Bitcoin, Blockchain, and Local Currencies
ECONOMICS, 18 Dec 2017
Tad Montgomery | Resilience – TRANSCEND Media Service
Pixabay
The Seven Social Sins of the World:
Wealth without work
Pleasure without conscience
Knowledge without character
Commerce without morality
Science without humanity
Worship without sacrifice
Politics without principle— Given by Mohandas Gandhi to his grandson Arun shortly before his assassination
Bitcoin and Blockchain
14 Dec 2017 –The world is on fire lately with the exponential growth of Bitcoin and other electronic cryptocurrencies. While some see these as speculative bubbles that are tied to nothing, used on the dark web to ransom hacked computers, and profligate users of electricity, others see Bitcoin and its ilk as our liberation from nation states and their central banks. Both could be true. Perhaps more important is that the platform underpinning Bitcoin, called blockchain technology, and later advances such as Ethereum, have the potential to completely transform the way that the world operates.
Many people see the rise in Bitcoin as the result of a growing distrust in governments, official/artificial fiat currencies, corporations, institutions, and other people. If the thing that we now call money has no inherent or intrinsic value, and is controlled by people and institutions who do not have our best interests in mind, why not invest in an alternative?
Bitcoin is not the only alternative economic game in town, just the first to capture the global imagination. People have spent decades developing other ways of moving in the economy that do not leave the planet trashed and societies broken. This work goes under many different names: regenerative or steady-state economics, LETS systems, the solidarity economy, local living economies, local currencies, Time Trade and barter networks are just some of them. The intentions of each vary somewhat, but a common thread is to create social economic mechanisms that do not rely on debt, interest, inflation, exploitation, restricted access to capital, or continuous growth.
Bitcoin has a short and shadowy history. An entity named Satoshi Nakamoto is said to have come up with an idea for an electronic monetary system that would allow for both failsafe security and anonymity between parties. The intention was for a currency that could be used peer-to-peer safely with no middlemen. They developed the encryption process that would make it work, invented a way for additional Bitcoin to be created, and then handed the system over to the world. Nine years later a single Bitcoin, created out of thin air, has reached a value of over $17,000. With about 16 million Bitcoins in circulation the total value of the system hovers around $800 billion. In the last month alone its value has increased 70%.
Some say this cannot last. Articles in the Wall Street Journal and New York Times call it a bubble and predict a massive ‘readjustment.’ The value is completely speculative, and Bitcoin has completely lost its usefulness as a medium of exchanging goods and services. Why spend your Bitcoin if its value might double next week? The process to create each Bitcoin, called mining or ‘proof-of-work,’ also requires tremendous amounts of electricity as specialized computers race through random number generation protocols to guess the next ‘chain’ in the Bitcoin blockchain sequence. It is estimated that this process uses almost 20 barrels of oil’s worth of electricity for each Bitcoin created. Every transaction where a Bitcoin[1] swaps hands takes 240 kilowatt hours of electricity at today’s rate[2], or enough to drive a Tesla model S sedan about 1,000 miles, and releases 260 pounds of carbon dioxide into the atmosphere.
bitcoin.org
Blockchain is the name of the underpinning software platform for Bitcoin that helps to guarantee the validity of a transaction. It does this by recording the transaction not on a main register but a connected distributed system of registers, all of which communicate through a secure validation mechanism.[3] Unusual and unique properties of blockchain technology include:
- Transparency Data about each transaction is embedded within the network as a whole, by definition it is public. Funds are tied to bitcoin addresses, and each Bitcoin has encoded on it the history of all of its transactions. Every transaction on the blockchain is public and recorded at every node in the system.
