The Breakdown - Could Local Digital Currencies Improve Communities?

Episode Date: May 22, 2022

This episode is sponsored by Nexo.io, NEAR and FTX US.    On this week's “Long Reads Sunday,” NLW reads “Let’s Use New Forms of Money to Commit to Our Communities.” - Nexo is a secure crypto exchange and crypto lending platform. Buy 40+ hot coins with your bank card in seconds and swap between exclusive pairs for cashback. Earn up to 17% interest on your idle crypto assets and borrow against them for instant liquidity. Simple and secure. Head over to nexo.io and get started now.  - NEAR is a blockchain for a world reimagined. Through simple, secure, and scalable technology, NEAR empowers millions to invent and explore new experiences. Business, creativity, and community are being reimagined for a more sustainable and inclusive future. Find out more at NEAR.org. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - Consensus 2022, the industry’s most influential event, is happening June 9–12 in Austin, Texas. If you’re looking to immerse yourself in the fast-moving world of crypto, Web 3 and NFTs, this is the festival experience for you. Use code BREAKDOWN to get 15% off your pass at www.coindesk.com/consensus2022. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “Catnip” by Famous Cats and “I Don't Know How To Explain It” by Aaron Sprinkle. Image credit: yuoak/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8. 

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Sunday, May 22nd, and that means it's time for Long Reads Sunday. Before we get into that, however, a quick piece of housekeeping. There are two ways to listen to the breakdown podcast. You can listen on the CoinDesk Podcast Network feed, which features both the breakdown as well as other great Coin desk shows, or you can listen on the breakdown only feed. Both of them come out the same day. The breakdown feed just comes out a few hours later in the evenings.

Wherever you are listening, if you're enjoying the show, I would really appreciate if you leave a rating or a review. It makes a big difference. Finally, a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. Now, today, we are really, reading a piece by Matt Pruitt, who is the president of the Radical Exchange Foundation, and it's about the way that local currencies, local digital currencies, could transform how we commit to our IRL communities. I will use this as a chance to do my normal reminder that me sharing pieces on LRS does not mean I necessarily agree with them. I think that there is so much that's challenging in what Matt says in terms of practical realities and how the world is

changing and how digital communities are supplanting geographic and local communities. But I think that the discussion that he provokes is one that's worth having and probably needs to include people with lots of different perspectives. So I'm excited to share this for you. I think that whether you find yourself agreeing or not, there'll be lots of food for thought. At age 10, a teacher asked me to write an essay on what I would do to fix a world problem. I declare that I would like to ban money because I saw it as the root of much evil. That idea was clumsy and what I'll outline here might be too, so I present it in a spirit of total humility. Much important work remains to be done to improve this extremely subtle, significant, and social institution. The problem is real. Everyone from

Keynesians to Bitcoins agrees that the way we measure store and exchange value are flawed at best and broken at worst. I don't think we're any closer to an ideal form of money than we are to an ideal language or government. That's why it's so exciting to live in an era of programmable money, where we can strip the institutions to the studs and rebuild it in ways that would have only recently been hard to imagine. I'm somewhat disappointed with the monetary innovation that has happened in blockchain technology's first decade, but many possibilities are only just coming into focus. In this essay, I'll present a view of money as a communication technology. Then I'll sketch some paths toward building a new and better kind of money, unlike either fiat or Bitcoin,

money for a more prosperous and complex world. Money is a communication technology. It resembles language, democracy, law, and telephone networks in that people use it to send messages. Milton Friedman famously made this point using the example of a pencil. Nobody, he observed, really knows how to make a pencil. To even begin with, you'd have to cut down a tree for wood. For that, you need a saw made of decent steel. For that, you need to start with iron ore. And what about the paint on the pencil, the rubber eraser, the finely processed graphite, the glue, the metal piece that attaches the eraser to the wood, etc. Summending this humble miracle is not some individual polymathic craftsperson, but simply the price mechanism, through which people around the world cooperate despite never

meeting, and Friedman significantly observes, possibly even hating each other. Austrian school economist Frederick Hayek and Ludwig von Mises similarly saw the economy as an information system, using price to integrate vast data about what people subjectively need where, when and how badly. I have important disagreements with these thinkers, but I share their view of the economy as an information processing system based on the price mechanism. Money is the language we speak and understand when we interact with one another through the economy. Languages are imperfect. As with that, every other complex information processor, the economy's information outputs must be somewhat compressed

or diminished compared to what went in. This is connected to the principle that entropy or disorder tends to increase over time. The basic idea in modern information theory and the ironclad second law of thermodynamics. It sounds awfully abstract to say that disorder increases in information systems, but the idea is simple. A photograph of a sunset always misses something. Words never perfectly convey their message. A map carries less information than the territory it depicts. This is the entire point of processing information. Photographs, words, and maps usefully summarize things that we couldn't otherwise communicate. But we have to be very careful to understand the limitations of our summaries and to realize that true progress flows from facing and mitigating those limitations.

