Designing the Perfect Money | Hidden Secrets of Value Ep. 5 | Alan Hibbard

Key Concepts

• Monetary Asset Design Trillemma: Scalability, Security, Decentralization.
• Layered Monetary System: Layer 1 (base money, store of value) and higher layers (currencies, mediums of exchange).
• Decentralization vs. Distribution: True decentralization means no special permissions, while distribution involves spreading responsibilities among multiple entities.
• Entropy Minimization: The property of an asset to resist decay or loss of value over time.

The Enduring Value of Gold and the Quest for Perfect Money

The video begins by observing the ubiquitous presence of gold coins in popular culture, from fantasy realms like Lord of the Rings and Game of Thrones to historical settings in Pirates of the Caribbean and video games like Skyrim and Age of Empires. This widespread use, the speaker argues, reflects a deep-seated societal understanding of gold's inherent value and its association with wealth. Despite being labeled a "barbarous relic," gold remains a significant asset, particularly for central banks.

The Monetary Asset Design Trillemma

The core of the discussion revolves around the inherent trade-offs in designing a monetary asset. The speaker introduces a "three-way trillemma" between scalability, security, and decentralization. It is posited that one cannot achieve all three simultaneously; at best, one can have two out of the three. This is likened to the common adage of "good, cheap, fast," where choosing two options necessitates compromising on the third.

For a monetary asset to function as money, the speaker argues that security and decentralization are paramount. Money is defined as an "entry in an honest database," implying an absolute need to prevent counterfeits and corruption by centralized entities. Consequently, scalability is the property that must be sacrificed to achieve the other two. This principle applies to gold, silver, Bitcoin, and any "perfect money" that might be designed.

The Role of Currency vs. Money

The video distinguishes between "money" and "currency." While money, like gold, is not scalable for everyday transactions (e.g., buying a coffee or groceries), it serves as a crucial store of value. Currency, on the other hand, is designed for transactions and must be highly scalable. To achieve this scalability, currencies typically compromise on the trillemma. Most currencies, the speaker explains, forego decentralization by relying on a centralized custodian to manage the asset, ensuring its security and scalability.

Decentralization vs. Distribution in Cryptocurrencies

A common claim in the cryptocurrency space is the achievement of all three aspects of the trillemma: security, decentralization, and scalability. However, the speaker contends that many projects conflate "decentralized" with "distributed."

• Decentralized: No single person or group has official, special permissions. Everyone is equal.
• Distributed: Responsibilities are spread across multiple entities, but some subset of users still holds special privileges.

The speaker uses the analogy of the Federal Reserve system. While it has 12 regional banks (distributed), it remains a centralized entity because a specific group holds special privileges. Similarly, many cryptocurrencies, despite having numerous nodes, are centralized because a subset of users possesses special permissions to act as nodes or validators, akin to the Federal Reserve's unique authority.

The speaker highlights Bitcoin as a rare exception, where no user has special permissions, making it as decentralized as gold. Gold's accessibility for mining and refining makes it inherently decentralized. The argument is made that crypto projects or CBDCs (Central Bank Digital Currencies) claiming to become "more decentralized over time" are misleading, as achieving true decentralization would necessitate sacrificing either security or scalability.

Layered Monetary Systems and the Erosion of Layer 1

The discussion then shifts to Layer 2 technologies as a proposed solution to the trillemma. The concept of a layered monetary system is introduced:

• Layer 1: The foundational layer, like gold, which is a true store of value and has no counterparty risk. It is designed to minimize entropy.
• Layer 2, 3, 4, etc.: Each subsequent layer represents a promise to pay the layer beneath it. These layers are essentially currencies and mediums of exchange.

The speaker illustrates this with an example:

• Layer 4 (Currency): A credit card.
• Promise: To pay bank deposits (Layer 3).
• Layer 3 (Currency): Bank deposits.
• Promise: To pay banknotes (Layer 2).
• Layer 2 (Currency): Banknotes.
• Promise: To pay Layer 1 money (historically, gold).

Historically, banknotes were redeemable for gold. However, the speaker points out that since August 15, 1971, the US dollar is no longer backed by gold. This event, the speaker argues, removed the base layer of the economic pyramid, leading to a "slow freefall" of the economy and its institutions over the past 50 years.

The Solution: Re-establishing Layer 1

The video concludes by asserting that to restore financial stability for individuals and the economy, it is essential to re-establish Layer 1 money as the foundation. This means utilizing assets like gold, silver, or Bitcoin as the bedrock of one's financial life.

The US dollar, not being an entropy-minimizing asset, "leaks value" and purchasing power over time. This constant erosion of value, the speaker suggests, is the reason for the perceived financial treadmill effect, where individuals must work harder to maintain their current standing. Acquiring gold, silver, or Bitcoin is presented as a way to step off this treadmill and achieve solid financial footing. The video ends with a call to action for viewers to invest in their financial education, with a plug for golds.com.