strict rule prevents the overproduction that plagued soft money. It's like if everyone suddenly wanted those rare shells, they couldn't just make more; similarly, with Bitcoin, no one can suddenly make more coins, protecting its value from vanishing like soft money did. This cap also stops governments from printing tons of money, causing prices to go crazy, as seen with fiat money.

This intrinsic feature addresses the shortcomings witnessed in soft money scenarios and offers a digital alternative that maintains scarcity, value, and security.

In a later article, we’ll explore how the way Bitcoin is set up on a protocol level prevents anyone from changing the supply cap of 21 million coins, and how vey basic incentives ensure that it will probably remain that way.

Sources

• Chen, K. (2020). The Evolution of Chinese Currency. Springer.

• Niv Horesh, E. (2011). Trade and Investment in China: The European Experience. Routledge.

• Wang, Y., He, X., & Zhu, Z. (2019). The origins and development of currency in ancient China. Journal of Archeological Science: Reports, 24, 207-214.

• A History of Money: From Ancient Times to the Present Day by Glyn Davies.

• The Wampum Chronicles: The Story of Wampum Among the Native Peoples of the Northeastern United States by James W. Bradley.

• Ammous, S. (2018). The Bitcoin Standard: The Decentralized Alternative to Central Banking. Wiley.

• Weatherford, J. M. (1997). The History of Money. Crown Business.

• Smith, A. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. Methuen Publishing.

• Mlambo, C., & Biekpe, N. (2008). The Zimbabwean Hyperinflation: A New Keynesian Perspective. African Development Review, 20(2), 180-199.

• Hanke, S. H. (2009). Zimbabwe: From Hyperinflation to Growth. Cato Journal, 29(2), 353-360.

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Cover Photo by Jp Valery on Unsplash

The answer lies in the nature of money, a concept that has fascinated human beings for millennia. From the ancient civilizations that used barley as a means of exchange to the digital currencies of today, money has taken many forms throughout history.

In this article, we will explore the definition of money, its history, and its evolution over time, as well as its future prospects.

Let’s start with the basics…

What is Money?

As economist Paul Samuelson put it:

Money is whatever people accept in exchange for goods and services.

Modern economists typically define it by the three roles it plays in an economy. In order for something to be considered money, it needs to serve as a store of value, a unit of account, and a medium of exchange at the same time.

Let’s break it down and see what each of the aforementioned roles means.

1. Store of Value

   One property of money is that it allows you to defer consumption until a later date. If perishable goods were used as money (e.g. apples), you wouldn’t be able to use them after they were rotten, thus they wouldn’t be able to serve as a store of value.

2. Unit of Account

   For something to be considered money, it needs to serve as a unit of account, meaning that it allows you to assign a value to different products and services without having to compare them directly. Instead of saying that 50 apples are worth an hour of plumbing work, you can just say that it costs $20,00.

3. Medium of Exchange

   Lastly, money needs to be widely used as a medium of exchange - as an efficient way for people to trade goods and services with one another.

For something to work as money in an economy, it needs to be able to play all 3 roles concurrently, otherwise, it will fail, as we’ll see in the following paragraphs.

History of Money

The earliest form of exchange was simple bartering, where goods and services were traded directly for other goods and services. But this system was limited by the need for a "double coincidence of wants" – the seller had to want what the buyer had to offer, and vice versa. Also, the goods and services traded often didn’t meet one or more of the properties of money mentioned in the paragraph above.

To overcome this limitation, societies began to use commodities such as seashells, beads, and stones as a more widely accepted form of exchange. Different civilizations developed different forms of currency. For example, in ancient China, cowrie shells were used as a form of currency. The Romans used silver coins called denarii, which were minted in large quantities and became widely accepted across the empire. In North America, Native American tribes used wampum belts made from shells and beads as a form of currency. These commodities met the aforementioned properties of money, but they had a serious downside; they were easy to come by.

In other words, they were soft money.

Soft Money vs Hard Money

Money has been around for thousands of years, and it has taken many forms throughout history. According to historian Niall Ferguson, the first recorded use of money dates back to the ancient civilization of Sumer, where they used barley as a means of exchange (Ferguson, 2008).

Over time, societies began to develop "hard" money, which had a higher stock-to-flow ratio* and was more durable than "soft" money.

• "Soft" money refers to money that is easily produced, transported, and destroyed, such as shells, beads, stones, and paper money.

• “Hard” money is typically more difficult to produce and is more durable, such as gold and silver.

*Stock-to-flow is a ratio that measures the total amount of a given commodity (the stock) held in reserves versus the amount that is produced (the flow) annually.

Once societies had access to "soft" money, they would develop "harder" money to replace it. That’s why economies around the world slowly switched to using metals such as gold and silver as money, which were valued for their rarity, durability, and divisibility.

