Money Sans Frontiers
The Transmogrification of Money and Wealth In a Transnational World Powered By The Blockchain and What This Means To You
“Radical uncertainty cannot be described in the probabilistic terms applicable to a game of chance. It is not just that we do not know what will happen. We often do not even know the kinds of things that might happen.”
― Mervyn King, Radical Uncertainty: Decision-making for an unknowable future
The history of money is a history of shapshifting. Excuse my deviation from colloquial English but I couldnt find a word better than ‘transmogrification’ (as per the Merriam-Webster dictionary, transmogrification is a great change or alteration often with grotesque or humorous effect)to describe the transformation of money from pebbles and shells to cryptocurrencies powered by the blockchain. It is funny to think that the new form of money (i.e cryptographic money — cryptographic tokens, stablecoins and Central Bank Crytpocurrencies) was originally implemented in video games (World of Warcraft)as tokens to buy stuff in a video game. In the near future, cryptographic currencies and stablecoins will play a large role in the Metaverse economy or metanomics — the economics of the Metaverse. In a nutshell, science fiction just became very real. New forms of money and wealth are offshoots of this transmogrification. This essay attempts to demystify these megatrends to prepare the readers for a new economic world order — one in which money can traverse borders without the supervision and knowlege of a central bank and companies can literally become digital nations — a libertarian fantasy come true.
The Underpinnings of The Transmogrification
It is important to start with the basics. There is an infinite number of ways to explain the blockchain. In its simplest form — a blockchain is a recording (accounting) mechanism i.e. a ledger. Entries in this ledger are made in a block and when the recording capacity (storage)of a block is exceeded, data is then recorded in the blockchain. Since it is a chain that begins with the first entry (The genesis block or the first block contains the initial entries. When the storage capacity of the genesis block is exceeded, a second block gets appended to the genesis block and so on), the ledger keeps track of all entries from day one.
The uniqueness of the blockchain as a recording mechanism is four fold.
First, all the entries in a blockchain are validated, verified, and confirmed with the help of computers (called nodes) participating in a decentralized network around the world. The network is ‘decentralized’ because there is no central server. There is built in redundancy in the blockchain since every node (computer also known as ‘miner’) in the network stores the entire blockchain from the genesis block to the most recently mined block. In other words, if one or more of the nodes on the network go down, the network keeps functioning since no data is lost very similar to the internet.
Second, the transactions on a blockchain are recorded using crytography. Crytography is a secure way of sending and receiving data. Data is encrypted and then decrypted using cryprographic techniques. There are three types of cryptography i.e. symmetric, asymmetric and hashing. Bitcoin doesn’t use encryption rather it uses digital signatures using the same mathematical techniques as encryption. With Bitcoin, the mathematical problem keeps getting harder as more nodes (miners) join the network requiring more compute power and more electricity (derived from fossil fuels or other sources). The node that solves the problem first is the one validating, verifying and confirming the entry in the blockchain ledger. For it’s work which is ‘proved’ by solving the problem (also known as ‘Proof of Work’), the node (miner) receives a reward in the form of a token e.g. Bitcoin.
Third, cryptography also ensures that anybody can become a node without seeking permission from a central authority i.e. the blockchain is permission less. The only catch is that the node has to have tremendously high computing power which essentially negates this permission less feature today since the price of entry to the blockchain miner club is significantly high.
Lastly, a blockchain is very close to being ‘immutable’ i.e. entries once made cannot be changed without a significant amount (>51%) of the computing power employed to alter entries in a blockchain.
It is important to note that cryptography was already in use in video games to create tokens to buy stuff in video games. Crypto tokens (explained below) can be seamlessly exchanged on a blockchain without an intermediary. Thus, the blockchain forms the underlying mechanism for transfer and recording of these new forms of money. It also forms an ‘Internet of Value’ where monetary and non-monetary assets (proof of ownership/contracts) can be transmitted across borders.
The Crazy Soup of Cryptos, Non Fungible Tokens (NFT’s), Initial Coin Offerings (ICO’s) and Decentralized Autonomous Organizations (DAO’s)
Despite its many characterizations, Bitcoin is essentially a token. A token is closer, in nature, to a security (asset) such as a company’s stock than a currency. If more vendors (such as Starbucks, Amazon, local coffee shops and the world at large) start accepting Bitcoin as a mode of payment, it starts acquiring the characteristics of a currency i.e. a medium of exchange, store of value and unit of account. Regulators are therefore in a quandary because a lot of what we call cryptocurrencies are essentially tokens which share characteristics of an asset such as stock and some limited characteristics of a currency. If these tokens are universally accepted as a medium of exchange, they would be akin to a US dollar. Today, that is not the case. Therefore, the best way to look at Ethereum, Bitcoin and the ilk is to look at them as tokens which are a hybrid between an asset and a currency (money) with limited acceptance. These tokens are also assets since they can be used to indicate ownership. For example, a project or a company can raise funds through crowdsourcing in what is known as an ‘Initial Coin Offering (ICO)’ thus supplanting the need for venture capital and underwriters. This can reshape investment banking in a fundamental way.
