The evolution of metal money to digital currencies
The move from a metal-based economy to a paper-based economy transformed the world – now we are on the cusp of a new innovation, from a paper-based economy to a tokenized economy.
8/6/20247 min read
In the 1200s, Marco Polo visited China and brought back to Europe the concept of paper money. This was an unworkable concept to the Middle Ages - how could the value of tangible, rare metals be represented by mere pieces of paper?
Although initially rejected, mere pieces of paper came to dominate the economy over time.
This transition was enabled by three factors:
Improved Technological Foundations
More suitable Institutions
Government enablement
This paper argues that the Schelling Point of value is derived from a combination of these three factors. We discuss how these factors were present in the Metal Economy, and how shifts in these three factors enabled the emergence of a paper-based economy. We then look at how we are seeing a shift in these same three factors today, facilitating a evolution from a paper-based economy to a tokenized one. Given the interplay of new technology (blockchain), new institutional organizations (tokenized business models) and shifts in government policy (CBDCs); we argue that the Schelling point of value is beginning a shift towards tokenized assets.
The Metal Economy
In the Middle Ages, the economy was based on tangible, physical assets like metallic money. Metallic money was grounded in firm technological underpinnings. Metals like Gold and Silver were perceived as highly valuable because they would not react with other metals and would not degrade over time, these attributes made them Schelling points of value.
A Schelling point is “a solution that people tend to choose by default in the absence of communication”. Powerful institutions of Medieval times, like mercenaries and goldsmiths, accepted and traded in metals like gold - everyone understood their value implicitly. In addition, government institutions, the kings and their treasuries, held hordes of gold which further cemented the societal acceptance of metals as the basis of value.
Whilst metallic money was powerful as a natural Schelling point that solved the coordination challenges of a barter-based economy, metal-based economies were limited. Ownership was based on land, livestock and physical goods like rare metals which were passed down through families. Whilst some limited partnerships did exist, these were based on proximity and local communities.
The move from Metal to Paper
By removing the limitations of locality, the move from a metal-based economy to a paper-based one has led to the emergence of a global economy. There were three key enablers of moving from a local metal-based economy to a global paper-based one: technology, institutional change and government policies.
Firstly, the emergence of a paper-based economy was facilitated by advancements in technology. The first of these was the printing press invented in 1448 by German goldsmith Johannes Gutenberg. The printing press enabled the mass production of paper currencies.
The second advancement was the publication of Suma De Arithmetica by Luca Pacioli in 1494. Pacioli established the concept of Double-Entry Bookkeeping and laid out principles of co-operate accounting. This enabled the emergence of a new institutional organization: the company, and with it a new asset class: equity. Equity is a piece of paper that represents ownership of a business – with Pacioli’s accounting principles providing transparency & trust, people could hold equity in distant businesses. In the 1600s we witnessed the emergence of stock exchanges in Amsterdam and London, and ownership in shared co-operations in the form of equity became widespread.
The third advancement came from the government - arguably the main factor in the establishment of new Schelling points for value. In the 1600s, we saw the establishment of the Bank of England and the Bank of Amsterdam which began issuing paper-based currencies. Accordingly, society in general implicitly co-ordinated around paper assets as the primary form of value.
With the wide-spread adoption of paper-based assets, money was grounded in modern technology allowing the economy to move faster and unlocking new innovations like stock-based co-operations. The evolution of the underlying infrastructure of money and ownership facilitated the emergence of a truly global economy.
The move from Paper to Digital Tokens
Whilst our economy appears to be digital already, current use of electronic payments still relies on paper-backed promises and an economy grounded in paper instruments like equity. In a "truly digital" economy, the underlying infrastructure of money is being transformed by blockchain technology.
Akin to the transition from metal to paper; the move from a paper-based economy to a tokenized, digital one promises many benefits. This includes greater efficiency, greater composability and greater transparency. All of these were benefits of paper money: the money moved faster, novel assets emerged, and the assets could be traced better.
The same trifecta of forces that enabled an abstraction from metal to paper appear to be repeating themselves today in a move from paper to digital tokens. In this section, we discuss how the three factors of new technology, institutional change and government enablement are contributing to the emergence of a tokenized economy. In addition, we discuss some of the benefits a tokenized economy can unlock.
Improved Technological Foundations
Firstly, the emergence of a new technology: blockchain. Blockchains created the concept of digital scarcity – this enabled native digital assets for the first time. Just as the printing press enabled the replication of paper-based assets across the globe; blockchains enable the introduction of truly digital currencies across the internet. Digital scarcity facilitates ownership on the internet without relying on intermediaries: instead of value being dictated from outside internet networks, value is created through Proof-of-Work within the network itself. Through the ownership mechanism of tokens within these networks, people & machines were able to manage valuable resources, work & usage.
