From Cowry to Crypto: A (Very) Brief History of Money
We spend it every day without giving it a second thought...
But what exactly is money?
Before money was invented, our ancestors had to make due with the barter system. The barter system worked well, up to a point, but because of its many drawbacks, was replaced in due course by a more flexible, abstract concept: Money.
Once upon a time, our ancestors would have had to negotiate the prices of the products or resources that they wanted to exchange: "I will give you 2 ewes in return for 4 new spearheads," or the like.
The problem with these transactions was the fact that the units were often indivisible (Half an ewe? No thanks!), were not very portable (or easily stored & protected), or even desired by the other person in the first place. Perhaps I have no interest in obtaining 4 new spearheads? But what if that was the only thing that the other person could offer me? And what if there was nobody else from whom I could acquire 2 ewes in the area? Then we have an insurmountable problem.
Enter Money!
What sets money apart is that it is far more acceptable, divisible, portable, and uniform. This is because money, in essence, is nothing more than a story that we all participate in. This is what gives it its value. The only reason I can buy a pair of shoes, for say $40, is because society at large also agrees that certain items have more or less value than others.
The first types of money were precious items such as cowry shells*, salt, and gold among others. These items often had an inherent value— either being unusually beautiful or desirable, or else hard to procure.
Then, in the 6th century CE, the Chinese made the bold move of putting their invention, paper, to use as the world's first paper currency. Initially, this paper currency was still backed by the value of a physical commodity. Previously, the Chinese had used copper coins, which were becoming ever scarcer.
After this Chinese abstraction from the physical object itself to a paper proxy, the next logical step was to do away with the physical commodity altogether and have the symbolic piece of paper (banknote) or coin, be a currency unto itself. Incidentally, if you look closely at any banknote, you'll notice something along the lines of: "I promise to pay the bearer on demand the sum of five pounds."(Pound Sterling, GBP). (Guaranteed in this instance by the Bank of England).
This is what we call Fiat Money— currency that's declared as legal tender by a government, but not backed by a physical commodity. Pounds Sterling, US Dollars, Yuan, Rupees— all of these are examples of Fiat Money.
This leaves us with a working definition of money as:
An exchangeable medium – An intermediary used in trade (banknote, coins)
A store of value — Anything that retains purchasing power into the future (real estate, precious metals, livestock)
A unit of account — Fungibility — A unit of a good or a commodity which is interchangeable and equivalent, i.e. one gram of pure gold is equivalent to another gram of pure gold, be it in ingot form or otherwise. Or Apple stock shares— One share is equivalent to another share, it's the quantity of these shares which is important.
Computers & The Internet
After the invention of computers, money went one step further again along the road of abstraction. Coins and banknotes were now joined by credit and debit cards, which accessed money held in a virtual form on a computer from records of digital information.
With the proliferation of the Internet, these bits and bytes of information were transferrable in a much wider variety of ways: Electronic banking, wire transfers, digital wallets, among others.
Bitcoin & Beyond
In 2008, Satoshi Nakamoto released a white paper entitled: Bitcoin: A Peer-to-Peer Electronic Cash System... A paper which would change how we would perceive money forever!
In essence, Bitcoin is a cryptocurrency, which is all well and good, but that leaves us with yet another question:
What is a cryptocurrency?
To go full circle: Imagine that I send you a digital ewe. How can you guarantee that that ewe is now yours, and only yours?
Think about it! Perhaps I also sent the same ewe to my best friend or to my boss, how would you know? How about if I uploaded the ewe to the internet and allowed 10,000,000 people to download it too?
As you can see, sending a digital ewe is a lot different from sending a physical ewe, as we did so at the start.
This is what is known as the Double-Spending Problem. It had computer scientists completely stumped... And yet Bitcoin solved this tricky problem!
The Ledger
We can track these 'ewe transactions' in a 'digital ledger', which is kind of like a normal ledger, but in a digital format. It's basically a digital record of every single transaction that has ever been completed on the Bitcoin (or other cryptocurrency) network. Just like a digital accounting book.
...This opens up a new set of problems!
If the ledger is digital, then what's to stop me from adding more 'ewes' to my digital balance whenever I want?
What we need, then, is some kind of inspector to monitor the ledger in order to guarantee its integrity... Or, better still, what if every single person's computer held its own copy of the ledger containing a record of all the transactions that were ever completed? That way, the integrity of the ledger could be maintained, without placing the responsibility into the hands of one person or entity, like a bank.
Now, imagine I try to add another 50 ewes to my balance... I couldn't! Because if I did try to send myself 50 digital ewes, then my updated version of the ledger would, as a result, fail to correspond to the ledgers of everybody else in the system.
Even better, the code behind this ledger is open-source, meaning that it can be maintained and upgraded by the whole community– practically eliminating corruption.
The only way to create these new 'ewes' is to "mine" them from the "blockchain", using computer processing power.
When computers "mine"Bitcoins, they are basically using the power of their computer's processors to decipher a large encrypted number known as a "blockchain."Think of this as the seam of coal that you mine to yield individual blocks of coal, or in this case, Bitcoins.
This adds to the total amount of Bitcoin (or 'ewes' ) in circulation; which is generally a capped number.
What all this effectively means is that Bitcoin manages to crack the double-spending problem. With this overcome, Bitcoin and other cryptocurrencies will likely be the mass currency of the future!
What do you think of this post? Please share your thoughts below in the comment section!
N.b. Try to bear in mind that this is in no way intended to be a thorough or exhaustive examination of money, but rather intended to give a rough idea of where we came from, and where we're headed!
_________________________________________________________________________________________
* An interesting side-note, in China, cowries were so important that many characters relating to money or trade contain the character for cowry! (See images)
