Ryan
Walker is an independent consultant and cryptocurrency enthusiast based
out of Denver, Colorado. Here, he joins the dots between Darwin’s
theory of evolution, fiat money and the rise of cryptocurrencies.
Charles Darwin first published his theory of natural selection in his book
On the Origin of Species
in 1859. The result of over 30 years of research, Darwin delivered to
the world a new understanding of how modern species came to be, evolving
over generations.
The son of a wealthy English family, Darwin was not a man in need of money. Nonetheless, for
On the Origin of Species and his other publications, Darwin received royalties that were most likely paid in British Sterling.
Still
in existence, the British Pound has origins dating back as far as 750
A.D. making it the world’s longest-surviving active currency. At the
time, I wonder if Darwin recognized that the very currency by which he
was being compensated would one day be subject to his very theory of
natural selection?
It is a realization that would become far more evident 150 years later with the advent of
block chain technology.
For
the fortunate minority throughout history, as with Darwin, a given
currency is not subject to question. It serves as the accepted means of
exchange and is recognized as such from the time one is old enough to
understand value.
In this way, currencies are not understood as
subject to the laws of natural selection. For the less fortunate
majority throughout history, and likely for more fortunate generations
to come, this may not be the case.
Natural Selection
Natural
Selection can be defined as the process by which specific traits become
more or less common in a population over time and it serves as the
foundation for the theory of evolution. It is the result of the relative
success or failure of these traits competing in a given environment.
Put
more simply, it embodies the concept of “survival of the fittest”.
Darwin famously defended his theory by describing the various species of
finches observed on the Galapagos Islands.
He
noted 13 separate species of finch within the ecosystem, each with its
own unique food supply. The key differentiating trait between each
species was the unique structure and size of beak. Darwin argued that
each specie of finch had evolved as the result of varied food supply,
where each beak was the best suited to each specific food source
available within their environment.
The law of natural selection
is most often observed in nature but can also be applied outside of this
realm. Corporations are forced to continuously compete and evolve to
remain relevant and profitable. Those corporations with the necessary
traits such as the ability to innovate, adapt and comply with
regulations succeed, while many more go extinct.
Whatever the
environment may be, specific traits prove advantageous while others do
not. It is in understanding which traits provide advantage and which do
not that once can better understand how the fittest survived, and
furthermore predict who the fittest will be in the future.
The Traditional Traits of Money
Before
we can understand how natural selection applies to currencies, we must
first define the traditional traits that have been used to characterize
them. For the purposes of keeping in line with the language of Darwin,
we will refer to what is traditionally stated as a
property of money as a
trait.
Table 1.0 displays
the commonly accepted traits that characterize money as well as an
estimated rating as to the ability of each specific medium, in this case
gold and fiat currencies, to fulfil these traits within the modern
environment on a scale of High, Medium, and Low.
While the ratings of these traits are subject to debate, the table below provides a relatively accurate representation.
Gold
has long served as an established means of exchange as well as a
commodity. Gold coins were adopted by King Croesus around 550 BC. King
Croesus was no fool. He selected gold as it fulfilled many of the
necessary traits to act as money.
Relative to the era, it was
highly fungible, non-consumable, durable and scarce. These traits were
strong enough to become a leading form of money simply because there was
nothing else around that fulfilled these requirements as well.
But
why did the king not select stones or feathers? The answer is that
these forms failed to be fungible, highly divisible, secure, and scarce.
The fact that
gold
has remained a valued commodity for thousands of years speaks to the
importance of these specific traits. In fact, the combination of traits
possessed by gold and other precious metals eventually provided the
foundation for the next evolution in money, fiat currency.
In
money’s next evolution of specie, fiat currency fulfilled several
critical traits to an even greater degree than gold. Paper was more
portable and could be more easily transacted. That is not to say it was
entirely superior. In many cases fiat currencies lacked durability, and
as we will see, would eventually become less and less scarce. In fact,
many fiat currencies have failed due to inflation; a inevitable result
of the inability of the currency to remain scarce.
As
a specie of currency, fiat currencies were not perfect but nonetheless
flourished in the last millennia. But how can this be? Are the benefits
of better fungibility and transportability really that significant as to
reign as the dominant specie of currency for so long?
In reality,
much of the credit for their rise, survival and success is due to the
existence of another less recognized trait. The trait of centralized
sovereignty lead to the creation and issuance of hundreds of new forms
of money.
Table 2.0 displays the degree to which gold and fiat
currencies fulfill the traditionally recognized traits of money in
addition to the newly recognized trait of sovereignty.
As of May 2014, there were 193 recognized fiat currencies in circulation regularly competing in global markets.
Each
of these currencies belong to the same specie, fiat. It is important to
recognize that dollars, euros and yen were not mined or extracted from
the environment. These are man-made; designed and issued by centralized
authorities.
For centuries, the specie of fiat currency has
thrived as a result of this fact and that these forms of money could be
used to pay taxes. In the course of its existence fiat currency has
evolved from a hybrid, by which the currency has been backed by a valued
commodity such as gold, to a self-standing form of money with no
physical backing.
During this period of time, the most notable
trait to have changed for the world’s most widely recognized fiat
standard, the US dollar, has been scarcity. Once backed by gold, the
dollar was severed from the commodity in 1971 and as a result its
scarcity is no longer a trait that the specie of fiat currency fulfills.
In
fact, to the surprise of many, there no longer remains a single fiat
currency in existence that is backed by gold. This evolution, or what
could possibly be regarded as de-evolution, of fiat currency as a specie
may have significant implications on its ability to compete and survive
in an environment with dynamically changing conditions.
