Why there's no Money on the Blockchain and what to do about that

Why there's no Money on the Blockchain and what to do about that

Mutual Credit
There’s no money on the blockchain. Granted, this is a bold claim, but as we’ll soon see, it’s not entirely fabricated.
It’s also a bit of an odd claim, since the blockchain was first introduced with Bitcoin, as a Peer-to-peer electronic cash system. Since then, it has undoubtedly achieved marvellous things. Besides creating an entire subclass of surprisingly rich nerds, it has not only birthed a new industry, but an entire zoo of new asset classes. But what about the one thing it was designed to be? “Electronic Cash” - an alternative to existing, state-sanctioned forms of money?
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In many ways, one could be excused for thinking that Crypto is teeming with various forms of money. Bitcoin and most other cryptocurrencies excel, probably more than anything that came before them, in fungibility, durability and portability, which are three of the five most important attributes of money. In other, very crucial ways however, none of them really pass as money in the true sense of the word.
In fact, Bitcoin, Altcoins, Network- and Utility tokens, are so exciting, exactly because they’re not money and don’t behave like money. They are assets we normally buy and hold to make a profit, not something we earn and spend to make a living, which is the very definition of cash.
Up until half a decade or so we still tried here and there. I remember having retainer contracts denominated in BTC; this was an absolute circus. Besides not knowing if my monthly income will buy me a house or not cover my rent, these contracts produced the weirdest behaviors. From payments being delayed for months because of a minor bull market, to no one being willing to sign any agreement during bear markets.
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Using my first BTC gains, I spent what would now be hundreds of dollars for a cup of coffee. I wouldn’t say that I regret each and every zip, because Carpe Diem and such, but if I’d spent $300 million USD on a few cheesy slices I’d probably be so traumatized that I would never buy anything again.

But Stablecoins!

So, while we may use our crypto holdings as a means of payment from time to time, when it comes to the actual monetary function of pricing goods, services, labour and capital, we’ll normally revert to the best thing we have at hand, which even in our industry, are fiat currencies, wrapped into a cryptographic container, namely stablecoins.
The problem being that stable coins, collateralized or algorithmic, aren’t stable in any intrinsic sense but are merely chain-borne representations of Uncle Sam’s good old liberty bucks. They’re essentially client-assets that expand the reach of central bank policies into cryptomarkets. Claiming that stablecoins are a distinct form of money, is like saying that your balance on Paypal, or your debit card for that matter, pose their own form of money. Both are digital representations of fiat, whether they live on the blockchain or on someone’s private server isn’t really relevant to the heart of the matter.
That’s true even if, like DAI, these stablecoins use algorithmically controlled crypto-collateral to mimic the behaviour of fiat money. When minting DAI, Maker does essentially the same thing banks do when handing out fully collateralized loans such as mortgages: An asset is “locked”, on the ground of which new dollars are created. The fact that these dollars run under the ticker symbol DAI doesn’t really change their nature as units reflecting whatever Maker’s USD price oracle spits out.
This may sound like nitpicking, but it only does because our day to day experience has trained us to underappreciate one of the main functions of money, namely it being a predictable unit of account. This is hugely important. Money can get away with being somewhat unstable, but it needs to be predictable for complicated, efficient markets to exist and for investments to make sense over longer periods of time.
For now, nothing on the blockchain comes even close to addressing this very basic need. While more people would feel comfortable with entering a long-term contract denominated in DAI than in Dogecoin, we do have to thank central banks for the price stability that makes this so, and not an independent market.

