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the original proof of work?

This week I read Nick Szabo’s Shelling Out – The Origins of Money.

I love the insight that money is prehistoric - though the first “collectible” proto-money was different than today’s currencies. Let’s compare properties of different monies.

Proto-money or collectibles, including wampum, gold or other jewelry, the stone money of Yap, and so on.

Proto-money was good because:

  • It was durable, a significant advantage over wealth in the form of food or other perishables. Its value is also expected to last over time.
  • It was difficult to counterfeit, as it invariably takes effort to make, though technological advances can change that INSERT link).

It is bad because:

  • It was low velocity (changes hands rarely) due to the high cost associated with transactions. This means it does not enable the frequent small transactions that make for a thriving economy.
  • It was not scarce since people can always manufacture more, the value of money is less reliable.
  • It was difficult to store or transmit large values, generally was impossible to accumulate more than one could carry.

Gold and other metal coins are better because:

  • They are high velocity with sufficiently small denominations to enable many small transactions.
  • They are scarce in a way that manufactured money is not. While the supply of shell beads can inflate enormously, there is only so much gold, and easy pickings are taken first leading to rising mining costs.

Sound money will naturally tend to replace bad money where possible, which the history of the American colonies bears out.

Backed Paper Currency, as in the dollar on the gold standard, improves on metal coins because it is much easier to transport and use paper currencies, especially at high denominations, than significant amounts of metal.

Fiat currency, on the other hand, removes the key benefit of scarcity.

Bitcoin’s key advantages over the currencies are:

  • Its security - It is far easier to securely self-custody a large value in Bitcoin than any of the other monies named.
  • Its scarcity - Bitcoin has a fixed supply, unlike any of the other monies.
  • Its ease of transmission. Bitcoin is the first money that allows near-instant secure transmission of large values to anywhere in the world.

Its key disadvantage is that it is low velocity. As we have seen with Ethereum, transactions that yield a higher fee will tend to crowd out less profitable transactions over time.

Direct Bitcoin use will never replace cash for small day to day transactions, and that’s okay. Even Ron Paul doesn’t want us to go back to paying for everything in physical gold coins. Crypto-backed digital cash issued by full-reserve institutions like the new Wyoming SPDIs is a promising future.