Cryptocurrency and the New Traits of Money
The invention of the block chain has given rise to a new specie of currency, that of cryptocurrency.
The
arrival of cryptographic-based currencies has enabled key new traits
previously not possible with traditional forms of money. Furthermore,
the realization of such traits will likely have a dramatic impact on the
environment in which these currencies compete.
Table 3.0
now includes the specie of cryptocurrency when rated against the
traditional and newly realized traits of money. The two newly-realized
traits include the following:
- Decentralized:
Defined as the delegation of power from a central authority to regional
and local authorities. With regards to block chain-based
cryptocurrencies decentralization implies a trust-less and distributed
network. This trait is a dramatically new innovation as a direct result
of the invention of the blockchain and was impossible with any other
prior form of money.
- Smart (Programmable): The
trait of smart currency indicates the capability to fulfill a growing
array of functions still yet to be determined. Existing innovations in
the cryptocurrency space foreshadow the potential that currencies could
be designed as such to not only act as currencies but represent other
forms of value as well.
Survival and Extinction
Extinction
can most simply be described as the failure of a specie to compete in
an environment to such at a degree that it eventually ceases to exist.
The inability to compete itself may be the result of two primary causes;
increased competition from superior species or a dramatic change in
environment.
For the dinosaurs, particularly land-based species,
the traits of size and strength were essential to their rise to
prominence. Although these traits enabled them to thrive for centuries
they did not allow them to compete as a specie forever.
The
advantages they enjoyed at the time also meant that they required large
consistent amounts resources, most particularly food and oxygen. As a
result, at the end of the Cretaceous Period many specie were unable to
survive what is widely believed to have been the arrival of a
earth-shaking comet known as the K-T Event.
Evidence suggests that
a large comet impacted earth and darkened the sky with dust and ash.
The blocking of the sun starved sun-dependent plant life and resulted in
a sharp reduction to the supply of oxygen.
The Journal of
Geophysical Research-Biogeosciences estimates that this event killed off
75% of species. The traits that had once helped dinosaurs flourish now
proved to be the traits that left them susceptible to extinction.
Meanwhile,
studies show that the freshwater organisms of the time only lost 10% of
their species. The commonly accepted explanation is that the freshwater
species were already conditioned to endure annual winter freezes where
their oxygen supplies were diminished.
Their relatively limited
dependence on oxygen insulated them from the effects of changes to their
environment allowing them to survive. Dramatic changes to the
conditions brought on by the K-T Event changed the paradigm and a new
combination of traits became necessary to ensure competitiveness and
survival. Meanwhile, the majority of land-based species disappeared
forever, their greatest strengths having become their greatest
weaknesses.
Currency, like the dinosaurs, has already shown us
that it is not always the immediately dominant specie that will survive
the test of time. In an era that has seen hundreds of highly evolved
fiat currencies go extinct, gold endures.
Charles Darwin’s theory
of natural selection originated to provide an evidence based explanation
of the past. We now leverage this theory to look forward and understand
its implications on the future of currency. Given the ever-changing
conditions of the future, will gold and fiat currencies continue to
compete or go the way of the dinosaur?
The New Paradigm – Currency Competition
According to a study of 775 fiat currencies by
DollarDaze.org
the average life expectancy of a fiat currency is 27 years. The study
also indicated the most common causes of any given currencies extinction
are hyperinflation, monetary reform, war and independence.
With
fiat currencies being so susceptible to failure, gold has long served as
an alternative as it is more scarce and durable. In terms of scarcity,
fiat currencies can be printed and inflated at the will of their
authorities.
With regards to durability, the US Federal Reserve
estimates the longest average lifespan of any paper bill is 15 years
($100 bill) with the shortest lifespan being 3.7 years ($50 bill). As a
result, gold has maintained a relatively high value in the era of fiat
currency and remains the primary alternative store of value when faith
in fiat currencies waiver. In this way, these stores of value have
primarily competed based upon only two of the traits of money; scarcity
and durability.
Fiat currencies and commodities now enter a new
paradigm where money can exist that possesses even more dynamic traits.
Gold and fiat currencies are not capable of possessing the newly
inherent traits that would make them decentralized or smart
(programmable).
Cryptocurrency has arrived adding heightened
competition. To date, bitcoin is the most widely recognized
cryptocurrency, but it is not alone. In the 5 years that
cryptocurrencies have existed over 200 have been established and the
list is growing.
Furthermore, the currencies themselves are in a state of
hyper-evolution
as they continue to take on a varied array of distinctive traits that
set them apart from one another within their own competitive ecosystem.
Equally
as threatening to traditional forms of money, the conditions of the
environment in which currencies compete is in a constant state of
change. Undertones of growing distrust in centralized entities encourage
populations to considered alternatives stores of value.
Sovereignty,
once a trait that was necessary for the survival of a currency, may now
be falling out of favor. Centralized failures such as the US financial
crisis of 2008 or hyper-inflated fiat currencies such as Zimbabwe
dollars or Argentinian pesos compound these sentiments. The most
profound of these conditions is the growing awareness throughout the
world that decentralized trust is possible.
It is interesting to
imagine what Charles Darwin would make of the current state of currency.
History would have us believe that the existence and survival of any
entity, be it plant, animal, corporation, or currency is the subject to
the laws of natural selection.
With this understanding, it is hard
to imagine Darwin contesting the opinion that cryptocurrency will prove
a competitive force against traditional specie of money.
Ultimately,
the real question may not be whether or not Darwin would predict the
survival of cryptocurrency, rather would he be willing exchange those
British Sterling pounds for it?
Finch and
evolution images via Shutterstock