Tokenized ownership facilitates the development of new technology by supercharging Open-Source software development. The vast majority of innovation comes from Open-Source projects. This is because in Open-Source development, people build on top of existing work with unrestricted contributions breeding accelerated innovation. Thus, the majority of advancements in mobile come from the Open-Source Android; the majority of advancements in computing come from the Open-Source Linux and major advances in cloud-computing come from Open-Source Kubernetes.
However, Open-Source development suffers from one major drawback: it is difficult to monetize publicly available work. Tokenization solves this. Take, for example, Ethereum. Ethereum is an Open-Source project whose success can be attributed to the distributed ownership enabled by tokens. Ethereum tokens represent ownership in the Ethereum network. Through this ownership, early developers did not just contribute to the development of the platform but also became active evangelists for the project. This led to rapid growth, with Ethereum creating an entirely new institutional format.
New Institutions
In the nascent tokenization paradigm, new forms of institutional organization are beginning to emerge. This has been enabled by so-called Smart Contracts which were invented with the Ethereum blockchain. With smart contracts, agreements are represented digitally on a blockchain. These agreements automatically execute according to pre-set rules. Through smart contracts, entities like Decentralized Autonomous Organizations (DAOs) have emerged which promise novel institutional formats that can rival traditional institutional forms like the co-operation.
These new institutions rely on tokens rather than equity. Compared with tokenization, equity is limited. Through tokenization, the entire concept of a co-operation & ownership becomes more fluid. Tokens are dynamic: they can be programmed to carry out different functions and can adapt according to real-time data feeds. With tokens, ownership can extend to the full ecosystem of suppliers, financial backers, customers and the business itself. Each stakeholder can participate based on token-economics with ownership & contribution represented by different token dynamics. In addition, tokens grant owners true governance rights, with the ability to vote in accordance with ownership embedded into these novel token-based networks.
By distributing ownership according to contribution and participation, new institutions based on tokenized ownership can unlock the value of our data. The digitally native scarcity of tokens enables value to be prescribed in more granular ways, for example, turning data into a personal asset. Since data producers can become fractional owners through token mechanics, more value can be accrued from our data. In 2019, only 3% of the world’s data was used to benefit mankind – and the vast majority of this merely contributed to the predictive advertising power of the incumbent Tech Giants. The open approach of Web3 has already unlocked more computing power, with the bitcoin network producing 100x more compute than Google, Amazon, and Facebook combined. Overtime, the Web3 model of distributed, tokenized ownership will create new institutional entities to rival incumbent ones.
Government Enablement
Finally, there is government engagement with this new technology. There are over 38 Central Banks involved in investigating Central Bank Digital Currencies, providing tacit approval of tokenization as the basis of money. Because of this, the Schelling point for value is likely to shift to tokenized assets. Just as governments issuing paper currency led to paper promises being commonly, tacitly and undeniably accepted as value – Governments issuing tokenized currencies will lead to a societal shift in how money & other assets are perceived.
Alongside progress towards issuing tokenized government currencies, governments are developing regulatory frameworks to facilitate the adoption of tokenized ownership technologies. For example, the Monetary Authority of Singapore launched Project Guardian in Asia; the EU recently released their foundational Markets in Crypto Assets Directive and in the US, election campaigns are being fought on the basis of crypto policy.
Conclusion
By adopting tokenized assets, we can move our current paper-based paradigm of static equity to participation in networks rewarded by dynamic tokens imbued with true governance capabilities. In this article we have highlighted how a combination of new technologies, new organizations & changing government policies are laying the foundations for tokenized assets as the Schelling point of value.
As a final note, it should be highlighted that the Central Bank Digital Currencies discussed above bring the potential of oppressive control. The underlying technology of tokenization, the blockchain, was developed to align with the open nature of the internet. However, tokenized money can be programmed by autocratic regimes with repressive monetary policies. Incumbent institutions like Citi Bank, JP Morgan and Blackrock are all earnestly exploring tokenization, but much of this is focussed on merely tokenizing existing assets rather than unlocking a dynamic, open economy. For the true benefits of tokenization to be realized, projects that preserve the open, decentralized nature of blockchain technology must be prioritized. These projects hold the potential to unlock a dynamic, open economy with new forms of ownership that are superior to our existing paper-based paradigm.
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