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MyCHIPs Digital Money

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Comparing MyCHIPs to Bitcoin

Bitcoin is modeled after the way gold works. The idea is good in many ways.

After all, gold may be the most stable measure of value mankind has ever devised. Gold money, and money based on gold have remained stable longer than any other. And people have a natural affection for gold. So if we set out to create a new type of digital money, why not make it as much like gold as possible?

Unfortunately, this idea that gold is the perfect money is a little deceptive. Gold itself is not really money. It is a commodity that has very often been successfully used as money, or as the backing for money. But even under a gold standard, most money is not actually created directly against physical gold reserves, as we might ideally imagine.

In fact, most money exists as credit, or debt—promises made from one party to another. Under a gold standard, those promises may have been measured, or valued in gold. But there will never really be enough physical gold reserves to fully back every unit of money (i.e. credit) in everyone’s accounts everywhere.

Rather, money has value only if it contains a valid promise to be exchanged for something of true utility in the future. That value might be provided by gold in some cases. But more often, it is fulfilled by some other commodity. This could include things like food, clothing, entertainment, or housing. Regardless, it is generally the product of someone’s work. We must employ our labors in order to give service to others or to improve and refine the raw materials we find in the earth.

In the Bitcoin way of thinking, there is a finite amount of money, whether that is physical gold, or mined Bitcoins. That finite supply is expected to be spread out as thin as necessary to serve as a proxy for all the other commodities we may trade in. In other words, even though the supply is limited, it is believed, that supply can serve as all the money we will ever need. It will just have to become more and more valuable, per unit, as it becomes more and more in demand.

But in spite of the conventional thinking, money is not a finite commodity such as gold. And it is not just a popular convention—merely something we all agree to trade as a substitute for what we really want. Money, at least the dependable kind, has real value behind it. And as mentioned, that value is most often expressed as a future promise of some commodity or another, such as wheat, gold, or human labor.

In the implementation of Bitcoin, as well as other digital cash schemes, one of the biggest technical challenges was how to prevent a single token, or coin from being spent twice. Another significant challenge was how to create money that doesn’t have the equivalent of a central bank or government agency regulating it. In other words, how can you maintain a public database, or one anyone can freely write to, and still not have dishonest people trying to unfairly manipulate it in a fraudulent way?

Solving these problems lead to the rather elaborate construct of the blockchain database. A blockchain makes it very difficult for someone in possession of a digital coin, to spend it with two different people at the same time. It also makes it effectively impossible to later modify transactions that have already taken place. Ideally then, it serves as a reliable, permanent record of all valid transactions that have taken place in the past.

One glaring problem with the blockchain is, the entire database has to be kept by every computer operating as a node on the network. Said another way, every transaction in the world has to propagate to every Bitcoin node on the Internet. Everyone has to store everyone else’s data. You can imagine how that data file would grow over time if it were truly meant to contain every transaction in the world, or even a single country. It would quickly become unworkable.

Another problem with the “finite supply” view of money is, it is prone to monopolization. For example, when the United States was on the gold standard, it was illegal to own gold privately. Only the government would own most of the gold so it could control the supply and effectively guarantee its currency. If not for this kind of onerous regulation, authorities claimed that large private financial concerns might have the power to buy up vast reserves of gold, and thereby manipulate the value of the currency for their own selfish purposes.

Bitcoins can also be monopolized to some degree, but in a different, more distributed way. Those who mined coins early in the development of the supply were able to do so relatively inexpensively and in larger quantities. Those who joined later had to expend much more effort to get their coins. If the Bitcoin supply would truly appreciate in value enough to serve the whole world, this inequity would become greatly magnified.

Early miners could become millionaires or even billionaires, without really doing anything of true value. They could control vast amounts of wealth solely based on the fortune of their early speculation. While those who mine, or purchase Bitcoins later on, when the values are much higher, would be the ultimate donors of value to the wealth of the early miners.

In other words, when the money supply is built upon an imaginary commodity, its value is purely based on speculation. Value is simply transferred from certain people to other people. If you are smart or lucky, you will win. If your timing is poor, you will lose. It is a zero-sum game.

The CHIPs concept is much different. It does not view the universe of possible money as finite. Rather, there can be as much money as people cooperatively decide to create. With that creation comes an obligation or promise to provide something of true value such as a useful commodity. In this way, the money supply, quite literally, derives its value from the totality of commodities we have produced, or will produce at some point in the future.

The CHIPs model truly understands, and even embraces the concept that money is debt, or a promise. Debt itself is not viewed as inherently good or bad. Rather, its legitimacy is determined by whether the debt was consensually incurred and is honorably discharged.

