Currency Evolves
A currency has no intrinsic value. It’s perceived value is a complex function of the accumulated trust it exhibits – the degree of trust, the number of people, societies, kingdoms and countries exhibiting the trust etc. Hence, a currency runs its course – something triggers its origin, it gains popularity & trust, the trust peaks and sustains for a while, something triggers a fall in the trust, another currency or form of currency appears in the scene. Repeat.
Bitcoin (and its cousins) is one such proposed currency that is fighting an evolutionary battle. While pondering over its evolutionary struggle/journey (struggle is not what it looks like so far though, given its cult-like following), I was reminded of a passage from Matt Ridley’s Book, The Evolution of Everything. I revisited the Chapter on the Evolution of Money in the book and ended up reinforcing my musings.
There is a lot of rhyming between how Bitcoin is evolving now and how Matt explained Money evolved a few hundred years back! In this article I have reproduced some of the content from the mentioned chapter verbatim and juxtaposed Bitcoin alongside it for an interesting comparison. The script from the book is coloured blue for easy distinction. Here it goes:
Money is an evolutionary phenomenon. It emerged gradually among traders, rather than being created by rulers – despite the heads of kings on the coins: those just illustrated the tendency of the powerful to insist on monopolies. And there is absolutely no reason why money must be a government monopoly.
We are all aware how Central Banks are running monetary policies as their monopolies, printing them at will, in order to kick the proverbial can down the road. This undermines the very fundamentals of a good currency. As Matt Ridley insists, “there’s absolutely no reason why money must be a government monopoly.” The government monopolises it for an illusion of control & power.
There’s a story that illustrates this, from the dawn of Britain’s Industrial Revolution. In the eighteenth century more and more poor people started moving to towns and working for wages rather than staying in their rural villages and being paid in kind by their semi-feudal employers. This presented employers with a new problem – a shortage of coins. There were gold guineas in circulation for the rich to use, but too few silver crowns or shillings, or copper pennies or halfpennies. Existing silver shillings were deteriorating in quality. As for the Bank of England, it would issue no paper notes smaller than £5. The entrepreneurs of Birmingham, unable to pay wages in silver, found too few copper pennies available and resorted to using counterfeits, which were abundantly if illegally supplied to them in the back streets.
One Birmingham businessman, Matthew Boulton, the owner of the giant Soho works, petitioned Parliament to let him solve the problem by granting him the right to produce new regal coins, but the Royal Mint was as jealous of its monopoly as it was complacent about the problem, and Boulton was rebuffed. Another businessman in Wales, Thomas Williams, had a better idea. In 1787 he began producing copper coins from his mine at Parys in Anglesey. He did not pretend they were pennies, but merely ‘tokens’ that could be exchanged for pennies, which was legal. The copper tokens were called ‘druids’.
Governments & central banks are digging holes. Left on their own, they are reluctant to first stop digging further and start filling the whole. A new efficient & robust monetary system solution is coming from the outside. They are also in the form of tokens or contracts.
Other entrepreneurs followed suit. Soon (in a reversal of Gresham’s Law, that bad money drives out good) the tokens had driven out the counterfeit coins and become a legitimate currency, preferred to the sovereign coins and accepted even in distant London. The habit of striking private coins was catching on. In 1794, sixty-four tradesmen issued coins for the first time. By 1797 over six hundred tons of tokens were in circulation. Private coiners had solved the problem of a shortage of change.
Oh hang on..that’s how Cryptocurrencies mushroomed too! As Bitcoin gained popularity amongst ‘early birds’, more and more coins emerged. From just a handful of coins as late as 2013, today there are over 1000!
“Ironically, there are more currencies out there than there are tokens.”
– Naval Ravikant
The slumbering Royal Mint eventually awoke, and stirred Parliament into action to defend its monopoly. It adopted Boulton’s methods, lobbied to win back coinage contracts, and gradually regained its monopoly. So it was that an ancient and hidebound institution was modernised, not by direction, but by competition. This time the politicians, with their usual preference for crony monopoly, objected, and by 1814 private token coins were banned by law.
Oh hang on again…We see similar reactions from so many governments. China banning mining. India seems to be following the suit. Most governments & central banks would not let the power slip out of their hands so easily. Almost all the Central Banks, worth their salt, seem to be gearing up to launch their own “Central Bank Digital Currency”.
So, is there a way to see what happens to Bitcoin & gang by studying what happened to such private currencies? I’m afraid the answer to your disappointment is NO!
What happened to such private currencies in the past is of little relevance. History only rhymes, it does not necessarily repeat. Events unfold in a probabilistic fashion as various possibilities vie for their occurrence. The occurrence of one event shuts the door on all other possibilities and opens up a new set of possibilities. History is a path driven progression of events through a multitude of possibilities; it only looks deterministic in hindsight.
What happens now?
Well, we’ll see an evolutionary battle not only between Central Bank Digital Currencies and Cryptocurrencies but also among thousands of crypto options. The larger trend is fairly certain – currencies getting digital. Lesser certain is currencies getting decentralised, and even lesser certain is the survival and thrival of some decentralised currencies over others.
Most likely, most of the decentralised coins will fall in the precipice of extinction. The futue generations will not even remember their names. The winner(s) will evolve through a path dependent turn of events.
Evolutionary Rhymes
That’s how evolutionary battles play out – numerous mutations appear, which compete for resources, most fail, the few who survive take all!
This is all to draw the inference that there’s a pattern to how evolution plays out. While, they are all different domains & operate in different times & time frames, there is a convergence-a rhyming in the way events evolve over a path dependent, inexorable, but unpredictable chain.
The idea of Evolution is a stage process:
- Natural Random Variation or Mutation or Experimentation or Trial & Error
- Competition amongst them for survival through a test of fitment with larger environment
- Extinction of the unfit & thrival of the fit
This process is a standard template for all evolutionary plays. As Matt Ridley says in his book, The Evolution of Everything, “Darwinism is the ‘special theory of evolution’; there’s a general theory of evolution too, and it applies to much more than biology. It applies to society, money, technology, language, law, culture, music, violence, history, education, politics, God, morality.”
“Darwin’s Theory of Evolution is like a Universal Acid. “it eats through just about every traditional concept, and leaves in its wake a revolutionized world-view, with most of the old landmarks still recognizable, but transformed in fundamental ways.”
– Daniel Dennette, Darwin’s dangerous idea: Evolution & Meaning of Life
An infinite universe with infinite stars and infinite planets (infinite x {avg no of planets = infinite!) yields life in just one planet (as far as we know), that’s Earth. On Earth, millions of species, more than 99% becoming extinct, yield one species, that’s Homo Sapiens. Even Homo Sapiens were not along to start with. “100000 years ago,” says Yoval Noah Harari in the opening remark in his book Sapiens – A Brief History of Humankind, “at least six human species inhabited the Earth. Today, there is just one.” On similar lines, at the onset of the auto industry (r)evolution, there were over 2000 car manufactures. A handful survived. Or take the dot com boom-bubble-bust. The dot com idea was real. It was only stretched to its illogical limits during the boom phase. Most of it was unreal and collapsed. However, the dot com phenomenon was real; the few survivors thrived in the coming decade. Or take evolution of cultures, empires, customs, religions for that matter. Christianity & Islam too ‘competed’ among other cults and religions for supremacy. A spin of the circumstantial wheel led to their rise to the highest stage.
There are similar examples across the history of all evolutionary battles, and there is no reason why a similar battle won’t ensue in the crypto world.
How & when, will depend on how events unfold on a path dependent trajectory. Darwin’s smiling!