Old Made New - Direct Exchanges - (The Great Awakening) - The move from “medium of exchange” to direct exchange.

Old Made New - Direct Exchanges - (The Great Awakening) - The move from “medium of exchange” to direct exchange.

By David Parsons and Antony AbellFounders of the TrustMe™ / TPX™ Property Exchanges

With the advent of blockchain technology, trusted digital assets and self executing smart contracts, trust in the execution of business transactions is approaching the level of historic confidence of one to one exchange with known parties. This level of trust in dealing with commercial transactions existed since the dawn of trading between peoples.

In the past or even in more recent times, obtaining

goods or services in a society between known or unknown parties, goods were exchanged for other goods or services that the two respective exchanging parties needed. This system of direct or barter exchange (trade of value) in which the participants in a transaction simply directly exchange their goods or services for other goods or services was done without using a medium of exchange, such as gold, silver or paper currency.

Transactions were not always immediate reciprocal exchanges, some were delayed in time. In most developed countries, direct exchange usually existed parallel to monetary systems only to a very limited extent. Today’s market actors use direct exchange as a replacement for money as the method of exchange in times of monetary crisis, such as when currency becomes unstable such as in a hyperinflation cycle or a deflationary spiral or simply because paper currency is unavailable for conducting commerce.

Studies have not shown any present or past society that used direct exchange without any other medium of exchange or measurement, and anthropologists have found no evidence

that money emerged directly from barter. They instead found that credit extended on a personal basis with an interpersonal balance maintained over the long term was the most usual means for the exchange of goods and services. This means of exchange coupled with interpersonal balances (trust) works very well for small communities where all the actors are known such as in a village. As the scope of exchange expanded past a village boundary to lesser known markets there was a corresponding diminishing of willingness to give credit (trust) in interpersonal exchanges to lesser known parties so exchanges tended to happen in a more immediate and sequential manner.

Despite this, economists often inaccurately presented early societies as examples of the inefficiencies of direct exchange to explain the emergence of money, of „the“ economy, and hence of the discipline of economics itself.

It‘s more likely money emerged as the possibilities for trust in interpersonal balances became less and less possible as exchanges extended geographically to more unknown and distant market actors. As the time and distance increased so did the trust factor decrease. Money effectively replaced the interpersonal trust balances since money had little relative counterparty risk to accept.

Deep Dive into Direct Exchanges

As depicted in figure 1 picture at the start of this article, the farmer in a remote podunk town after the autumn harvest is depicted asking the newspaper editor to accept two chickens (perishable after 2 days) in exchange for 52 weekly editions of the newspaper. The newspaper editor has: a pumpkin (perishable after 30 days), a basket of autumn root vegetables (perishable after 180 days), a piglet (perishable after 2 days), and 2 salt cured hams (perishable after 730 days). The newspaper editor also has employees: a typesetter and an apprentice. The editor is determining the value of two chickens before making an acceptance decision. Presumably he is taking into account the following modern day components

of the direct transaction: » Storage of value

• Chickens will last only 2 days thus a short window of storage must be used quickly, equivalent to a negative daily interest rate of 50 percent.

» Unit of Value

• What’s the value of two chickens compared to presumably one year subscription paid in gold back currency USD.

» Unit of Account

• Fungibility.

• Two chickens allows division

into two equal units of account. » Unit of Payment

• Can it be used as a unit payment to the employees at equivalent value?

• Will the employees accept it as a unit of payment?

• Can he use the chickens to pay off other debts?

» Opportunity Cost

• Can the editor demand to be paid in gold backed currency or does he lose the opportunity for revenue with no marginal cost associated with the subscription?

Article 2

» Counterparty Risk

• The farmer is at risk for the newspaper not delivering a newspaper due to external factors out of control of editor.

• The editor has virtually zero counterparty since he is using and has control of the food stuffs.

Long term interpersonal credit (trust) allows direct exchange transactions to take place amongst known participants. The transaction’s reciprodic exchanges sometimes happen not at the same time, but over a period of time. The measurement of counterparty risk for each participant is done on an interpersonal trusted basis without third party involvement. Each participant gains the other‘s trust typically through a long history of previous transactions. Trust in this case can be defined as the sum of the number of successful transactions between two known parties over time.

The newspaper editor in the above example is however making a relatively complicated multifaceted decision in accepting the farmer’s foodstuffs in lieu of payment with US dollars. Factors which include longevity, value, acceptability as units of payments to employees and cost of storage all factor into his decision process. What appears as a simple exchange therefore takes into account a diverse and exhaustive amount of factors into the decision process.

Gold Coin Bank Notes Source: Wikipedia

In the example above the payment of a yearly newspaper subscription in US dollars would be a much easier decision process without a long list of factors to take into account. US dollars (a commodity medium of exchange) would reduce the factors from ten distinct decisions to just one. This certainly would be the preference of the newspaper editor. However, US dollars would need to be commonly available in the local economy to be able to be exchanged for the farmer’s foodstuffs (the sum of the farmer’s costs, labour and time) and thus to convert his foodstuffs into a common medium of exchange (US dollars in the example above).