Make a promise and document it, and you have just created your own money. Fulfill that promise, and the money or debt will be extinguished.

You can create as much money as you want, as long as you have the ability, and the intention, to honor it. Whether that money, your credit, is deemed acceptable to others—that is up to you. It will be a function of your reputation, their trust in you, and the value of any collateral you may be willing to pledge to secure the obligation.

MyCHIPs formalizes this process in an Internet protocol so people can make promises to, or exchange credit with, others of their choosing, and in amounts that are reasonable, given their individual levels of productivity and credibility. This medium of privately issued credit can be used in addition to, or instead of, the central bank issued money we currently use in commerce and trade.

MyCHIPs does involve the creation of digital tokens, in some ways similar to Bitcoins. But these tokens, or CHIPs don’t derive their value from their scarcity. Rather, they get it from the nature of the thing being promised—future delivery of value.

And CHIPs are not transferred along from one party to another like you would imagine with a coin or a dollar bill. Rather, when new promises are made, new money comes into circulation, just at the moment it is needed. Then as those promises are fulfilled, the associated CHIP is destroyed, and the money supply naturally contracts, just as it should.

The value of a quantity of CHIPs is not a function of speculation or foreknowledge. It is simply the worth of the promise that backs it. So trades occur not as a proxy for value, but truly as one value, exchanged for another.

What does this all mean in terms of comparing Bitcoin and MyCHIPs?

Bitcoin is referred to as a cryptocurrency. But technically it is not really a currency. It is more of an equity.

As was introduced in a prior article, assets typically have two different types of obligation associated with them: liabilities and equity. Liabilities represent a debt, secured by the asset. Equity represents the actual ownership of the asset, after all liabilities have been satisfied.

Each variety of blockchain-based crypto coins, such as Bitcoin, specifies an algorithm which defines the finite universe of coins that can exist within that particular variety. Then, using mining and the blockchain, people can discover coins and publicly register their claim of ownership to them.

This notion of owning a Bitcoin, made possible by the blockchain, is the clearest evidence of what Bitcoin really is: an equity. It can be thought of as a commodity with a finite supply. There is a pre-determined maximum amount of it that will ever exist. And it is a thing you can own, if you are willing to find some or buy some.

So rather than a cryptocurrency, Bitcoin might more accurately be termed a crypto-stock. Each new species of coin can be thought of as a corporation with a limited number of unclaimed shares available. You can perform a specified mathematical exercise in order to lay claim to as many shares as you are able. Or you can buy shares from someone else who has already discovered them.

But one thing is clear: this corporation has no assets, and it never can—because it can never earn income. In other words, it has no intrinsic value.

The only value the stock may have is based on its scarcity and its popularity. If other people want it, you will be able to sell or trade it, according to that demand. But if there are not enough buyers, its value could easily drop—even to zero.

In the end, blockchain-based coins are not really a currency. Rather, they are a commodity, designed to be readily tradable with the hope they can be used as medium of exchange. Unfortunately, their nature as an equity, and more specifically, an empty equity, makes their value prone to extreme volatility. This, in combination with the obvious scalability problems inherent in the blockchain design, means cryptocoins are not likely to be widely used for commerce.

More likely, they will go on functioning as a zero-sum investment network. Value will be exchanged back and forth among the players in the system. There will be winners and losers—the winners winning what the losers have lost (or will lose).

Digital CHIPs are designed to function as a reliable substitute for conventional currency. They are not based on the equity model like public blockchain tokens. Rather they represent a debt, or a liability.

We might call MyCHIPs a crypto-bond. The system uses cryptographic technology to facilitate the convenient exchange of debt obligations in a world-wide crypto-secured bond market.

Like a publicly traded bond, a CHIP is issued by an entity such as a person or a corporation. The CHIP is always backed by the full faith and promise of that entity. And in many cases, it will also be secured by actual hard collateral—assets that have already been created using past human labor. As such, MyCHIPs are clearly not empty but hold very real value.

Like conventional bonds, MyCHIPs is designed from the ground up for stability, predictability, and reliability. And isn’t that what you want from your money?

Let’s score blockchain and MyCHIPs on the three generally recognized functions for money:

As a: Blockchain MyCHIPs
Store of Value: (holdings won’t erode over time) Awful: If you buy in late and lose money—Great: If you mine/buy-in early Good: Better in the medium or short-term; Store long-term value in assets instead
Medium of Exchange: (everyone accepts it) Bad: Speed/cost/throughput breaks down with too many users/transactions Great: Infinitely scalable system bandwidth and user capacity
Measure of Value: (value consistent over time) Awful: Value based purely on speculation too volatile, unpredictable Great: Objective definition-based valuation, constant across time, borders and cultures

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