- Anonymity Bitcoin and many other cryptocurrencies are considered ‘pseudonymous.’ Pseudonymity is achieved through the use of what are called public and private “keys.” A “public key” (a long, randomly-generated string of alphanumeric code) is a users’ address on the blockchain. A Bitcoin sent across the network gets recorded as belonging to that address. Owners of Bitcoin addresses are not explicitly identified, unless someone knows the address of a particular owner. The “private key” is like a password that gives its owner access to their cryptocurrency. Protecting one’s digital assets requires safeguarding the private key by printing it out or the equivalent. This is referred to as the creation of a ‘paper wallet.’ Electronic wallets are apps on computers and smartphones that include identity management.
- Incorruptibility Fraudulently altering any unit of information on the blockchain would require a huge amount of computing power to override the entire network.[4] Another aspect of security is that each blockchain transaction is closely connected to a process of identity verification.
- Decentralized Blockchain operates on a network of peer-to-peer ‘nodes’ – computers that make up the blockchain network and perform the task of validating and relaying all transactions. Each new node that joins the network gets a copy of the entire blockchain, which is downloaded automatically on that node when it joins the network.
This last feature is an entirely different way for the internet to operate. It is slower than the standard internet, and requires tremendous amounts of computing time and energy, but is terribly robust and secure. These nodes are the administrators of the network, and are rewarded for their participation by acquiring the opportunity to earn Bitcoins through a random selection process that is called ‘mining.’ Mining combines transaction recording with the solving of complex computational puzzles which one cryptocurrency expert compared to make-work.
Bitcoin mining[5] can be understood as a decentralized, distributed computational review process performed on each “block” of data in a blockchain. This allows for achievement of consensus in an environment where trading parties do not know or trusts each other. It is what makes Bitcoin un-hackable. This mining controls the security and validity of the Bitcoin network, the release of new coins into circulation, and it eliminates the need for reliance on centralized networks. It involves adding and verifying new transaction records to the Bitcoin blockchain (e.g. distributed public ledger), which includes all past transactions. During this process, new Bitcoins are released from the remaining un-mined pool of 21 million total Bitcoins.
Ethereum
Distributed ledgers like blockchain enable the distribution of simple, cryptographically secured contracts on the internet that will execute when specified conditions are met. Ethereum is an open source blockchain project that was built specifically to expand upon this function. Still in its early stages, Ethereum is said to have the potential to leverage the usefulness of blockchains on a truly world-changing scale. There is a saying going around, ‘the Bitcoin blockchain is to Ethereum what email is to the internet.’ And Ethereum has its own trading currency, called Ether.
Applications for this technology include the sharing economy (imagine an Uber without the middleman), crowdfunding (Ethereum accounts for 64% of all crowdfunding, Kickstarter is only 15.9%), elections, peer-to-peer purchases (OpenBazaar is an Ethereum-based alternative to eBay), supply chain auditing, financial transactions . . . The list goes on and on and is growing at an accelerating rate. A website called State of the DApps lists over 850 distinct applications of Ethereum.
The benefit of Ethereum is that it allows for the development of innumerable blockchain applications all on the same open-source platform, as opposed to having to build an entirely new blockchain platform for each application that is envisioned. The primary mechanism within Ethereum is automated ‘contracts’ or agreements between parties that are executed when prespecified conditions are met. The parties can be anonymous, but the contract is a public ledger that people can use to monitor the activity in the market while maintaining the privacy of the individual actors.
The implications of Ethereum are immense when one considers how much of our society depends on contracts — corporations, constitutions, financial securities, laws, elections, even games. Ethereum has been designed to give people the ability to create computer executable contracts that can be generate quickly, easily, safely, and at nearly zero cost.[6] This eliminates the need for a centralized administrative authority and the middlemen. These attributes are now used to a large extent to create wealth based on the speculative value of cryptocurrencies. They can, however, also be used to create robust local currencies with substances of real value behind them, or perhaps even for the deployment of regenerative economic systems that start the process of healing the planet.