For example, the Chinese began using copper coins in the seventh century BCE, and by the third century BCE, they had transitioned to using silver coins. This transition from "soft" to "hard" money was a common occurrence in many civilizations throughout history and is still relevant today (Ammous, 2018).

Paper Money

According to Niall Ferguson in his book "The Ascent of Money," paper money emerged in China during the Tang dynasty, where merchants would deposit their goods in a warehouse and receive a receipt that could be traded for goods or redeemed for the stored goods at a later time. The first paper banknotes were issued by the Ming dynasty in the 14th century.

The Gold Standard

Until the 20th century, most paper money was backed by gold or silver reserves. This meant that the government or central bank backing the money promised to redeem the notes for a certain amount of gold or silver. This system was known as the gold standard.

The gold standard worked as a system for backing currencies and providing stability to the monetary system.

Gold-backed money had several advantages, including providing stability in the value of money and limiting the ability of governments to manipulate the money supply since governments couldn’t manipulate the supply of gold backing the money.

However, the gold standard also had some significant drawbacks, such as limiting the ability of central banks to respond to economic crises and making it difficult to expand the money supply to accommodate growth. Additionally, the gold standard could be destabilized by fluctuations in the supply of gold, which were subject to the whims of the market.

According to economist Milton Friedman, the gold standard contributed to the severity of the Great Depression by limiting the ability of central banks to expand the money supply and stimulate the economy. On the other hand, proponents of the gold standard, such as economist Murray Rothbard, argue that it provided a check on inflation* and helped to prevent excessive government spending.

*Inflation refers to the sustained increase in the general price level of goods and services within an economy over a specific period of time. It means that the purchasing power of a unit of currency decreases, and it takes more money to buy the same goods or services. The most common cause of inflation is when the supply of money is expanded.

Fiat Money

In the 20th century, most countries moved away from the gold standard and adopted a system of fiat currencies. Fiat currencies are not backed by a physical commodity, but rather by the government's ability to control the money supply and manage inflation.

This can be useful during times of economic crisis, but it can also lead to inflation if too much money is printed.

To control inflation, governments can adjust interest rates to make it more or less attractive to borrow money. When interest rates are high, borrowing money becomes more expensive, and people tend to save more and spend less. This can help slow down inflation.

On the other hand, when interest rates are low, borrowing money becomes cheaper, and people tend to borrow more and spend more, which can stimulate economic growth. However, this can also lead to higher inflation.

The use of interest rates to manage the money supply is a delicate balancing act, and central banks are tasked with making decisions that balance economic growth and stability.

The Future of Money

The future of money is uncertain, but some experts believe that digital currencies could play a significant role. Bitcoin, in particular, has attracted a lot of attention due to its decentralized structure and limited supply.

As discussed earlier, one of the main problems with modern money is its lack of scarcity, which can lead to inflation and a decrease in purchasing power over time. Bitcoin, on the other hand, has a fixed supply of 21 million coins, making it "hard" money with a high stock-to-flow ratio.

Additionally, Bitcoin's decentralized structure means that it is not controlled by any central authority (read: Why Bitcoin is Unstoppable), which can help prevent issues like inflation and currency manipulation. Bitcoin also offers a high degree of security and privacy, thanks to its use of cryptography (read: Transactional Security of Credit Card vs Bitcoin).

While there are certainly challenges that need to be overcome before Bitcoin can become a mainstream form of currency, its potential advantages are hard to ignore.

Informed By:

• Friedman, M. (1963). A Monetary History of the United States, 1867-1960. Princeton University Press.

• Rothbard, M. N. (1962). What Has Government Done to Our Money? Mises Institute.

• Ammous, S. (2018). The Bitcoin Standard: The Decentralized Alternative to Central Banking. John Wiley & Sons.

• Antonopoulos, A. M. (2016). The Internet of Money. CreateSpace Independent Publishing Platform.

• https://www.investopedia.com/terms/f/fiatmoney.asp

• Blanchard, O., & Johnson, D. R. (2013). Macroeconomics. Pearson Education.

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Cover photo by Christine Roy oν Unsplash.

In this post, we’re going to look at what makes Bitcoin, and other cryptocurrencies for that matter, unstoppable.

The post is heavily influenced by Andreas Antononopoulos’ talk at the Bitcoin South Conference in Queenstown, New Zealand on November 2014, and I’ve condensed and simplified a lot of the things you can also read in his book, The Internet of Money.

Bitcoin: Money as a content type

An important thing to understand in order to get why Bitcoin is unstoppable and uncensorable is what a Bitcoin transaction essentially is. Bitcoin transactions are signed data structures that can be executed anywhere in the world, through any medium.

For the first time in history, money is completely independent of the underlying transport medium and is now a stand-alone content type.

Contrary to what most people think, a Bitcoin transaction doesn’t have to be transmitted on the Bitcoin network to be valid. It does have to reach the miners and be included in a block on the Bitcoin network, but the method with which it reaches the miners is irrelevant to the execution and therefore the transaction's validity.

