In Marvel Comics, the Universal Church of Truth is a reoccurring villain that brings ruin to any society that doesn’t agree to believe in their dark purpose - worshipping the evil “Magus” (the dark half of the hero Adam Warlock). Those who agree to believe are promised prosperity and stability in return for their participation in fueling the Church’s “faith generators” - batteries powered entirely by one’s belief in Magus. When that faith is shaken, they lose energy - which leads the Church to use any means necessary to convert people to and sustain its dogma.
This was very persuasive. I’ve long believed that at least the cryptocurrencies that exist as fuels for distributed processing could have a real basis. But the recent experience that you point to, where Ethereum has been unable to keep up with transactional processing is a sufficiently strong case that I think “disproven by experience” is the best way to describe my now former belief. Sad.
You said: “ While one might argue any currency is a belief system, there are at least societal and logical reasons that a dollar is worth a dollar (though I’m sure the worst people alive will argue with me on this one).” A dollar is worth a dollar as long as the federal government denominated its citizens’ tax liabilities in dollars and accepts dollars to satisfy those liabilities. That seems like approximately forever, though that hasn’t been true for some countries.
I’ve now read more about the design of Terra and Luna. All I can say is that the next people who try to design a complete system of currency really ought to read a lot of economic history of the 1800’s, when banks were the ones issuing currency and governments only issued coinage. (With lots of exceptions, especially during wars.)
That perspective would have shown that the Terra-Luna design had a serious flaw. Currency systems have to be anchored by something. For the US dollar, it is that you can pay US taxes with them. For most of the 1800’s, banks issued currency backed by assets, mostly loans but some in gold to cover redemptions. To maintain faith in a currency, that anchor has to be able to give the currency a usefulness regardless of what happens to perceptions of the currency’s value. That’s why governments have a deep competitive advantage in issuing currency -- you can always pay your taxes with your government’s currency.
In the Terra-Luna system, the Luna is the only coin with an anchor, but that anchor is not very big. It is the value of being able to perform transactions on the Luna blockchain. Recall that the Luna blockchain was intended as a distributed processing network for financial transactions. So that does have some value, proportional to its adoption. Imagine, for example, that all of Amazon AWS was on a blockchain. That would be a big heavy anchor. But the business being done on the Luna blockchain, apart from the processing of its associated coins, was small.
Now look at those associated coins. They put out coins pegged to the dollar, the won, and a couple others. They proposed these as ways to carry out transactions. The volume of those transactions took off because everyone liked a coin pegged to a real currency. And this is where the problem comes in. The mechanism to maintain the leg was to vary the amount of Luna -- if the price of an associated coin fell below its peg, you could redeem that coin for Luna.
But the value of all Luna in existence is anchored by the value of processing done on the Luna blockchain. That total value doesn’t somehow rise the value of an associated coin drops. Instead, the price of doing processing on that blockchain falls. If there were a big pool of processing that could shift quickly to the blockchain to perform economically valuable work, that could have worked. But there’s not. So the price of Luna just kept falling. At some point, you hit an inflationary spiral -- redemptions of one associated coin into Luna spreads instability to the other associated coins, which then increase the supply of Luna even further.
One of the problems with crypto currency is that Bitcoin seems not to have an anchor. I think it kind of does. As the first mover, it got acceptance in a demographic that no one else can displace: criminal transactions. If you want to buy stolen identities, or child porn, or any other criminal nastiness over the internet, Bitcoin turned out to be where it’s at. Because stolen identities can be turned into dollars by credit card and tax refund fraud rings, Bitcoin has a link to real-world (stolen) value. That’s its anchor. If something disrupted that, then Bitcoin might become more vulnerable.
The more I think about currencies and how they operate (per David Graeber, anything that your local government will accept to pay taxes is currency) the more I come down to the essential idea that a currency that isn't ultimately backed with the threat of overwhelming physical force is not a currency, but a speculative investment reliant on the greater fool theory of investing. "Fiat" currency works because, ultimately, other people have the ability to incarcerate you or do violence to you if you, say, steal it, counterfeit it, refuse to accept it, etc., which inevitably leads me to the conclusion that "non-fiat" currency by definition is not actually currency.
