Thread by @Breedlove22

What is Money? What is Bitcoin? and what the heck is Time? This tweetstorm is breakdown of my recently published essay 'Money, Bitcoin and Time' - full version available here: parallaxdigital.io/blog

Sections covered: Human Exchange, Story of Money and Hard Money

Here we go👇🏽

THE SIMPLE TRUTH ABOUT MONEY: Money is the most successful story ever told by humans. It is a reflexive narrative: meaning it has value only because everyone believes it, and everyone believes it because it has value. Money is a story that continues to be written…

When humans began to exchange with one another, they intuitively discovered the division of labor which allows people to focus on their relative advantages and concentrate on their chosen craft.

Tools, or technologies, are mechanisms that increase productivity by amplifying the returns on human time directed at production. You can chop more wood per man hour using an axe than you can with your bare hands.

As people made and exchanged more tools, time savings increased and specialization deepened. Specialization sparked innovation, because it encouraged the investment of time in tool-making tools, such as whetstones used for making sharper axes.

This enabled people to create superior tools, which increased productivity even further. That saved more time, which people used to specialize and trade even more, which increased the division of labor even further, and so on:

Human exchange is to cultural evolution what sex is to biological evolution. By exchanging and specializing, innovations come into existence and spread. At some point, human intelligence became collective and cumulative in a way that happened to no other animal.

Language, and later writing, allowed us to pass our collective learnings to each successive generation. Written language allowed us to manifest and share our belief systems. Eventually, we began to organize ourselves around stories like math, nations and corporations.

Money is an emergent property of human exchange that solves problems inherent to trade and accelerates the rate of human exchange and the division of labor. Money, as the vital lubricant for human exchange, was among the first stories we used to collectively organize ourselves.

The simplest way for people to exchange value is to trade actual goods, say guns for boats, in a process known as direct exchange or barter. This is only practical in small groups of people where few goods are exchanged.

In larger groups of people, there are more opportunities for individuals to specialize in production and trade with more people, which increases the aggregate wealth for everyone.

Larger groups of people exchanging goods mean larger markets, but also creates a problem of non-coincidence of wants – what you are seeking to acquire by trade is produced by someone who doesn’t want what you have to offer. This problem has three distinct dimensions:

The only way to resolve this three-dimensional problem is through indirect exchange, where you seek to find another person with a good desired by the counterparty and exchange your good for theirs only to, in turn, exchange it for the counterparty’s good to complete the deal.

The intermediary good used to complete the deal is called a medium of exchange - the first function of money. Over time, people gradually converge on a single medium of exchange (or, at most, a few media of exchange).

Money is the most liquid asset within a trade network. In this sense, money is said to have the highest salability, meaning the ease with which it can be sold on the market at any time with the least loss in price.

The relative salability of goods can be assessed in terms of how well they address the three dimensions of the non-coincidence of wants problem:

The third element, salability across time, determines a good’s utility as a store of value – the second function of money. Since the production of each new unit of a monetary good makes every other unit relatively less scarce, it dilutes the value of the existing units.

Hard money is more trustworthy as a store of value precisely because it resists intentional debasements of its value by others and therefore maintains salability across time. The ratio which quantifies the hardness of money is called the stock-to-flow ratio:

For a good to assume a dominant monetary role within an economy, it must exhibit superior hardness with a higher stock-to-flow ratio than competing monetary goods. Particular goods become money based on the interplay of people’s decisions, so let's consider its social aspects.