This blog post sets out Saga’s stall on several key matters: the role of fiat currency; the issue of volatility; the importance of interdisciplinary knowledge; earning trust and the cost of change; a rationale for participant identity.
What’s Wrong with Fiat Money?
Bert Lance famously said “If it ain’t broke, don’t fix it.” That kind of seductive common sense seems fair enough, but may be the enemy of progress.
In truth, there is nothing wrong with fiat money. It serves humankind well enough, marking a hefty notch of progress from the gold bars that served our forefathers; cash being the natural heir to precious metals as a tangible, tradable token of value.
Actually, gold wasn’t all that great: heavy to carry and barely fungible, tough to melt down into ingots, elaborate to mould, easy enough for a burglar to cart off under cover of darkness.
Now, fiat money brings its own issues; a monolithic scope of issuance; dependence on the state fiscal and political agenda; human control over supply. Each of these qualities carries both advantages and vulnerabilities.
While gold is constrained in quantity, fiat is subject to human control. While fiat depends on the strength, skill, judgement and trustworthiness of the country who issues it — and its changing leadership — it also depends on the caprice of ever-shifting national agendas.
Super Global — Super Local
In an increasingly globalised world we start to hear of non-nation state issued currency: What could be possible? What wider needs could be met by a globalised currency, that steps aside from the workings of the nation state?
Designing a multitude of currencies — to match the growing number of networks where value is exchanged — we can hope to add to fiat currencies a variety of solutions, catering to a variety of needs.
Lately this hope has become stronger, its realisation more concrete. Blockchain has emerged as a tool to encourage new types of contracts, offering advanced monetary mechanisms and techniques that carry the thrilling promise to complement the production, distribution and use of money.
The sheer opportunity to rethink money is surely worth considering.
Yet, we must keep our eyes wide open. Clearly, crypto currencies — or complementary alternatives — remain in their infancy and should be taken with a pinch of salt. Experiments in new currencies should be seen as just that: experiments. Some may thrive, many will fail.
There are those who steadfastly claim that fiat is, and always will be, the only legitimate form of money. They aver that nation states are the only organism suited for the production of currencies. Perhaps these voices will be proven correct. And yet, to substantiate these claims, surely we must countenance — and trial — the alternatives.
The great money experiment has begun; it will not go away. There is no ‘un-invent’ button on blockchain technology. Neither is this a game: the consequences are certainly grave, with wide-ranging impact. Because on money relies the fruit of human labour, the sweat of our brows, the workings of our social life. Caution, balance and stability must take centre stage.
Saga proposes to take the money experiment seriously. To deliberately approach the formation of a new monetary contract with a mature, long-term horizon, from the very start.
What’s Wrong with Volatility?
Actually, there is nothing wrong with volatility. It merely depends on its source.
Prices change: here is the bedrock of all market economies, how resources are allocated, how decisions are made. Financial assets also fluctuate: prices, returns, exchange rates. Thus capital is efficiently allocated, a prime engine of economic growth. Volatility gives rise to risk, but also the promise of reward for taking this risk.
So absolutely, we must make room for volatile assets. They’re a pillar of our economy.
Currency is one place where unfettered volatility is simply not welcome; on the contrary, a trusted currency must serve as an alternative to speculation. It must be stable and reliable; it must take serious measures to tame volatility.
Consider a merchant. She needs to pay her employees the next day. If she has a choice of two separate currencies in which to hold funds: one volatile, that may change in value; the other stable, with no chance of appreciation. Although she might wish to hold the former, to enjoy a possible increase in value, the fear of depreciation forces her to choose the latter, since she is under an obligation to pay her suppliers and workers.
From Currency to Money
Decentralised digital currencies are now nine years old.
So far, none fulfils the three conditions of money, serving as:
It’s no wonder they don’t meet these conditions. They were never designed to.
Digital currencies have been built by technologists of all stripes: they were at no point designed by policymakers. Harnessing Disciplines for a New Paradigm
Let us consider, for example, the birth of the printing press.
The machine inventors had only a vague conception of the uses of their technology; they thought in terms of weights and coils, rollers and stamps. It didn’t cross their minds to print vast numbers of fixed-rate bills, let alone to implement policies for, as yet non existent, central banks.
In the same way, the inventors of blockchain technology are unlikely to design blueprints for its eventual usage.
Seen in its entirety, currency has a far from technical purpose. At the core, it should strive to be a neutral representation of shared value, agreement, and trust. Properly designed, it must account for social purpose, philosophical standards and their mathematical implications.
With the global nature of new currencies, they can represent communities which complement the nation state. Money is no longer simply printing notes and coins showing the King’s face. We’re on the brink of a a breathtaking shift in the scope of money.
Entering this new, delicate, paradigm, anyone wishing to design monetary policy will surely seek as broad a perspective as possible: leveraging knowledge, and negotiating and cooperating with state institutions, to carve out a sensible path through this unmapped terrain.
Modelling The Cost of Change
Learning to trust has its costs.
Now we’re gathering trust in new sources; as more people earn probity, power is dispersed through a great many hands.
That process takes time, with countless pitfalls. When trust is promoted arbitrarily, artificially, inorganically, we create risk. This translates into high volatility: no more or less than the expression of massive fluctuations in trust.
We cannot escape the global trust and acceptance already enjoyed by fiat currencies. This is a proven fact.
Indeed, there is something audacious in introducing a brand new currency, which by definition has yet to demonstrate value.
So in an effort to model the cost of change, we lean heavily on trust embedded in the established system. Based on variable backing in the fiat currencies of nation states, Saga aims to gradually earn trust, and slowly, respectfully, reduce reliance on older contracts.
Give Unto Caesar
Today, with over 1,500 crypto tokens in circulation, many existing contracts are threatened.
New initiatives aim to reimplement and redesign the exchange of value between people, in fields as diverse as finance, banking, and education.
Let’s scratch a little beneath the surface. At the core there remains one overarching contract — and only one — that insures accountability between participants across all other contracts.
This ‘contract of contracts’ is the nation state; the interpersonal social contract; the societal glue that ensures we ride on roads that our taxes paved.
Within the nation state contract, the currency of exchange is Identity. The state needs to know who its citizens are: both to collect from them, and to repay them. Nothing can operate — no-one can claim accountability — while personal identity is invisible.
The same holds true for blockchain. And yet here the notion of anonymity has taken hold, making accountability impossible.
It is true the chief promise of blockchain is resistance to censorship. In fact, this has nothing to do with identity; examining this principle, we find it concerned with content creation, usability allowance, and zero down-times. Blockchain, as a mere tool, is no enemy of accountability. Each person is responsible towards the systems under which they operate.
There need be no conflict between identity and privacy; the latter can always be protected by taking due care of identities, saving and constraining their use. However, accountability must be guaranteed, so we state an upfront caveat: when, and only when the law is broken, a participant’s identity can be revealed, so justice can be served.
Saga believes in the promise of a diversity of impartially governed contracts. Not wishing to challenge any state, but to catalyse the evolution of new, harmonious governance mechanisms.
We choose to operate in the purifying sunlight of full accountability.
After all, we have nothing to hide.