Money and Reputation at Scale

We’ve been told that thousands of years ago, before the invention of “money”, societies used complex systems of bartering in order to exchange value. We learned that as these systems scaled, bartering lost favor with a more portable medium of exchange, eventually paving the way to our modern world of finance.

But just like most everything else in our high school textbooks, the idea that bartering was a prominent form of value transfer before the “invention” of money is barely the full story. Old, budding societies of yesteryear used a far simpler and more robust mechanism of value, one that we still use today.

This value mechanism was favors backed by reputation.

Have you ever successfully gotten your girlfriend to do the dishes by offering to pay her? Probably not. The mere suggestion of it is highly insulting and could quickly make you single. When a group is small enough, money is completely useless.

In other terms, you could be the richest man in the world, but if you’re stuck on an island with 20 other people, your money has zero influence. Your value to the rest of the group comes down to your character and reputation. If you want someone to do something for you you won’t be able to cut a check, you’ll have to offer to do something in return.

At a small scale, favors backed by reputation are the single most robust system for value transfer known to mankind.

You can think of your reputation as equity within your society. The more positive your reputation is, the bigger your equity. Similarly, think of favors as loans. Each favor you receive is a loan against your reputation (equity). Just like in the modern sense, if you pay back your loan (favor) you increase your line of credit (reputation) for future loans.

A good reputation will get you favors at a “much cheaper rate”. Folks know you’ll pay them back — and ultimately, most people want to be around good, honest people, and they’ll “pay a premium” to do so.

In a small group, favors backed by reputation are the de facto medium of exchange. Reputation itself is a strong store of value. It requires a significant amount of work and takes a long time to build.

A good reputation is impossible to fake. It’s the best and most unforgeable store of value we know.

But there’s a problem. This reputation system can’t scale. As a society grows, the number of connections among the community increases exponentially. It’s possible to keep track of the reputations among each person in a small group of 50 people; it’s absolutely impossible to keep track of the reputations of each person in a larger group of 10,000 people — or 1 million people.

The President of United States will never be able to get to know each of his/her 400 million+ citizens on a personal basis.

In order for our societies to scale, we needed to turn our favors into a neutral token that could be moved between members of our society. This became the basis for what we understand as money. It was not one guy’s invention, it was a bottom up solution to the issues of scaling a growing society.

Today, money is the favor we collect from others and it’s the favor we give to get others to do something for us. Our savings account is our reputation.

Traditionally, the best way to scale a reputation system has been with sound money, or money that, like a reputation, is difficult to forge or fake. In order to keep a society honest you cannot give someone the power to alter the value of a favor.

If the money can be forged, you create a system whereby the money forger can get favors from others without ever having to give a favor in return. This is the definition of slavery; where you get your girlfriend to do the dishes but never return the favor yourself. The favor she gives you is far more valuable than the one you give her.

Over time this breeds resentment and, eventually, anarchy.

At a small scale, favor forgery is very easy to catch. If you have a friend who accepts favors but never offers any favors in return his reputation is quickly downgraded, and he is eventually removed from the friend group. At a larger scale, however, this forgery becomes a lot more difficult to follow.

Think about inflation. In our current world, inflation is a form of favor forgery. We know it exists, and can see it in hindsight, but it’s impossible to witness it in real time.

Inflation erodes the value of our reputation (savings account) despite us never doing anything to negatively impact our reputation.

For thousands of years, the best way to prevent inflation and favor forgery was to implement a gold standard. Gold is both difficult to fake and easily portable over small distances. It was the perfect unit of money.

But when our communication systems moved into a new global paradigm with the emergence of the digital dimension it created a massive problem for gold. Defined by the introduction of the telegraph, phonograph, telephone, and other digital technologies, the digital dimension created a reality in which favor could be transferred 1,000x quicker than gold could move.

In essence, our ability to transfer favors to one another outpaced our ability to transfer our abstraction of those favors (gold money). Just like a small group’s reputation system doesn’t scale as it grows, gold failed to scale in the new digital dimension.

As a result, our system was forced to adopt paper currency — and eventually a digital fiat. We gave a small number of actors total control over the reputation system so that we could transfer our favors at a pace that kept up with our digital communication channels.

This fundamental shift in communications is what allowed gold to be co-opted and captured. Gold’s decentralized ownership quickly centralized into the hands of a few very powerful institutions. It was broken.

Today, in order for our global society to scale into the digital dimension, we need a new token of value. Its adoption must follow the bottom up process that reputation systems and money has always followed, and it must also be able to compete in our lightning fast digital environment.

That solution is bitcoin. A digital token for our digital world.

Bitcoin is nearly impossible to forge. The blockchain accounts for each token on the network while, simultaneously, the output of electricity proves that an enormous amount of work went into the creation of each token. And unlike gold, bitcoin is able to keep up with the rapid transfer of favors within our digital ecosystem.

Today’s fiat system is a failed attempt to solve the issues of scaling reputation following the collapse of gold. Because forgery is possible within the fiat ecosystem, every individual’s reputation (savings) is constantly under attack. Favor forgery incentivizes each individual to put an inordinate amount of focus on preserving their reputation, and this leads to the financialization of every asset and industry on the planet.

If you can’t safely save, you are forced to invest your savings into anything whose return will outpace the rate of inflation. That’s how you get the financialization of the art market, trading cards, wine, real estate, and more.

In a society running on a broken reputation system, trust among the individuals is eroded away until no trust exists. The favor backed reputation system breaks down, and society collapses.

This is evident in today’s reality. Trust in our institutions is at an all time low, and overburdened nation states across the globe are collapsing and turning inward. In a broken reputation system, favor is spent on a financial return that moves the individual forward at any cost to society.

Alternatively, under a sound reputation regime “investment” is not totally focused on a financial return. A sound monetary system doesn’t have to compete with every other asset class for the preservation of reputation, and therefore favor is able to be spent towards a cultural return that helps elevate society.

At a deeper level, by messing with our reputation system you sacrifice culture. Today, cultural phenomena like “collecting”, “art”, and even “recreation” (see “networking”) have become financial acts, not one of general cultural intrigue.

This is the difference between a wealthy developer building a $50 million strip mall on the outskirts of town, subsidized by the government, that’s meant to earn a return that outpaces its 30 year depreciation in value

vs

The building of a cultural monument like the Statue of Liberty that’s meant to inspire a culture to strive for the most lofty of goals.

When was the last time America built a cultural monument?

Is Game of Thrones the closest we can get today?

Sound money de-financializes the world. In such a regime, individuals with large amounts of reputation spend their favors on cultural projects that will outlive them. Compare that to today, where inflation makes everyone terrified that they must either tread water or die. In such an environment, long-term thinking is a pipe dream.

In one system, you have a perpetual financial war that destroys the bonds between neighbors and erodes society’s reputation. In the other, you have a system that encourages growth and sustainable thinking, and which brings neighbors together and helps society to ascend to new heights.

Money is a technology that helps societies scale. It is necessary for the maintenance of our reputation systems. Reputation is the hardest form of money known to mankind. Bitcoin is simply the abstraction of this reputation built for a brave new digital era.

Alas, you’ll never hear about this in our fiat-subsidized textbooks. You’ll have to study it on your own and hold yourself to a higher standard.