Virtual Currency – the big deal

As in previous posts, let’s begin this post letting you know what this post is about. We wanted to write something that some people can use when talking or discussing with non-industry individuals. Or when drinking in a bar, and that relatively cute person asks you what you do, and then makes the mistake of asking a follow up question. Virtual Currencies are a big deal, but it has yet to sink in for the majority of people and governments.

Money has had numerous forms and purposes for a very long time. However, for the majority of time it was something tangible. Although its tangibleness fades with each passing day, the concept of money being tangible still lingers in people’s minds. Before delving into that, it’s necessary to very briefly explain what money is, and this is necessary (for the purposes of this post), because money is something that everyone knows what it is, but can’t really fully explain the concept. Before money, people traded things. Since human beings are social animals, to evolve and always surpass expectations, human beings have divided labor among themselves, so that they don’t have to learn to do everything.

Thus, everyone did something the other didn’t, and exchanged those things with each other (i.e. crops in exchange for meat). It all comes down to time, because people’s lives are not infinite, and the world spins on its axis every 24 hours, people divide labor, because they don’t have the time to do everything themselves. So, money as a concept is the social quantification of time contributed to work. Back when fiat money didn’t exist, people used the most widely used goods as currency, such as grain or cattle. But people are smart, they agreed that some metals such as silver or gold are equivalent of a certain amount of grain or cattle. It’s much easier to transport coins than cows, right? This way, with endorsement from formed governments, the form of money we know, understand and love (?) today was formed. So money, becomes the quantification of time in a government backed currency, readily exchangeable for goods. Back to tangibleness, some of it was lost when governments decided not to peg their currency to gold. More was lost when banks enabled “electronic” transfers. But we still love that cold hard cash! We still get metaphorically wet when we see stacks of it. Probably not as much as when we see numbers on a screen.

The thing about government backed currency is that, its worth relative to other government backed currencies rests on the whims of that which we love and hate: the government. But if the government doesn’t back the currency, who will? Who ensures that $5 gets you one cup of a milk syrup cocktail claiming to be coffee from Starbucks? We ourselves signed up for this system of government and economy when we came into this world as offspring of generations that didn’t have computers. Really hopping the sarcasm in that previous sentence gets picked up. The problem is that, if the government doesn’t give us such assurances, who will? We collectively vote every few years and are complicit in forming governments that are meant to represent us and our wishes. This whole process implies trust. When it comes to currency, we trust the government to maintain a value of it, relative to available goods. If the government isn’t there for us to trust, who would we have to trust? Each other? That’s another issue that will be dealt with in the next blog post. As far as virtual currency is concerned, the idea is to have a currency that is independent of government, is universally accepted, and its value is directly dependent on the users. That’s the big deal. Almost everyone nowadays has technology with themselves. Either at home, or in their pocket. We should be able to transfer value just as easy as information. Virtual currency is the step in that direction.

Why haven’t we done this already? Well, the concept of virtual currencies is totally new. The concept of 'currency' has been the same for thousands of years. And it has had some tangible form ever since. This virtual currency is not tangible, and its value can be not backed by any government or entity. The value is dependent on the market. The users say how much it’s worth. It’s like having a more direct form of democracy, in terms of economics. With virtual currencies users can directly decide on how much their time is worth relative to someone else’s time. People have to get used to this kind of concept. Infrastructure has to be built around it as well, in terms of technology and safety. Meaning, we all have wallets in our pockets, and cash registers in our shops, and we all have locks on our doors. That same kind of thinking needs to start applying to virtual currencies as well. Our wallets can easily be stolen by motivated thieves, and our locks can easily be picked (depending on the lock) by anyone with some “training”. Similarly, our virtual currency money can be stolen in various transactions, and our virtual wallet passwords can be “hacked” by motivated individuals (depending on the password strength).

Currently we’re at a stage where we think that the physical is much safer and more practical that the virtual. Of course we do, we have thousands of years of experience with the physical, and only a few decades with the virtual. That’s beginning to change. Being able to make payments from your phone has made people more comfortable with technology. It’s only a matter of time when virtual currency will become mainstream. Or on the other hand, governments will take note and they will convert their currency operations into virtual reality, with the illusion that they can still control value. If by this point your cute inquisitive companion is still interested, you can start talking about inter-ledger operability and the Hyperledger project.