disrupted the Financial System a. Overview of Internet b. Overview of friction in financial system from small to big Ú Takeaway: The transfer of value is not “digitally native”….why not? 2. Money & Government a. What is Money? b. Why Gold became history’s most popular money (~700 BC to Present Day) c. Why we developed a Gold Standard (~19th & 20th Centuries) d. Why we developed Fiat Currencies (~1970 to Present Day) Ú Takeaway: Properties of Gold that made it the best money & why it ultimately failed 3. Bitcoin’s Value Proposition a. Overview of Bitcoin Ú Takeaway: Properties of Gold + Digitally Native = Digital Gold B. How Bitcoin Works (Technology) C. A Peek into the rest of the Crypto Universe A 1 2 3 B C Free market Government controlled
humans Hunter Gatherers ~100,000 yrs. ago Early Civilization Agr. Rev. ~10,000 BC q Humans settle and specialize q The number of goods and services increases q Barter system allows for trade of goods & services Ø Non-scalable Civilization Scales q Need a transferable reference for value to allow for scalable trade q Various items emerge in different communities as a reference for value q Value is exchanged through small-scale barter Early Forms of Money Cattle Properties: Ø Utility value (food) Ø Mass adoption Ø Some cost to acquire Ø Discrete units ~9,000 – 6,000 BC Cowrie Shells Properties: Ø Utility value (ornamentation) Ø Mass adoption Ø Some cost to acquire Ø Discrete units (often woven together) Used until 19th/20th cent.
is money. “Money is the bubble that never pops…it just changes forms” – probably not Tim Ferris q People need to trust in a money for it to work q Utility value (often referred to as “Intrinsic value”) only matters as a factor to build trust in a money q What properties are required to build this trust? Store of Wealth Medium of Exchange Unit of Account Practical Trust Properties of Money
monetary asset Ø ~700 BC to Present Day Ø Used by many different civilizations (free market money) Ø Initially had utility value as ornamentation Store of Wealth Medium of Exchange Unit of Account Physical Properties of Gold Malleable – easily divisible into coins, bars, etc. Ø Does not corrode Ø Does not rust Economic Ø Scarce Ø High stock-to-flow ratio See next page
q Flow = new supply created every year Ø Scarcity: how expensive is it to create more of an asset Ø Low scarcity means it is easier to dilute the value of an asset by raising the flow relative to the supply q The ratio of Stock/Flow for an asset indicates how many people are storing it as a long-term store of value SF > 1 indicates monetary value (people are holding it instead of consuming it) SF ~ 1 indicates utility value only Source: Plan B https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25
exchange & unit of account (Currency) q Trust Properties q Store of Wealth Ø People need to know that an asset will hold its long-term value in order to trust it as a money Ø An important aspect of this is a limited supply of the asset Ø Economic definition: An asset has limited supply if it is expensive to produce → Bitcoin’s proof-of-work algorithm: it is computationally difficult (expensive) to produce Bitcoins 1 2
Store of Wealth Medium of Exchange High Medium Low Poor Very Good Very Good (Theoretically) Works well, but not up to date technologically Poor Very Good for large transactions Ø Bitcoin’s key strength as an MoE1) is its ability to transfer large amounts of value efficiently Ø Future innovations (such as the Lightning Network) may make small transactions more scalable Ø One vision for the future is that Bitcoin acts as a bottom settlement layer for large institutions, governments etc. (i.e. a “Bitcoin Standard”) and smaller transactions are layered onto this protocol 1) Medium of Exchange Bitcoin is the world’s first fully decentralized money that functions as a store of wealth and a medium of exchange for any amount of value at the speed of the internet