Oh, and kudos for the shout-out to Jim Starlin's Warlock and Magus saga.
I'll be shocked if this doesn't become a wider contagion, but I also failed English so it's not unpossible.
This was very persuasive. I’ve long believed that at least the cryptocurrencies that exist as fuels for distributed processing could have a real basis. But the recent experience that you point to, where Ethereum has been unable to keep up with transactional processing is a sufficiently strong case that I think “disproven by experience” is the best way to describe my now former belief. Sad.
You said: “ While one might argue any currency is a belief system, there are at least societal and logical reasons that a dollar is worth a dollar (though I’m sure the worst people alive will argue with me on this one).” A dollar is worth a dollar as long as the federal government denominated its citizens’ tax liabilities in dollars and accepts dollars to satisfy those liabilities. That seems like approximately forever, though that hasn’t been true for some countries.
Tether sounding like an ominous name, rn
I’ve now read more about the design of Terra and Luna. All I can say is that the next people who try to design a complete system of currency really ought to read a lot of economic history of the 1800’s, when banks were the ones issuing currency and governments only issued coinage. (With lots of exceptions, especially during wars.)
That perspective would have shown that the Terra-Luna design had a serious flaw. Currency systems have to be anchored by something. For the US dollar, it is that you can pay US taxes with them. For most of the 1800’s, banks issued currency backed by assets, mostly loans but some in gold to cover redemptions. To maintain faith in a currency, that anchor has to be able to give the currency a usefulness regardless of what happens to perceptions of the currency’s value. That’s why governments have a deep competitive advantage in issuing currency -- you can always pay your taxes with your government’s currency.
In the Terra-Luna system, the Luna is the only coin with an anchor, but that anchor is not very big. It is the value of being able to perform transactions on the Luna blockchain. Recall that the Luna blockchain was intended as a distributed processing network for financial transactions. So that does have some value, proportional to its adoption. Imagine, for example, that all of Amazon AWS was on a blockchain. That would be a big heavy anchor. But the business being done on the Luna blockchain, apart from the processing of its associated coins, was small.
Now look at those associated coins. They put out coins pegged to the dollar, the won, and a couple others. They proposed these as ways to carry out transactions. The volume of those transactions took off because everyone liked a coin pegged to a real currency. And this is where the problem comes in. The mechanism to maintain the leg was to vary the amount of Luna -- if the price of an associated coin fell below its peg, you could redeem that coin for Luna.
But the value of all Luna in existence is anchored by the value of processing done on the Luna blockchain. That total value doesn’t somehow rise the value of an associated coin drops. Instead, the price of doing processing on that blockchain falls. If there were a big pool of processing that could shift quickly to the blockchain to perform economically valuable work, that could have worked. But there’s not. So the price of Luna just kept falling. At some point, you hit an inflationary spiral -- redemptions of one associated coin into Luna spreads instability to the other associated coins, which then increase the supply of Luna even further.
One of the problems with crypto currency is that Bitcoin seems not to have an anchor. I think it kind of does. As the first mover, it got acceptance in a demographic that no one else can displace: criminal transactions. If you want to buy stolen identities, or child porn, or any other criminal nastiness over the internet, Bitcoin turned out to be where it’s at. Because stolen identities can be turned into dollars by credit card and tax refund fraud rings, Bitcoin has a link to real-world (stolen) value. That’s its anchor. If something disrupted that, then Bitcoin might become more vulnerable.
Very nice write up. Good job.
The more I think about currencies and how they operate (per David Graeber, anything that your local government will accept to pay taxes is currency) the more I come down to the essential idea that a currency that isn't ultimately backed with the threat of overwhelming physical force is not a currency, but a speculative investment reliant on the greater fool theory of investing. "Fiat" currency works because, ultimately, other people have the ability to incarcerate you or do violence to you if you, say, steal it, counterfeit it, refuse to accept it, etc., which inevitably leads me to the conclusion that "non-fiat" currency by definition is not actually currency.
Oh, and kudos for the shout-out to Jim Starlin's Warlock and Magus saga.