This is why photographers seek better cameras. Languages evolve, and a mapmaker's work is never finished. Money, too, carries information, and it is not exempt from this universal law. The question is not whether it muddles its messages, but how? The information money carries. cameras receive information through an aperture and form an image. Markets receive information through people's decisions to buy, sell, or hold things in form a price. But what goes into the decisions that form prices? Do prices convey less information than they might, or superfluous information that they need? If so, we might think of that like a signal distortion or noise.

And just as a lens helps a camera capture a cleaner image, a different kind of money might contribute to a better economy by capturing better information. Whenever we take actions in markets, buy, sell, or hold, we are always comparing alternative. For example, would I rather have A, $5,000, or B, a beautiful antique table? The choice is actually much more complicated than it sounds, because to choose wisely I have to think about people other than myself. For example, I might sorely need $5,000 and dislike the table. But if I think that someone out there in the marketplace would be willing to pay $7,500

for the table, then my express preference will change. I'm buying a $2,500 profit, I'll communicate to the market that I prefer the table to $5,000 even though this is flatly untrue. I just prefer $7,500 to $5,000. If we want prices to tell us what the global highest bidder will pay, then this process looks efficient. But from another perspective, it looks noisy and wasteful. After all, everyone participating in a market knows more about themselves than they know about others. So you'd think we want markets to gather that special information that every actor is in a uniquely good position to give.

How much do you want the table? But instead, the global market asks us also to speculate about what the world's richest table enthusiast would pay and incorporate that into our decisions to buy, sell, or hold. Stated differently, the global market asks us to think and communicate about things we aren't in any special position to know about. This is a significant cognitive burden multiplied across countless decisions in the economy, and it drowns out other information from the price signal. Even though everyone participates in markets, markets aren't finding out what everyone thinks

about the value of things. They're only finding out what the highest bidders think. Looking for ways to step up your crypto game? Then go with Nexo. For starters, you get free crypto for, each purchase or swap. How about earning guaranteed yields? Up to 17% paid out daily. Ideal for you hardcore hoddlers. You don't even need to sell. Instead, borrow instant cash against your assets. Get the most out of your crypto with nexo at nexo.io. That's nexo.io. This episode is brought to you by

NIR, a climate neutral, high speed, and low transaction fee, layer one blockchain platform. near is a blockchain for a world reimagined through simple secure and scalable technology near empowers millions to invent and explore new experiences business creativity and community are being reimagined for a more sustainable and inclusive future reimagined your world today at neer dot org the breakdown is sponsored by ftx us ftx us is the safe regulated way to buy and sell bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S.

FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. A reason Austrians like gold. My argument partly tracks the case some Austrian school economists make for gold and now Bitcoin. These hard-to-mint kinds of money ease people's cognitive burdens, according to the Austrians, by making it simple to save. By contrast, the threat of inflation with easy-to-mint money forces everyone to invest rather than save. We all have to play the markets, guessing about what

the global highest bidders are going to pay next year for tech stocks, euros, and beachfront real estate, instead of just stocking money away and planning for our own futures. This amounts to a division of labor problem. It means people who are great at, say, music, spend less time making brilliant music and more time amateurously investing money, just in order to not lose what they've earned. But, and here's where I leave Salzburg, markets asking everyone to think seriously about what other people are going to want next year isn't necessarily such a bad thing. Arguably, it's a feature rather than a bug. Inducing distributed intelligence into the problem of capital allocation across society might be worth the mental bandwidth that demands. If the Austrians are pointing to a

genuine problem, because it is wasteful for people to have to assess complex things that they have no special knowledge about. Unhappily, the fiat-dominated global market asks us to do this all the time, but moving to a world in which everyone simply hoards hard money would swing the pendulum back to an opposite extreme of individualism, in attention to the capital needs of others, and compounding power concentration. The real problem arises from a difference in scale between an individual person and the global or other very large market environment in which they must set their prices. The chasm of scale between the limited concerns of individuals and the vastness of the market makes the information they provide to markets noisy, like a microphone signal with too much

gain or a photograph taken with too long an exposure. The situation could be completely different, though, if markets incentivized us to price things in local rather than global terms. Then, when making our decisions to buy, sell, or hold, we'd consider only what we need and what our communities need, not what the entire global market needs. This would not waste so much energy because our communities are close to us. We actually have special knowledge about them. The promise of alternative currencies. This helps explain the attraction of local currencies, despite their challenges which I'll address soon. Currency circulating locally rather than globally could bend market participants' plane of focus like a lens, gathering less noisy information.

Instead of trying to guess what an expert dealer in Manhattan might pay for an antique table, a participant in a truly local economy would only consider the value of the table to them and those they know. shifting people's attention in this way could unlock healthier and more self-sustaining economic communities. Global trade networks aren't going anywhere, but meaningful local or community currencies could conceivably form new layers, contributing to a more richly textured global economy, following the principle of subsidiarity, the idea that decisions are best made nearest the people they impact. Capturing locally meaningful information in prices would facilitate more local transactions, as opposed to global ones.