The roughly 3 Trillion dollar question

Can we even imagine a form of money that is neither pegged to fiat or arbitrary goods such as gold, but that would still allow us to price things, make long term commitments, and predict future costs?  Can we think of a form of money, in which we would happily denominate prices in a 5 year contract, without using fiat as a reference?
To answer these questions we’ll need to redefine “stability”
Instead of treating stability as an arbitrary relationship between abstract numbers, as investors tend to do, we need to think of it the way actual people do: how many hours do I need to work in order to pay rent and buy nice things? Will this be the same next week, and if not? Why? Is my contribution now less valuable, or have the things that I want and need become more scarce?
If we think like that, we’ll soon discover that money isn’t really an asset in any tangible sense, but rather an entry into a ledger, tracking human activity and the availability of resources. And we wouldn’t be the first ones to think this way.
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The image above depicts what is known as a Tally stick. These neat little gadgets have been in use for literally milenia to track all kinds of things, mostly - mutual obligations.
By cutting a block of wood into two unique pieces, the first immutable ledger was created. If you bring the two pieces together you can make a notch in both of them, which remains independently recorded on both pieces. If you try to forge a notch without the owner of the other piece being present, your forgery attempt would be exposed and you tarred and feathered. Proof-of-Notch, I suppose?
These sticks were used mainly to record debt, but not financial debt, as we would think of it today. This primitive form of debt was more like time-delayed barter: You’ll hunt a hog for me today, and I’ll give you a few bags of rice in a few months from now, after the harvest.
The moment these tally sticks became tradable, a wheat-farm owner could pay their worker with a notch on a stick instead of a bag of wheat, which the worker could directly trade for freshly-baked bread the very same day, even if the baker didn’t have immediate need for more wheat anytime soon. The tracking of obligations and commitments made it so that value could now be produced in one place and time, and then consumed at some later stage. Barter now transcended Space-Time.
What’s interesting here is that the amount of notched tally sticks is neither constant, scarce or unlimited - but rather expands and contracts depending on the state of the economy they serve. Notched tally sticks are created when work has been done and paid for, and are destroyed when someone comes along to redeem them against the fruits of this labour. So, at least theoretically speaking, we get an elastic money supply that adjusts itself to meet the amount of value produced in a given market. Such a money supply is what economists call “endogenous”, arising from within, rather than imposed from the outside.

There actually is Money on the Blockchain

One of the questions we asked ourselves at ReSource is -  how could this method be reliably ported to the blockchain to create money that is truly endogenous to the internet?  Mutual Credit - a centuries old method for debt clearing held many of the answers we were looking for.
Just like notches on a tally stick, mutual credit money is spent into existence when debt is created, and destroyed when equal exchange is achieved. Just that in our case, instead of uncountable individual sticks, we have one large stick, called the Cello blockchain, with each notch being a freshly minted RSD unit - the endogenous currency serving the ReSource network
This way we have created a stable unit of account that, just like tally sticks, is backed by whatever is being traded with it.
If you’re creditworthy, you can access a credit line, spend money into existence to buy what you need, which is then destroyed whenever someone buys something from you and closes your overdraft by doing so. This way RSD can be “redeemed” against all goods and services offered on the ReSource market.
Now you might say -  hold up there, these sticks you’ve been ranting about only had value because someone (in our case the farm owner) was legally obligated to accept them as a means of payment. And the same is of course true for RSDs. The circulating RSD supply only maintains its value because someone, somewhere has a corresponding amount of debt that needs to be paid in RSD.
How do you pull that trick off in a decentralized environment? How do you get people to pay their debts, or assess their creditworthiness to begin with?
Well, to answer these questions precisely we have built the ReSource Protocol. This would be a post in it’s own right (and there a few like that on our blog), but in short:
Underwriting, risk assessment, assumption and management is achieved by a distributed network of competing underwriters, staking mechanisms and reserve pools. While the enforcement of obligations is transferred to a secondary debt market on which lost accounts are auctioned off to the highest bidder, without the protocol and its DAO ever having to directly interface with court systems.
While the mechanics of endogenous stablecoins are fascinating, what’s much more interesting is the fact that they have already allowed us to issue more than one million USD worth of interest-free credit, which our users have used to payroll employees, buy food and access health services. Note that no one has physically lent these businesses $1M, this interest free debt endogenously arose from network activity and value created, just like notched tally sticks did.
And the best part is that you don’t need to trust our network, underwriters and risk management schemes. The ReSource protocol can be used by anyone to create their own endogenous stablecoin, serving their own circular economies.