(Part 2 – What could programmable money look like?)
Contrasting the existing system of electronic money with true programmable money
First, this excellent post from Bankless, a newsletter about ‘crypto finance’ makes an important distinction:
digital money is not programmable money. Currently, money exists as an entry in an ad hoc confederation of private ledgers our society refers to as “the banking system”. The banking system is replete with unnecessary redundancy and a commensurate level of inefficiency. Although the legacy system is electronic, it merely digitizes a process that was designed during a time when money was explicitly tied to a physical asset, gold. Banks stored the gold in their vaults and rather than physically settle every transaction with hard currency, they kept track of transactions on their ledgers, netting out inflows and outflows…. It is a miracle that my Visa card issued by a small US bank still works in a place like rural Tajikistan. The success of companies like Visa, Stripe, PayPal etc show just how hard it is to interface with the legacy system. And their healthy profits show how much we are willing to pay for the added convenience.
and, memorably, this
Trying to imagine the future of human commerce at this point is a bit like Renaissance merchants in Florence trying to visualize Standard Oil.
From an essay on the crypto-focused site Bits and Blocks:
My Citibank-dollars are legally, and practically, a different instrument to your JP Morgan-dollars. My Citibank-dollars are a legal agreement that Citibank owes me dollars; your JP Morgan-dollars are a legal agreement that JP Morgan owes you dollars… The result is that money, controlled by all of these different entities, is all different and behaves in different ways.
Think how hard it is to implement anti-money-laundering rules across the board. Every participant has to attempt to apply the same logic. Every. Single. Participant. No wonder it’s ridiculously expensive, and has many gaps.
What makes money programmable
More by Bits and Blocks:
Now you can create money where the money itself has control logic built into it. This is done at the smart contract level. A smart contract is typically a bunch of code that is run by all participants in a blockchain network. It that defines:
* The characteristics of the money (how many units there are, who initially owns it, etc)
* How users can interact with the money (ask for a balance, make a payment, etc).
* The constraints are coded into the second part of the smart contract, so that all payment requests are subject to those constraints – no matter who is in control of the money at the time…
Vinay Gupta, one of the original members of the Ethereum team, writes
[Ethereum is a] universal computer which is accessible from anywhere by anybody, and (critically!) which always gives the same results to everybody. It’s a global resource which stores answers and cannot be subverted, denied or censored.
This, as he says, is a big deal when it comes to money and policies about money and securities. Of course, in the case of the Chinese government’s – or any central bank’s – digital currency, the total ownership of the chain has the opposite results, that unlike cash, digital currency can always be denied or censored.