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TLDR below. This is not financial advice.
You've probably heard enough about the whole argument of "money used to be gold". In this episode, we will uncover the fundamentals of how money accrues value from 2 perspectives — metallism and chartalism.
There are plenty of research and papers talking about the justification of value. From Bretton Woods to equation of exchange explanations, this episode will take a more fundamental view of money. After all, economics design is about understanding the basic fundamentals of an economy so we can build upon them.
1. Metalism vs Chartalism
1 penny is worth 1 cent on its face value. But if you melt that penny into its copper and nickel material, it is worth 1.5 cents in 2016. That difference in value of the penny is the difference between metalism and chartalism.
Metallist money is where the thing has value in its own rights. That is the value of copper in that coin, 1.5 cents.
Chartalist money is where the thing represents value. That is the face value of the penny, 1 cent.
In metalist money, money only serves the function of a medium of exchange. Chartalist money has 2 other functions, unit of account and means of payment. Chartalist money has a balance sheet function. Why? Money (asset) is generated from debts (liabilities).
Why is this important?
Different monetary policy approaches to the different money
How these 2 money both exists in our international economy today (IMF's special drawing rights VS sovereign currencies)
Money being an independent vs dependent thing
2. 3-Steps to Legitimising Money
What is legitmise money? That is when money has a stamp by the central bank as legal tender.
Here, we are not asking the what. We are asking the HOW. How to legitimise money.
Step 1: social debt obligations via taxes
Step 2: social and legal contracts
Step 3: credit system
Even when we have legitimate money, there is still a hierarchy of money. This is important when it comes to international trade.
3. Application to Bitcoin
Bitcoin moved from metallist money (pre-2016 period) to chartalist money (especially post-mining). Following the 3-step process, we also observe a boom in credit infrastructure compared to 2009.
Notable credit infrastructure (step 3) in the Bitcoin ecosystem:
wBTC and pTokens that are ERC-20 tokens, used in the ethereum defi platforms
Atomic loans to lock Bitcoin in an escrow and borrow DAI and USDC
Ren provides access to intern-blockchain liquidity in Dapps
Various other fiat on-ramp to allow for btc as payment like Carbon Fiber and Moonpay
Lightning network to enable instant payment
What Does this Mean
The future of money could go in at least 3 ways:
Public Money by Central Bank (Government)
Private Money by Companies (Facebook)
Private Money by Machine (Bitcoin’s code)
These systems can all coexist at the same time. It is perhaps high time for us to think of a new monetary world order. E.g. money based on geography (money #1), money based on corporate power (money #2), money based on ideologies (money #3).
What else you've missed in the podcast
Recap on the evolution of money from agrarian state to digital states
Money as credit and its significance on the balance sheet
Explanation of metalist money and monetary policy
Explanation of chartalist money and monetary policy
Analogy and real world example of how metalist and chartalist money co-exists
Elaboration of the 3-step process with USD
Elaboration of the 3-step process with BTC
Hierarchy of money
BTC value explanation using metalist vs chartalist money
Money accrues value either from the material used to make it (e.g. weight and price of gold coin) or by the power of the state (e.g. central bank). They differ in monetary policy. To legitimise money using the power of the state, there is a 3-step process. Bitcoin is on its path to becoming a powerful money with the 3-step process.
If you are keen to learn more, we are currently having a discount for the Token Economics Blueprint course! It's a 10 lesson session and you can choose which section you are interested in. Total lesson time: 15 hours.