P2P Currency

If there is one over-arching trend in the information age, it is towards p2p architecture. P2P is more efficient since resources are not needed to maintain access hubs (think Skype, Limewire, etc). The evolution towards p2p is a continuation of what happened to scribes when the printing press was invented. Before books could be produced on a large scale, it made sense to have a class of people who devoted themselves to literacy. However, when the printing press came on the scene, universal literacy was enabled. This transition was slow by today’s standards, but it was very real. See Clay Shirky’s book “Here Comes Everybody” for a great description of this evolution.

While I am sure this is not news to most of you, its relation to the issuance of money bears some careful thought. The evolution that happened in reading and writing during the Renaissance is about to happen with how we issue currency. Almost all currency designs to date (dollars included) depend on either a scarce commodity (such as gold or paper notes) or a centralized authority to issue and/or track the currency (barter clubs, time-banks, etc).

The IRS classifies the latter as “Third-Party Record Keepers” and provides users with 1099B forms to make sure they stay above board. Fundamentally, p2p architecture in currency design will mean the obsolescence of third-party record keepers. Information about account balances will not need to be held and tracked in a central location, and participation in such systems (and the creation of new ones) will no longer be dependent on any form of central authority. But how is this even possible? Let’s take a deeper look at what the historic role of banks has been.

Banks have performed two main services since their inception. The first was to be a safe place to store gold, silver, or other commodity money. Since money no longer has any relation to precious metals (thankfully), and is issued entirely as credit, this function is no longer needed. The second service banks provided was and is far more significant. Banks have the authority to determine whose IOUs are meaningful and whose aren’t. Put another way, banks are the arbiters of trust in our society. Given the current state of affairs, one thing is clear: banks have failed miserably at this job. The reason is quite simple. They had a conflict of interest between being the arbiters of trust and making a profit. But who should be the arbiter of trust in a given community?

The answer is that, given how much information technology has evolved recently, the members of a community can be their own arbiters. Since the advent of Ebay it has been clear that online communities are capable of policing themselves. In Ebay’s case, the concern was whether sellers (or buyers) could be trusted to make good on their various promises. Instead of implementing a complicated and costly authoritarian scheme, Ebay let the users police themselves through reputation. Being a trustworthy member of the Ebay community provides users with more value than cheating the system. This simple process has proved the ability of online communities to police themselves according to their own unique criteria. What enables a seller to trust a never-before-met buyer is what will soon make possible the issuance of money on a p2p basis.

At heart, money is a promise (or IOU) to provide goods or services at some point in the future. Determining who will actually make good on their promises has heretofore been the primary function of banks. However, the advent of reputations systems like Ebay’s opens the very real possibility that people can determine for themselves who is trustworthy. So how does P2P currency differ from currency as it has been implemented thus far?

Money thus far has been a promise VOUCHED for by an authoritative body (such as a barter-club or bank). The central shift is that money will become a promise VOUCHED for by the community of users. The specifics of how this process plays out will be different for every community. The users of a given money will determine the basis for a reputable promise themselves. As this architecture becomes more commonly adopted, millions of currencies will take root worldwide. Issuers will be able to use real-life relationships in their communities as the basis for currency issuance. So will this be more reliable and cost effective than the current model?

The unqualified answer is YES! Who is better qualified to vouch for potential currency issuers than those who conduct business with them? Think how different this is from today’s model. People will be able to consensually participate in currencies rather than being held hostage by an authoritative them. P2P architecture will at long last bring democracy to the domain of money.