A Bitcoin transaction can be transmitted over any form of communication medium.

What’s even more mindblowing is that regardless of the medium, the transactions are secure and cannot be compromised, even if the medium itself is compromised. As we saw in my previous post “Transactional Security of Credit Cards vs Bitcoin”, there’s nothing that can be compromised in the transaction - the security of the transaction comes from the network, not the transaction itself.

Transactions through any communication medium

Since the transaction itself comes as a message, and therefore as content that cannot be compromised because there’s nothing to compromise, and since messages can be transmitted through various communication mediums, that means transactions can be executed through any medium available.

As long as the message reaches a node that contains a copy of the blockchain, the transaction will be verified and executed.

Think about what a transaction message is for a second: it’s 250 bytes of data - that’s it. You can encode that data into any character set you wish.

Bitcoin transactions in emojis sent over email

If you look at the transaction from an information-content perspective, all you need to do is encode the 250 bytes of data into the character set you’ve chosen - in this example, emojis. Since we have an encoding scheme, we’d be looking at about 500 emojis to encode the transaction.

You can do that by running a Python script, and with the increasing popularity of tools like ChatGPT, even the non-tech-savvy could run such a script. The script would basically take the hexadecimal representation of the Bitcoin transaction and encode it in emojis. You’d then copy-paste that into an email, and voila; a Bitcoin transaction over email.

The recipient would have to copy-paste the email into a decoder-script and then inject the decoded format into the Bitcoin network, and the transaction would go through. In Andreas Antonopoulos’ words:

Money is now completely disconnected information content. There is absolutely nothing you can do to stop information from traveling from anywhere in the world to anywhere in the world when you have an abundance of fully interconnected multimedia communication mechanisms as we do today.

Bitcoin is censorship resistant

Let’s say you live under a tyrannical government and you are not able to transact freely with others. If you use Bitcoin, you can transact with whomever and however you want and there’s nothing the government can do to stop that.

Let’s say that in the above example, they block emails. You’ll use Skype. If they block Skype, you’ll use Twitter or Facebook. If they block those, you’ll post your transactions on public websites like Craigslist. They block that too, and you post your transactions in the comment section of YouTube videos.

Any attempt at blocking the transaction will be futile and it’ll be like playing a game of whack-a-mole. You block one medium, and people simply use another. You can’t block everything.

And even if you did, a Bitcoin transaction can be transmitted even through Morse code or shortwave, frequency-hopping, burst radio. As long as there’s a receiving station somewhere within your range (which can be several thousand miles away) that is connected to the Bitcoin network -and you can hide a receiving station anywhere since it’s just a passive listener and it can’t be triangulated- the listening device can inject the transaction into the network and it will be executed. There’s no stopping that.

Epilogue

So now you know the technological premise on which people base the phrase “Bitcoin is unstoppable”. Bitcoin and generally blockchain technology aren’t just unstoppable in the metaphorical sense. They are also if need be, unstoppable in the very practical sense.

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Cover image by Cointelegraph

In this particular post, we’ll take a look at the difference between the transactional security of a credit card and Bitcoin.

Credit Cards are insecure by design

One of the most common payment methods people use nowadays is a credit card. Whether you have a plastic or metal card in your wallet, you use Google Wallet or Apple Pay, or you use your card’s info on your computer, credit cards work in the same way. They transmit your data through multiple points before the money you want to send reaches its destination.

When you pay with your credit card, the POS captures your credit card number, the expiration date, and the CCV2 number (which basically acts as the private key of my bank account) and passes it on to VISA or MasterCard, or another card network through a processing bank, which then sends it to the destination bank for it to approve and send the money back at the merchant’s account. Your information needs to be encrypted through each step because if any of those points is compromised, your account is at risk.

And we’re not only talking about transactional security but also about transactional privacy. All of these places that your card info goes through need to know the contents of the transaction (amount and transacting parties) for them to verify and approve it.

If you’re trying to transact with a party that has been blocked by any of those points for whatever reason -or if you yourself have been blocked- you won’t be able to. Essentially, card processors and banks act as gatekeepers of transactions and only approve the transactions they want to approve while they’re able to block any transaction for any reason at any time.

Bitcoin is secure by design

Bitcoin is fundamentally different in the way transactions take place. When you complete a transaction, you’re not transmitting any sensitive data to any other party. You’re not giving away your private keys to third parties. Instead, what you are transmitting is an authorization that contains two references: a) where the money is coming from and, b) where the money is going.

Bitcoin transactions are transparent, in the sense that if a bad actor steals the data, all they know is which addresses are transacting, and for what amount. The addresses reveal nothing - there are no identifiers. There’s nothing in the message itself that can be compromised.

The magical thing about Bitcoin is the fact that the transaction doesn’t incorporate any security mechanisms itself. Instead, the security is the proof of work provided by the miners, and the signature on the transaction is put there by end users with their own keys - not a third party with theirs.

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