A lesson on money, from the island of Yap.
A long time ago on the island of Yap in Micronesia people used stones as a form of money. Just as some African communities used sea shells and Native American tribes used beads, the inhabitants of Yap used stones as a method for saving money, making payments and tracking the value of goods.
In practice, a small stone could be exchanged for something of less value, and a big stone for something of greater value. Additionally, a lot of small stones could get you a really big stone allowing you to store all your money in one place. (Everyone in the village knew the immovable, elephant-sized stone on the beach was yours.)
The people of Yap realized something fundamental about money; stones did not need to be intrinsically valuable to be useful. The stones became valuable solely because they served as an effective way to store value, and pay for and price things.
This example helps us understand how anything with six key attributes can effectively function as money:
Even though we are taught that people first used barter for trade and then invented money, anthropologists believe that’s inaccurate. What is more likely, they believe, is that people traded goods and services for promises to pay in the future, or credit. And because it was hard to keep track of and assign an exact value to each of those credits, we invented money.
That is what happened on the island of Yap. Before money, a fisherman would give away some of his catch and then have to remember who he shared with. Conversely, those people would need to remember how many fish they'd been given, and then eventually pay the fisherman back with something that "felt" of similar value. This system was profoundly inefficient. It was incredibly difficult for everybody to remember who owed them money, and how and when they should be repaid. That was until someone on Yap came up with a new technology. Instead of having to remember every (subjective) credit, they suggested keeping track of each credit in a physical "ledger".
That ledger was the stones.
Now when someone made a promise to pay, they gave stones instead. And other things, like salt, beads and seashells, that were also scarce, durable, fungible, divisible, verifiable and portable, were adopted in other places around the world. Soon it was impossible to find any civilization that had not adopted a method for keeping track of credits.
We have money. Now what.
As the people of Yap grew more open and trade expanded, existing forms of money started failing. Stones like the ones used on Yap were relatively hard to transport, making it difficult to purchase goods that were not locally available.
Coincidentally, around this same time people started to figure out that gold was a highly effective form of money: it was universally scarce, durable, fungible, divisible, verifiable and, importantly, portable. Indeed, for the next 5,000 years, gold would exist as the world’s most reliable store of value. Nothing, not even land and other essential resources, has kept its value better than gold.
But gold has little intrinsic value. You cannot eat gold, or use it for shelter. In fact, we use it for jewelry not because it looks nice but because it's a traditional display of power and wealth.
About 40 years ago, we decided to get rid of gold entirely and started using paper bills as money, backed only by government promises. This made it easier for governments to issue new money when it was needed. Around this same time, we also began figuring out how to do away with paper money entirely. We started transitioning to digital money – money stored in online bank accounts, exchanged with credit cards, etc. – and away from paper bills.
Today, while access to information has become freer and faster, money still moves slowly and expensively. With the stroke of a keyboard key, someone in Chicago can send an email to someone in Jakarta. Yet, if that same person in Chicago wants to send $0.01 to the same person in Jakarta, it could take days or weeks to get there, not to mention cost anywhere from $0.50 to $50. Said differently, the electronic money we have today is like a pig trying to fly with paper wings; we can work on improving the wings all we want, but fundamentally, pigs are not made to fly.
Bitcoin is the first form of truly digital money, designed from the ground up for the information age. Consider the following attributes:
If we were to rank gold, cash and Bitcoin according to the six key attributes of money, the results might come out like:
Perhaps even more important than the above is that bitcoin already has traction. There are today millions of people around the world using bitcoin and hundreds of thousands more starting each week.
A note on adoption.
The revolution that bitcoin is spurring is just starting. Bitcoin will be for money what TCP/IP was for many other forms of information. History teaches us not to underestimate leapfrogging technologies. Consider communication. While the landline telephone was invented in the late 1800s, the world never surpassed 1.5 billion landlines. In comparison, today over six billion people use mobile phones.
The global banking system faces a similar penetration curve; presently, less than half of the world's adults have a bank account. Having failed to reach a majority of the world’s population over the past several centuries, we will soon see new ways in which bitcoin can leverage mobile technology to bring financial services, and the global economy, to presently underbanked parts of the world.
Meanwhile, back on Yap.
At some point, a group of Yapese were transporting one particularly large stone back from Palau, about 275 miles away, when their elaborate shipping structure broke apart and the stone sunk. Since everyone in the party had witnessed the stone's collection, transport, and ultimately its sinking, they all agreed that the stone was there at the bottom of the ocean, and still of immense value. It did not matter that nobody ever saw that stone again.
And so it remained that if by chance you got rich on the island of Yap, you were given the stone in the bottom of the ocean. After all it worked just as well as any other.
Or just as well as a bitcoin.