Most money histories start with bartering, talk about sea shells, gold and other mediums of exchange and finally consider coins and other currency. After starting with the network, thdey abruptly transition into objects, and keep the focus there.
What happens, though, if we retain a focus on networks?
Elements of Barter
Barter includes negotiation but is really all about the network, especially trust in the network. Trust in the network builds over time with the success of multiple, probably frequent, transactions. The more trades where everyone wins, the more trust grows.
The trust also becomes distributed, since I trust Uncle Donald when he says that Carrie is not to be trusted. So, reputation and "social capital" are key features of the bartering economy.
And while trust grows slowly, it disappears almost instantly. A single instance of fraud or deceit usually finds the perpetrator outside of the trust network. Falling outside of the network of trust in a bartering economy means a tough life!
Trust Networks & Modern Money
Trust networks with our current monetary practices have not grown too far from the kinds of trust bartering networks use. Cheques, for example, continue to use social capital security techniques, where the teller verifies signatures before cashing the cheque. ATMs put this type of security on life support, and online banking essentially killed it. Its demise is not merely a matter of the digitization of finance. The larger problem is centralized banking has virtually no connection to its customers and no social capital on which to depend.
Another perspective is this: the modern world creates more potential connections between people than former trust methods can secure against. Two examples of the capacity breakdown are: anti-money laundering (AML) and know your client (KYC) techniques.
AML attempts to stop malicious actors from taking two actions: using the profits from crime and financing terrorism. AML is a large reason every year it seems you can take less money out of your bank account or transfer money between accounts. Reporting large transactions to central authorities by (at least) one of the many middle-men is essential in the process of money moving.
KYC purportedly attempts to save people from themselves by limiting the investments types they can access. Clients self-report their current comfort with risk, and centralized authorities then control which investments are available. It actually incentivizes lying, since honesty can put the investor into a financially hobbled situation!
Both AML and KYC security techniques leverage a series of professional snitches to tell centralized authorities about client behaviour. Yes, we're using barter economy social network security with some of the most modern of financial instruments.
And that would be fine, if it worked. Instead, mostly it doesn't. Instead of protecting clients, it mostly creates unnecessary drag in the economy, increases incentives to dishonesty, while penalizing the majority for a few's bad actions. In other words, we have progressed only a little beyond punishing the whole third-grade class for my buddy's masterful spitballs.
Beyond AML and KYC, all the lawyers, bankers, politicians, bureaucrats who take a slice of each transaction all theoretically exist to protect the network using these same barter economy social network security practices. So, I would argue that while the objects and use cases of financial practice have changed dramatically, the security network has changed minimally.
Here Comes Everyone!
Soon, we face a simple problem: with 8+ billion people with internet access, all trading together, how can we secure trust using a system requiring so much personal knowledge of the actors?
This is where crypto points toward better future!
Crypto is short for cryptocurrency, which is the mashing together of "cryptography" with "currency". Cryptography is the practice of hiding communication so that the sender and receiver can read it, but others cannot. Cryptography has developed sophisticated techniques over the centuries for increasing the level of trust between two people. One of its biggest breakthroughs was public-private key encryption.
The system is very simple to explain. Two "keys" are generated. Using one key to hide a message, means only the other key can unlock it. If I give you my public key and keep my private key, you can use my public key to hide a message and I can use my private key to unlock it. If I lock a message with my private key, anyone with the public key can unlock it.
Without the private key, nobody can read any message locked with a public key. So you can give my public key to someone else and they can also lock their message to me. But they cannot unlock your message to me.
A New Basis for Trust
Cryptography offers a new basis for trust. We needn't know each other to trust in the messages each other's messages.
Considering money, if I send Alice money for the bike she's selling and then send the same money to Bob for the computer he's selling, I've stepped into the "double spend problem." Early digital money required trusting others to be honest, since solving the problem was difficult, a problem physical money doesn't suffer. Cryptocurrency solves the double spend problem with an innovation called blockchain.
Periodically (for example, 10 minutes for Bitcoin), the blockchain packages all transactions into a "block". Others verify the block, then attach it to the blockchain as a public record that cannot change. When I try paying Alice and Bob with the same money, the verification of my transactions will fail and get excluded from the block.
Solving the double-spend problem again increased trust in the network without reliance on knowing any of the actors.
Consider a music, book or movie collection instead of money. As a digital asset, copying them is child's play. The process might be more complicated with digitial protection in place, but will still be simpler than copying physical media.
Most digital products are identical to any other, or to use a fancy word, they are fungible. Their fungibility makes it hard for copyright owners to prove that the one I have is yours.
NFTs (non-fungible tokens) solve this by uniquely identifying a digital (or physical) resource. Like with the double-spend problem in money, using NFTs to identify my rare collection of spitballs from my third-grade buddy stops me from selling them to both Alice and Bob.
Again, trust increases with no need to activate the barter economy social network security system.
With a non-fungible token, we can model anything that is unique. In a community, for example, a token can stand for the amount of voting power, or resources, or influence a member holds.
Mechanisms like this change how strangers collaborate on projects big and small. Decentralized Autonomous Organizations (DAOs) are early examples of experiments in this kind of shared governance. Some DAOs hold billions of dollars and have thousands of members.
Blockchains have smart contracts, a kind of automated code for enforcing rules, can dictate what actions happen when certain conditions occur. A simple example is when your money and my spitball collection are both ready, the smart contract automatically transfers the assets, completing an exchange.
Automation again increases the trust level between strangers.
This Changes What?
You might have heard, "Cryptocurrency changes everything." This idea is not about money. Instead, we're talking about the new ways of trusting strangers.
But wait! There's more!
If I can trust you, and you can trust me, we don't need an escrow service to hold money and good while the barter economy network security system does its job. We don't need a notary to identify the actors. We don't need lawyers to write most of the contracts or judges to adjudicate conflicts. We don't need bankers to hold my money or other valuables. We don't need governments to tax transactions in order to "protect" us.
In short, all the drag on economic transactions becomes unnecessary. Goods, services and money flow more freely. Since an economy's size doesn't determine its health, but the volume of the flows, reducing the drag improves economic health.
As the new network trust model eats the barter economy social network trust model, our world is going to change. The change the internet brought disrupted any industries that had a digitize-able product. Since cryptocurrency trust applies both physical and digital products, the cryptocurrency changes will be many times more revolutionary. And because it turns everyone with a cellphone into their own bank, it won't be just the rich people involved.
Cryptocurrency started with Bitcoin, meaning that in 2024, it's only 16 years old. The last 16 years saw a wild ride of innovation and incredible news cycles. Even so, it's safe to say we're just getting started. If you were thinking you may have missed the crypto boat, don't worry, you're still early!