A Brief history of non-redeemable or non-asset backed currency.

A political cartoon from the 1864 USA election above depicts the Lincoln administration of the time operating „Chase‘s Mill“ to flood the country with fiat money (or what was then called ‘Greenbacks’). Two other modern day memes below, 156 years later, show the same thing in Europe and in the USA. It is interesting to note that both Legardere and Chase (depicted below) were both attorneys before becoming banking leaders.

Previously (pre-1971 in the USA) paper currency was redeemable for money in the form of precious metals gold or silver. Without the restrictions of the redemption of money for a precious metal placed on paper currency creation, politicians, central banks and commercial banks have all been relatively free to expand the currency supply without any true restraints.

Running the machine: Source Wikipedia.

The above political cartoons or “memes” in today’s parlance, illustrate politicians lacking the restraints necessary to prevent hyper monetary inflation. Astonishingly, these memes are separated by almost 160 years, yet illustrate in precise detail the identical causes of monetary inflation.

Non-redeemable currency (fiat) or, as it is known sometimes as, ‘legal tender’ must by law be accepted in satisfaction of previous debts denominated in that fiat or be used in the settlement of taxes of the nation state issuer. Should a legal dispute arise over a past commercial or public transaction, the legal tender laws of nation states declare a monetary debt is satisfied if these notes have been “tendered” or formally offered in the correct amount. Of key import under these same laws, it is still possible to make a contract in something other than the legally designated currency or legal tender. A vendor, for example, may specify the payment type needed may not need to be accepted in legal tender. But if payment for a debt not otherwise specified is tendered in the legally designated medium of exchange, it must by law be accepted at face value. If some other medium of exchange is made legal tender, payment of that medium for a debt cannot be refused on the grounds that the designated currency is not money. Issuing ‘money’ may therefore come in other forms and therefore it is possible to issue currency without in fact making it ‘legal tender’. Governments have previously issued various forms of notes that have circulated as currency, but which have not been declared ‘legal tender’. Gold or silver coins may be issued without making them legal tender. At the same time, legal tender status can be conferred on the coins or notes of another country. Consequently monetary standards and legal tender can in fact represent different things.

Legal tender notes are only good for private and public debts inside the country's borders. These fiat notes are not good for paying out interest on government debt or paying excise taxes on imported goods. Source: US Treasury.

Today’s currency is no longer useful for John Bull or Joe Sixpack

What this means is government can change at will the value of contracts and salaries negotiated in non-redeemable currency. As an example, $10 dollars in redeemable currency (i.e., gold, property or property certificates) is generally immune to the vagaries of politicians‘ decisions. $10 dollars in non-redeemable currency can however have its value changed to anything at any time by governments.

Given the choice which one would you prefer?

What is old is new

DECENTRALISED CREATION AND DISTRIBUTION OF MONEY SYSTEMS

Bringing all this forward to our current economic cycle, Decentralised Finance (DeFi) systems are designed to be trustless as their core design. This means the asset in the transaction along with payment and settlement occur almost simultaneously in a DeFi transaction under a smart contract infrastructure without third party involvement or counterparty risk.

In such environments currencies such as GBP or USD are being ‘tokenised’ using blockchain technologies and then used in these trustless transactions more efficiently than in the legacy banking systems. Likewise, new tokenised assets are being created as recognised currencies and are being used to create complex financial transactions but which can have trusted recognised value. These new forms of currencies are created quickly and are then being used again as their own recognised ‘currency’ in other transactions. This process is repeated over and over again in the DeFi world. Furthermore, the custodial holding of these trusted digital assets can be kept securely by the owners and no longer require third party custodial services or banks to safeguard or maintain them.

The great move backwards:

These new decentralised finance mechanisms are now implementing the ability to directly swap one asset for another asset without the use of conversion into fiat currency. The costs of using these systems are negligible coupled with low operational friction on a global scale. This has resulted in a meteoric rise in their adoption across the multiple industries and sectors. In short, the legacy “mediums of exchange” of USD/GBP/ EUR fiat are being discarded for the more stable and trustworthy “Direct Exchange” systems which remove the uncertainty of value and replace it with ‘3i’ (intuitive, inherent, intrinsic) assets which people are more willing to recognise and accept.

Conclusion:

All of these features result in very low transaction costs with regards to the investment in personnel, systems and computing resources and lead to ultra low friction in the exchange and transfer of value and provision of liquidity mechanisms. These distributed systems can be located anywhere on the Internet and can use recognised assets from anyone. In short, the new blockchain based systems and associated DeFi technologies deployed within and alongside direct exchanges are providing more stable systems, governance and transparency to the underlying real value of transactions than traditional financial institutions, exchanges and governments.

What’s next?

Instant liquidity mechanisms across trusted asset classes are core to providing blockchainautomated liquidity.