For example, talented professionals in Ohio or Nepal might work for more local businesses, helping to bootstrap local economies instead of holding out only for remote work from the same few global agencies. Note two that local currency need not only refer to geography. We could imagine many intersecting currency networks operating within communities defined in many different ways. It's hard to estimate how much wealth this could generate, but clearly systematically improving the informational qualities of price like this could be a very big deal. So why hasn't it already happened? Many projects have done meaningful good, but none have truly revolutionized the economy in a way that I'm suggesting. Why hasn't the ease of creating ERC20 tokens created a boom in community currencies?

Global currency and the trouble with exit. Local currencies have always faced a serious headwind, because when people accumulate a significant amount in them, they tend to want to exchange it for a more universal form of money. Even before they do that, they perform a mental translation. How many dollars do I have right now in currency XYZ? This is natural because we can spend dollars anywhere, not just where we earn them. Taking what we earned in one community and bringing it to a second where it buys more lets us feel richer as individuals, and yes, there are gains from trade. But from the point of view of the first community, where the accumulation occurred, this is air leaving the balloon. Local currencies will only truly sustain local economies if they manage to

discourage people from exiting with capital. In other words, for local currencies to capture more information than the global economy, we need people to think in terms of them, instead of always mentally translating to dollars or Bitcoins. This might seem like an added cognitive burden, but remember, pricing everything in a local economy would be simpler because you wouldn't have to consider the willingness to pay of strangers on the other side of the world. The question is, how to do it? How could we actually build community-oriented currencies that people think in instead of exiting from? Values, incentives, and exit costs. Why use local currencies? An important motivator of community currency use is expressing shared values. Accepting a community's

currency would be a signal of support. Spending it would be a signal of belonging, and the unique values of the community would show up in the resultant economy. But to preserve this special local information, this expression of particular shared values against the winds of global economic incentives, there needs to be a cost, either a direct cost or a clear opportunity cost, to extracting capital from the system. And to be sustainable, the cost would need to be something other than a speculative belief that prices will rise. Sorry, Hodlars aren't a real community. Existing and emerging technologies will let us experiment more rapidly than ever before with currency governance. The key will be to making local and community currency systems semi-permeable.

We want them to hold energy in, like efficient internal combustion engines, while also breathing and interacting intelligently with the outside economy, like cell membranes with transport proteins. Here are two incentive structures pointing in that direction. First, the currency might be the only tender in which it's possible to interact with the community's shared assets. This would create a unique reason to hold it. Those assets could include exit taxes. In an earlier piece, I sketched some ideas for an exit tax structure where you'd have to pay a higher fee to the community when transferring capital to more socially distant communities and or from richer addresses. The identity structure is based on Soulbound tokens described by Glenn Wheel, Pujo O'Havar, and Ethereum founder Vitalik Boudarin in their

recent paper constitute a design space for enriching these taxes. More work is still needed on this, but generally we'd want to design exit taxes that are high enough that most people don't think very much about removing their money from the community, yet are low enough that obviously beneficial external transactions can still occur, and these should only apply to unilateral decisions about removing capital. The community, through delegated or democratic decision-making, should have a free hand with external economic relationships. Conclusion, money isn't perfect. It has changed throughout history. It's a technology that can be improved. In the modern era, it is failing us because it's too universal. It draws our attention away from

the communities that are the real sources of our wealth. The biggest opportunity new technologies afford us is not to help us exit our communities, but to help us commit to them. This would make the world not only wealthier, but more pluralistic. All right, guys, so back to NLW. Like I said, Matt presented this in a spirit of total humility, and I'm thinking through it, and so I don't want to go too deep on things where I differ, because I think that the point in me sharing it with you is for you to ponder. It's an interesting set of questions. I think the baselines that I have a hard time with,

if we were starting a conversation about this, is one, this notion articulated in the conclusion that the communities that are the real sources of our wealth, I think that's a very broad brush to paint with, two, the definition of community, I think the place that you're most likely to see this type of experimentation happen is absolutely not geographic, where a big portion of the people are there because they happen to be born there, which I don't believe is a sufficient entry condition for this

sort of thinking anymore, but instead opt-in communities in digital metaverse type spaces, where people might want to buy into the idea of one of these currencies rather than impose it on a community that didn't have it in the first place. If I had to guess, that's where we're going to see a lot of the experimentation. Finally, I'm skeptical on an inherent gut level, maybe I could be convinced differently, that a system that relies on an exit tax to work is long-term sustainable. It strikes me as an exertion of power when ideally you'd want this type of system to create its own incentives to stay in without penalizing people who have made a different decision.

But this is so abstract, it's hard to know how to take those things too far. Those are just my starting points. In any case, I hope this was a fun, different listen. certainly we've been doing some big thing stuff. For now, I want to say thanks first to Matt for writing this great piece. And then to my sponsors, nexus.io, near NFTX for supporting the show. And of course, to you guys for listening. Until tomorrow, be safe and take care of each other.

Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all. all sides of blockchain, crypto ecosystems, Web3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, CZ, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coindesk.com slash consensus 2022.