Local Currencies
Tom Greco has been helping communities to envision and develop healthy economic systems for decades[7]. He says that phenomena like inflation, boom and bust cycles, interest payments, unemployment, and the need for perpetual growth are not inevitable to a society. The systems that he helps to establish prove this. Tom says that there are a few key features that a healthy economic system must contain if it is going to avoid contributing to disparity in wealth and unbridled environmental destruction:
- A currency should have one purpose and one purpose only—to enable the purchase and sale of goods and services that are in the market
- A currency must represent value, and the value must be understood by the community using it
- The essence of currency is credit. Whoever issues a currency is essentially issuing an i.o.u. or promise to reciprocate
- Currencies must be transmittable. Whether they are paper notes, wampum, text messages, or transfers within a decentralized electronic ledger, they need to be able to be passed from person to person or account to account, and the platform that they do this on needs to have a relatively high degree of security and trust
The most ordinary model of an alternative currency is what is known as a hand-held script. This is a paper note, like a dollar bill, but generally used only within a specific city, town or region. The value of this script can be pegged to the value of a national currency, or some different commodity like an hour’s worth of time, or a cord of wood, or a gallon of maple syrup. The Schumacher Center for a New Economics has been helping communities to develop these systems for a long time, and issued their own regional currency – the Berkshare – in the Berkshire Mountains. The program was launched in 2006 and the script comes in denominations of 1, 5, 10, 20 & 50. Over $7 million in Berkshares have been issued. In Ithaca, NY the Ithaca Hour was a script for many years that denoted an hour’s worth of time, roughly pegged to $10 in the 1990’s. In the Pioneer Valley of Western Massachusetts there was the Valley Dollar, and there have been many others: Bristol Pounds on the west coast of England, Lémans in the Lake Geneva region of Switzerland, Bangla-Pesa in Kenya, and Euskos in the Basque region of France. These currencies are not designed to avoid taxes, in fact they must have a commonly accepted exchange rate with federal dollars and earnings are supposed to be reported, just as barter transactions are. They are meant to stimulate the local economy and build community.
A next step from the tangible to the etheric can be seen in Time Banks. This international system allows local communities to set up accounts on an internet platform that allows participants to accrue credit by providing goods and services to their neighbors. Say I really enjoy shoveling snow, but hate sewing. I can earn credits pushing snow around for my neighbors and use them to obtain the services of a tailor/seamstress. One advantage of this highly egalitarian system is that the IRS has so far deemed the transactions volunteerism, and does not require time credits to be taxed. A downside is that the system rarely helps people to obtain basic goods and services, like rent, food, transport, or childcare.
rCredits is a next step toward a digital currency. Inspired by the Valley Dollar program, William Spademan and his team developed rCredits through a non-profit organization called Common GoodTM. The rCredit currency was instigated in order to spur local control of the economy while solving the common problem of alternative currencies getting ‘stuck’ in the cash registers of charismatic businesses. A secondary purpose is to enable a participating community to issue rCredits as grants to worthy social causes or loans to help locally owned business to start or expand.
The basis of rCredits are: a swipe card, a Community Agreement, a centralized online ledger of accounts, and a democratic process that issues the currency. rCredits are pegged to the dollar and can be exchanged readily for them. Using rCredits earns participants ‘incentive rewards,’ which cannot be traded for cash but can be spent within the rCredit system. The total amount of rCredits in circulation in a community is determined by the community based on the demand for rCredits within that community, which is based on the amount of goods and services available for purchase in that community using rCredits.
Buying and saving rCredits is never going to make a person rich, like gold or Bitcoin might, but as Tom Greco says – that is not the purpose of money in a healthy society. Speculation, whether it is in land, stocks, currency, or housing, only stratifies a society into the haves and the have-nots and turns the Earth and its living and nonliving forms into ‘resources’ to be exploited. This is a tough concept for Americans to grasp because we have been conditioned by the peculiarities of a growth- and debt-based economy to hoard and stockpile out of a fear of future need. It is exceedingly difficult for most of us to envision an alternative.