Money has always existed in a digital form for decades. Digital money is not new. Money has acquired a new form as a cryptocurrency because the way it is secured (using cryptography) and transmitted (without an intermediary such as a central bank over a permission less blockchain between perfect strangers) has changed. Simply put, a cryptocurrency is a variation of digital money without the need for an intermediary.
Therefore, the money of today has various forms i.e. cash (coins and notes), digital money, cryptographic tokens (hybrids), Stablecoins (a cryptocurrency tied to the value of a Dollar/national currency) and Central Bank Digital Currencies (cryptocurrencies issued by the central bank) of a country.
Crypto tokens will be used in the metaverse as a medium of exchange, store of value and unit of account. Regulators will face a new challenge. As an example, Meta (erstwhile Facebook) can be its own country of 3 billion users with its own currency (Libra/Diem which is a crypto token). In other words, the real world has comically come full circle from the age when tokens were used in video games to buy stuff in video games. Of course, it is no laughing matter. This shape shifting has serious implications on economies all around the world. If a lot of an economy’s business is performed on a blockchain without an intermediary, money can traverse nations slipping out of the grasp and supervision of different nations’ central banks like grains of sand out of a hand.
Also, a company can run automatically using smart contracts (if and then statements that signify legal contracts) and voting mechanisms (similar to solving mathematical problems on a blockchain). An example of a voting mechanism is the ‘Proof of Stake’ mechanism contemplated by the Ethereum blockchain where a transaction can be validated and recorded based on the majority stake (signified by holdings of Ethereum tokens) held by nodes in the network. Such companies are known as Decentralized Autonomous Organizations (DAO’s) consisting of an online club (network) of computers that come together to breathe life into a DAO and use smart contracts and voting mechanisms.
Finally, cryptography is also used to secure collectibles (both physical and digital) which are known as Non Fungible Tokens (NFT’s) i.e. one of a kind collectible ‘copyrighted’ by a cryptographic algorithm. A painting, baseball card or a digital picture can be digitally signed using cryptography. The digital signature ensures it is one of a kind. It also signifies ownership. Investors in NFT’s expect the value of the collectible (e.g. a vintage Pokemon card, a painting or even a piece of land in the Metaverse) to appreciate significantly. This explains why NFT investors spend an insane amount of money for a single NFT.
What This Transmogrification Means To You
First, the obvious — money will exist in various forms. Your participation in different worlds or a combination of different worlds will determine what types of money you will carry in your wallet and the type of wallet (digital or physical).
Second, finance has taken a ‘decentralized’ form i.e. decentralized finance which means the flow of money without the need for an intermediary using permission less blockchains secured by cryptography. Practically speaking, you can borrow from or lend to complete strangers without the need for a central authority. You can earn interest on your tokens which are lent to others who can in turn lend to others at a higher rate. Also, a new generation of debit and credit cards with reward points (e.g. Blockfi credit card, Coinbase debit card)denominated in Bitcoin, Ethereum or other tokens are now available. This mega trend will fundamentally change retail banking. This mega trend will also allow you to diversify your income stream by being an active participant in this decentralized economy.
Thirdly, nations will have a new meaning with the growth of virtual nations i.e. platforms powering the Metaverse, DAO’s and other forms of online clubs that can transfer money seamlessly within its international borders. These nations will pose a significant threat to the concept of a national economy and a national bank. These entities will also reshape payment mechanisms and overseas money tranfers.
The virtual economy will become the next frontier of personal finance education and investment. This will be evident through three major changes:
First, there is a high probability that your children will learn more about macro economic principles (the functioning of an economy) from video games and the Metaverse than from traditional sources i.e. economic literature, business media and the central bank.
Second, it is absolutely certain that the next generation will invest in a variety of asset classes i.e. Non-Fungible Tokens (NFT’s), the art market (using apps such as Masterworks), crypto graphic tokens (Bitcoin, Ethereum, Solana and others), and real estate in the Metaverse. As an investor, you too have a wider array of asset classes to create wealth. You can invest in NFT’s using a browser (e.g. MetaMask), a digital wallet (e.g. Coinbase) and a platform (e.g. Opensea).
Third, the Metaverse is likely to incorporate three dimensional virtual education hubs i.e. schools, universities and avenues for group learning that will be a significant enhancement to existing digital (e-learning) education.
I am not espousing or evangelizing these changes. All I am saying is that they are coming whether we chose this future or not. Education is key to winning in any world. Most seismic changes require learning new ways of doing things. The world of money is no different. The game is the same (a capitalist world order for the most part) but the way of keeping count (money) is shifting forms. In this transmogrification lies an immense opportunity to earn and invest. The only hurdle is your resistance to change.