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The dawn of algorythmic currencies

photo of Michel Bauwens

Michel Bauwens
15th June 2013


The ultimate promise of math-based systems is to bring the principles of the Internet to money. Money is information and the Internet is the greatest information engine of all time. The missing link was a money protocol. The Hypertext-Transfer-Protocol allowed the Internet to share text and graphics. The Simple-Mail-Transfer-Protocol made communication free and instantaneous. Each of these protocols had a seismic impact on our reality. The Ripple Protocol and others like it will have a similarly profound effect. Independent businesses using shared protocols will be able to do businesses directly without requiring third-party services.

– See more at: http://citizentekk.com/2013/06/11/the-future-of-money-and-bitcoin-by-chris-larsen-ceo-of-opencoin/#sthash.OVDRGHGV.dpuf

Republished from Chris Larsen, co-founder of OpenCoin, the organization that crafted the Ripple protocol:

“Commodity money was first—gold, precious metals, things considered inherently valuable. Next came political money—fiat currency, banknotes, things that had value because they were backed by governments and legal systems. Now there’s math-based money—money controlled only by protocols and algorithms. Harnessing and maximizing the power and potential of these new math-based systems is going to be the big story in finance for decades to come.

Bitcoin made this revolution possible. It kicked down the door and opened everyone’s eyes. Money has always presented a technical problem—how can we track value in a way that is reliable and useful to extended networks of people? For centuries, the best available money “technologies” were business contracts: my bank will keep a faithful record of my accounts, Visa will process my PoS payment, MoneyGram will move this cash around the world, etc. Bitcoin proved that computer protocols are as effective as institutional practice at handling security and reliability. Money had been manual, now it is automatic.

Once the technical obstacles were toppled, then math-based monies began to accrue value. At the time it was shocking. In hindsight it’s pretty obvious. The utility of math-based systems is off the charts. Transactions are cheap, fast, and global in a way that was previously impossible. Critical elements of the financial infrastructure can be replicated with only a few lines of code. Processing lag, network limitations, service fees, and the many intermediaries of the money systems can now be streamlined or eliminated. Critics have attacked Bitcoin’s valuation as “speculative,” but a technology with such heterogeneous application demands early speculation. What is the appropriate value of a technology that can dramatically cut transaction fees, reduce transaction speeds by days, and finally interconnect the global economy?

We are only at the very beginning of this process. Bitcoin focused on a single target—creating a digital currency—but there are a plurality of targets, and the development and expansion of math-based money is an iterative process. How can math-based principles be applied to mainstream currencies? What other financial operations can be automated using network protocols?

A new wave of technologies looks to answer these questions. Post-Bitcoin technologies like the Ripple Protocol now exist that facilitate payments in all existing currencies, automate currency exchanges, and process cross-currency transactions. Software is in development that will allow derivatives, loans, interest rates, fees, subscriptions, and exotic financial instruments to be processed by algorithms. These money technologies give merchants new options, consumers more control, and financial institutions powerful new tools. So-called “cryptocurrency” may have a fringe reputation now, but the long-term impacts of math-based money systems are 100% mainstream.

The ultimate promise of math-based systems is to bring the principles of the Internet to money. Money is information and the Internet is the greatest information engine of all time. The missing link was a money protocol. The Hypertext-Transfer-Protocol allowed the Internet to share text and graphics. The Simple-Mail-Transfer-Protocol made communication free and instantaneous. Each of these protocols had a seismic impact on our reality. The Ripple Protocol and others like it will have a similarly profound effect.”

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2 Responses to “The dawn of algorythmic currencies”

  1. Matthew Slater Says:

    Chris, like many Bitcoin geeks, you are conflating the payment technology with the monetary design. As with sex, most possible types of money were explored long ago.

    Your potted history of money is plain wrong. I suggest you read :Debt: the first 5000 years”. You have completely forgotten to mention accounting money, or IOUs which have been used many times in history from ancient mesopotamia to Greek city states, Tally sticks, to Green backs. This money has no value in itself and serves better to spread wealth around

    In my view our political monies, (including bitcoin & XRP, when they are better established), should be considered commodity currencies, even though they are created from nothing in arbitrary quantity because
    their supply is limited
    there is an opportunity cost to lending them
    they (will) yield interest
    they are controlled by and work for the rich.

    Bitcoin and ripple should be applauded as payment technologies, but as currencies there is nothing remarkable about them.

    For me the promise lies with arbitrary currency creation in ripple. When you declare a new currency, if I’m not mistaken, no units are created. Any user can therefore issue and redeem a circulable form of credit, or accounting money, out of nothing, in their own name. That’s Peer to peer money

    Chris I strongly reccommend you familiarise yourself with the work of Paul Grignon, especially his Digital Coin proposal. http://www.digitalcoin.info/Digital_Coin_Introduction.html
    Could Ripple be used as a platform for that?

  2. Apostolis Xekoukoulotakis Says:

    Chris Larsen’s view of the effect that the internet has on the financial industry is correct. Algorithms and computers will reduce financial transaction costs
    and will allow new economic tools to be created. So it is important to keep that into our minds.

    But for this to make social change, to transform and liberate society, to help the simple folk like us, the design of the new financial system is very important.
    This is where Chris Larsen and his company fail twofold. Firstly, they write programs, algorithms to control this new financial market and to control the people that take part in it. Secondly, they have the same political/economical ideas with the current economic system.

    The only change that will happen with Chris Larsen’s company is a transfer of power from the old financial system to their hands. The transaction cost might decrease too but the
    problem in the economy has never been that of efficiency. In fact, capitalism has always tried to increase efficiency.

    At this point in time it is important to strongly oppose Ripple 2.0.

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