The Value of the Blockchain: The Medium is the Message
If you’ve ever really thought about what money actually is, you’ll realise there are major shortcomings with our current system – and also significant challenges to bitcoin adoption. The two systems are now taking their first tentative steps towards one another, with the intention of mutually benefiting from the strengths of each whilst avoiding some of the worst problems.
Marshall McLuhan is famous for coining the term ‘The medium is the message’. What he means by this is that the delivery mechanism for content is absolutely critical for the way that content is received and interpreted – in fact, he suggests it is more important than the content itself.
Consider, for example, instances of social media that shape your communication with different sets of rules – 140 characters, an emphasis on images, videos of maximum 6 second length, and so on, or the way that your feeds are uniquely tailored to your history of previous engagement. McLuhan writes the following:
‘For the “content” of a medium is like the juicy piece of meat carried by the burglar to distract the watchdog of the mind…’
The values embodied in the delivery mechanism are certainly powerful. They fly under the radar. We seldom question the ways in which our use of smartphones and social media impact us, for example, as we consume content on them – the values they communicate and the effect they have on our lives and relationships. Whether these are positive or negative is not the primary issue. The point is that they are communicated by stealth in the course of delivering the content we wish to consume.
What is true of communications technology is also true of money. Money is a number of things. It is a unit of account, a medium of exchange and a store of value. Historically it has been all of these things to greater or lesser extent, but there is broad agreement about the purpose of money. But what we rarely contemplate is the delivery mechanism used to create and curate money. And this is critical, because they means by which we transfer Value embodies certain values, just as a social media post or a TV show or a newspaper will inherently embody certain values.
Blockchain vs fiat
Blockchain is a suite of technologies. It could be used (and there are organisations who are seeking to use it) as a means to turbocharge our existing fiat system. However, there are certain properties and therefore values built into the nature of blockchain as it was originally conceived that set it distinctly apart from money as we know it.
One of the most obvious of these to the outside observer is the peer-to-peer nature of the blockchain. Users send money directly to each other. (More accurately, balances in the shared ledger are updated without a central authority being required to do so; blockchain solves the trust problem inherent in typical online financial transactions.) This makes it radically different from regular online transfers.
It’s important to recognise both the pros and the cons of this. There is no middleman, no trusted party through which all transactions occur. That means transactions cannot be blocked or cancelled unilaterally, but equally it means they cannot be reversed if this is desirable, either. If a hacker manages to gain access to an address, they can empty it and there is no technical way to recover funds (recourse instead being taken through law enforcement routes).
What this means is that there is no intervention in an open blockchain system: individuals really do own their own money and are free to do with it what they want (including create and transfer their own forms of value). Naturally, this greater freedom comes with greater individual responsibility. If users are careless with their personal information, they may find themselves the victims of hacking and fraud. One of the major challenges for bitcoin and blockchain businesses over the coming year is to square this circle: to maintain the freedom that blockchain-based currencies bring, but to offer sufficient protections to customers that they require to feel safe using them. These may include insurance and appropriate regulation, but also better user interfaces and key storage. Realistically, unless customers know their funds are 100% safe, few will use a new system.
Money and debt
Almost everything of note about the blockchain derives from the peer-to-peer nature of transactions, and the issue of irreversible transactions is arguably the most noteworthy to newcomers. However, there’s another issue that sets blockchain-based money apart from its fiat cousin, and that has enormous significance for the values embedded within the two systems.
Our money is based on debt. Although a small proportion of the money supply (around 2-3%) consists of physical currency – coins and notes – the vast majority exists as electronic balances in bank accounts.
Contrary to popular belief, banks do not lend out the deposits they hold from customers. They do not even engage in fractional reserve practices any more, whereby they lend out more money than they actually hold. Instead, money is lent into existence: whenever a bank makes a loan such as a mortgage, it creates that money. This means that almost all money requires a corresponding amount of debt to exist.
The implications of this are quite staggering. Debt-based money requires the payment of interest, meaning that there is a flow of wealth away from the end users of money to those who create it. When politicians and economists talk about growth, that is predicated on increased debt. Inflation is built into the system and becomes a matter of public policy, because inflating public debt away is better than paying it off. And a highly-leveraged system cannot cope with deflation, because with rising prices comes increased default and catastrophic problems for the banking sector.
Blockchain money, by contrast, can be characterised as ‘positive money’, that is, money not based on debt. The original forms of money – gold and silver, cattle and grain – were positive money, because they actually existed and were not cancelled out by their mathematical opposite. This is money that we really own, because its existence is not nullified by an equivalent negative balance elsewhere. That also means we don’t pay for it through interest. Once it’s ours, it’s ours. Similarly, the known and fixed supply means that unpredictable or unwanted inflation doesn’t erode its value.
And so this is the message that comes through the medium of fiat money: your money is not truly your own, you have to pay for it, and it will not and probably cannot hold its value. You are merely allowed to use it by those who create it under certain conditions.
The message that is delivered by the medium of blockchain is that you not only own your money but have full responsibility for it. There is no intermediary to protect you, but equally there is none to inflate the value of your savings away.
Neither of these alternatives is palatable for the vast majority of consumers in its purest form. The protest votes of recent weeks and months in referenda and presidential elections demonstrate the level of resentment and dissatisfaction around the political-economic status quo. Conversely, blockchain adoption has been hampered by the risks of entrusting the security of your money solely to yourself. 2017 will be the year in which these two value systems, diametrically opposed to one another, start to take a series of meaningful steps towards one another in the interests of achieving attractive and workable compromises. Neither is going anywhere, but both needs the other to work better.