How could blockchain help? The city of Hull in Northern England is developing HullCoin, a cryptocurrency that will be issued in payment of services that have been done for the common good. The primary objective of this program is to help to alleviate poverty, and a host of non-profit service agencies have banded together to launch the currency. A secondary objective/methodology is to match unmet needs with otherwise wasted resources. People will earn HullCoin by engaging in an activity that is sanctioned by one of these agencies, will have it recorded through an app on their smartphone, and will be able to spend it by getting discounts on purchases from participating retailers.
One characteristic of this program, made possible through the blockchain platform, is that every ‘coin’ will have a record of every type of activity that was ever used to earn it. A record of the good karma created through that coin, so to speak. A retailer then has the opportunity to offer deeper discounts for particular work that they wish to encourage, be it picking up litter, childcare, mycoremediation, serving on a town board, of the production of biochar. Furthermore, the organizations overseeing the program, as well as all participants, can instantly determine how many HullCoins are in circulation, where they are flowing freely or getting stuck, and all of the things that they have been used to accomplish. InvolveMINT is an organization based in Pittsburgh that is pioneering this community-based cryptocurrency in the U.S.
FairCoin is a cryptocurrency of FairCoop, an open global cooperative that organizes itself through the Internet outside the boundaries and controls of nation-states. FairCoop aims to instigate an alternative global economic system through Faircoin based on “cooperation, ethics, solidarity and north-south redistribution and justice in economic relations.” The main objective of FairCoop is to reduce the economic and social differences between humans as much as possible and simultaneously contribute to a new global wealth available to all humanity in the form of commons[8]. The FairCoin value is pegged to the Euro, so FairCoin will not be used for speculative gambling and wealth accumulation that does not include labor. Its energy use profile has been designed to be conservative, and transactions are faster and cheaper than most other currencies (about 3¢). FairCoin uses a Proof of Cooperation algorithm for its function, as opposed to Bitcoin’s proof-of-work or Ethereum’s proof-of-stake process to create Ether.
There are a number of us who think not just about stopping the rampant destruction of the global economy, but about how to conceive an economic system that encourages repair, healing and regeneration. Going by the names bioregionalists, permaculturists, greens, steady-state economists – slowing down the mighty, gobbling engine that is neoliberal corporate capitalism isn’t enough for us; we want to reverse the trend. Two cryptocurrencies in the energy sector that might offer this are SolarCoin and Power Ledger (POWR token). People and businesses earn SolarCoins in proportion to the electricity produced by their solar PV arrays. It was designed as a way to further incentivise the deployment of solar energy. SolarCoin started with a value of 1¢ in 2014 and as of Dec. 2017 was hovering around 45¢. Maybe a similar cryptocurrency could be developed to incentivise one ton of carbon built-up in an organic farm’s soil, or one person healed from a chronic illness, or another person freed from a jail, or an acre of forest that is preserved or re-forested. Ethereum seems to be just the right platform to make such things reality.
Endnotes:
1 How Many Barrels Of Oil Are Needed To Mine One Bitcoin?
2 Bitcoin Energy Consumption Index
3 Ian Kahn
4 What is Blockchain Technology? A Step-by-Step Guide For Beginners
6 Don’t Leave BitCoin to the Libertarians! (Or, Why Your Movement Needs Open Source Money) – YES! Magazine, 4/14/14
8 https://en.wikipedia.org/wiki/Faircoop
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Tad Montgomery does ecological engineering from the Connecticut River Bioregion. Areas of endeavor include energy conservation & renewable energy, regenerative agriculture, agroforestry, permaculture design, bioregional organizing, ecological wastewater treatment, biofuels, mycology & mycoremediation, alternative/regenerative economics, and alternative health care. He co-founded the Valley Dollars program in the Pioneer Valley and is now involved with Brattleboro Time Trade. In his spare time he plays ultimate, pours waste vegetable oil into his fuel tank, and romps in the woods with small children. He is currently writing a screenplay loosely based on the life of Edgar Cayce that he hopes will turn the health care industry on its head.
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