The last five years have transformed conventional and alternative economics.
During this time period, the Federal Reserve Bank has created more US dollars than it had in its entire history before 2008 – and it’s still creating around $85 billion/month through its “quantitative easing” program. Many economists, especially those from the Austrian school, are anticipating some type of currency crisis in the not too distant future.
Meanwhile, in less than five years, the value of a unit of Bitcoin has gone from $.01 to over $1000 (at the time of this writing), with a market capitalization of over $15 billion dollars. Thousands of businesses have been created to service the Bitcoin economy and three more robust cryptocurrencies have emerged, ensuring that the concept of cryptocurrency will live on no matter what happens to Bitcoin.
To understand the emerging field of cryptocurrency-based economics, we need to look beyond Bitcoin and towards the ecosystem of solutions that will make new/alternative economics a lived experience. Before we can do that, we need to define some terms.
First, let’s define money. It has has three functions.
It’s a means of exchange – so you can use it to trade with people. Ex. I give you a dollar, you give me a cup of coffee.
It’s a store of value – so the unit can hold value over time. Ex. A dollar won’t “go bad” like a bushel of wheat.
It’s a unit of account – so you can use units of money to request payment, document your income and expenses, and plan for big purchases, retirement, etc.
Fiat is a Latin word that means “let it be done”. I’ll let Wikipedia define fiat money for me:
any money declared by a government to be legal tender.
state-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.
money without intrinsic value.
Another way to describe fiat money is that its value is derived from the capacity of a government to force people to use it.
The US Dollar, Euro and all major national currencies all qualify as fiat.
Dollar bills have a variety of “security features” that make them difficult to counterfeit: the intricate designs, the quality of the cloth/paper on which they’re printed, special threading, plastic inserts, holograms, serial numbers, and more.
Digital currencies also need security features so they can’t be counterfeited. To create these features, software developers use the practice of cryptography. Cryptography allows people to turn a message into a nonsensical string of symbols, numbers and letters that can only be “deciphered” with a “key”. People who have the key can see the message, while people who don’t, can’t. Cryptocurrencies use a network of computers to authenticate units of digital currency during transaction. These networks operate similarly to how the popular peer-to-peer file sharing system BitTorrent works: a user downloads and runs a client on their computer which holds their files (or bitcoins) and lets the user send, receive and authenticate them.
Games are a form of structured play. The structure is made up of rules and rewards. In many games, the reward is explained as a “victory condition”: the set of things that need to take place for someone to win the game. Games without victory conditions often have reward systems that become much more intricate. While there are many possible reward systems in games, the two I’m focusing on are points and badges.
Points are tokens that players earn by engaging in certain activities. The accumulation of points is proof of a player’s progress in the game. Sometimes games allow players to spend their points on items in the game (ex. new costume for an avatar), trade their points with other players or cash out their points so they can spend them in the real world. When games allow players to do these things, point systems become a form of money.
Badges are issued to players to indicate achievement and status. They often accompany another type of reward, such as access to additional levels or components of a game. Unlike points, they can’t be spent or traded among players, but they can be used within games and outside of them to signal reputation. Everything from diplomas to credit ratings can be displayed as badges.
POS is an acronym that stands for “point of sale”. 50 years ago, cash registers were the main type of POS systems. 30 years ago, credit card terminals connected through telephone lines to banking servers were added to many POS systems so that people could use credit cards in stores. 10 years ago, many POS systems added custom computer operating systems so they could provide more features to their users such as managing inventory and dynamic pricing. Now, people are using consumer-grade smart phones, tablets and laptops with (often free) POS applications as POS systems. Since merchants are now using consumer hardware and software, they have an unprecedented amount of control over the systems they use to transact — and software developers can make POS solutions just as easily as they can make any other type of application. This means that, from a technical perspective, many stores are just an application download away from accepting gaming rewards and/or cryptocurrencies for their products and services. Indeed, there are already a number of commercial loyalty programs that merchants are using with their POS systems to sell their items for points or give people with special status (i.e. badges) specific discounts and deals.
Predictions and Implications
As the old currency system breaks down, the question many people are asking is: what will take its place?
The answer is, in my opinion, an unimaginable diversity of things that will no longer be limited to solutions based in national fiat currencies.
Here’s a list of predictions I’ll continue to explore going forward:
The proliferation of cryptocurrency like Bitcoin and Litecoin. Some will be reputable and stable; others will be scams. Over time, the market will separate the wheat from the chaff.
The integration of cryptocurrency technologies into gaming platforms so that games can provide people with rewards they can spend in the real world.
The development of “productivity games” whereby people work or volunteer to earn “game” credits or point that they can use in the real world.
The incorporation of cryptocurrencies and gaming reward mechanisms into modern POS systems, making it as easy to spend alternative currencies as it is to use a credit card.
- As it becomes increasingly easy for people to use the rewards they earn for day-to-day transactions, the lines will blur between conventional currencies and reward currencies; and conventional jobs and rewarded game play.
My Next Steps
I believe that these developments will democratize finance by enabling anyone to turn their assets and resources into “reserves” that they can use to “back” their own currencies.
Nonprofits can benefit greatly from this type of activity. Here’s how:
- A group creates a list of tasks they’d like their constituents to complete
- Each task is descibed and assigned a point value
- People complete tasks, send in proof and receive points that they can spend in the group’s online store
- The group can modulate demand for it’s points by modifying the contents and prices in their online store.
In a subsequent post, I’ll explain how to turn this theory into reality using WordPress, the world’s most popular free/libre/open-source content management system.