Proposal for a Karmic Currency

Published on April 28, 2012 in Currency, PunkMoney and Social currency. 5 Comments Tags: , , .

Anything which alters its environment to increase production of itself is playing the game of increasing returns. – Kevin Kelly, Out of Control

I’ve been thinking for a while about introducing a currency into #PunkMoney, which would make it possible to account for value created between its users. Such a currency could, in theory, do a lot to help #PunkMoney scale, by encouraging participation through a positive feedback loop. After some weeks of thinking, I came up with a tentative solution which I’d like to develop here.

First of all, some groundwork. I’d like this currency to adhere to certain principles – explored elsewhere on this blog:

  • It must be tied to a social gesture

Like a +1 vote or a retweet, it will be created through a simple and effortless social gesture. In #PunkMoney terms, this is likely to be a thanks tweet created ad hoc, or in reply to a specific promise. [1]

  • It must be asymmetric, and therefore, abundance-based.

There should be no material cost associated with creating and awarding this currency to another user in the network. Its creation will not entail any further obligation or commitment from the issuer. [2]

  • It must be karmic

By ‘karmic’, I mean the principle of increasing returns. Receiving this currency will make it more likely that you will, in turn, receive value back from other users. In this way, the currency will enable effort, attention and resources to flow to the people according to merit, as determined by the network’s users.

  • It must be un-gameable

It should be impossible or impractical for any conspiring group to artificially award each other this currency, and divert the network’s value to themselves as a result.

  • It must support gradients of value

It should be possible to award the currency conveniently in different amounts to different users, based on the perceived value they have delivered.

It might seem like I have defined a wish list for something so perfect it could not exist. Certainly, if this problem were to be approached from a narrow monetary perspective, it would be completely intractable. There is no way money could be created by a user without an obligation or commitment backing it. I am however using ‘currency’ in a broader sense, to describe a trusted symbol in a network which acknowledges and shapes the flow of value through it. [3]

The approach I’ll develop uses some simple secondary school maths. It’s meant to outline the bare structure of a system which could work. No doubt a mathematician with a grasp of network theory could devise a more refined version of what follows. (If you are one, I’d be grateful for some feedback.)

Thanks as social gesture

As mentioned, the basic gesture which we will use to create this currency will be a #PunkMoney thanks tweet. The ‘thank you’ note can be created in two ways: by replying to a promise with

@someone thanks #punkmoney

or by creating a new tweet from scratch, for example

@someone thanks for the beer #punkmoney

This new functionality has already been added to the tracker, so this building block is already in place. In the proposal that follows, thanks basically stands for any gesture from X to Y which constitutes an acknowledgement of value created by Y. We can represent this as an edge between two nodes:

X -> Y

The approach will in fact be agnostic to the type of gesture used, as long as it means the same. All my examples will rely on the #PunkMoney thank you gesture as this is the context the currency is being defined for.

Perspectivalism

A naive approach would be to simply count the number of thanks a person received over a given time period, and represent this as a karma score. The basic problem with this is that it is trivial to game: just tweet someone a lot of thanks to inflate their score.

The solution is to take a perspectival approach. [4] According to this way of looking at things, no user in the network has an intrinsic score or balance which is the same to all other users. Instead, Y’s karma will look different depending on where you stand in relation to Y in the #PunkMoney network.

Let’s assume the following graph of A’s basic network. We arbitrarily normalise A’s karma to 100, representing the total amount of karma which will be shared out to users as A sends thanks to others.

In this thanks graph, we can calculate a perspectival karma score for every user from A‘s point of view, using some simple maths. Since A has sent two thanks, each of them is worth 50% of his starting balance of 100. As a result, A will see B and C‘s karma as 50 respectively (50% of 100.) Since B has thanked D and E, their karma will be equal to the product of the ratios (times 100) down the branch to either user. We also want karma to decay with distance, so that after a certain number of hops through a branch it fades out, rather than continues indefinitely. To achieve this, we can divide the ratio for each hop by its distance from the origin of the calculation, A.

In this case, D’s karma from A’s perspective can be calculated as follows,

KA->D = (1 x KA->B) x (1/2 x KB->D) x 100

= (1 x 50%) x (1/2 x 50%) x 100

= 12.5

E’s karma from A’s perspective:

KA->E = (1 x KA->B) x (1/2 x KB->E)

= (1 x 50%) x (1/2 x 50%) x 100

= 12.5

Finally, F will have a karma score equivalent to:

KA->F = (1 x KA->B) x (1/2 x KB->F)

= (1 x 50%) x (1/2 x 100%) x 100

= 25

The defence against gaming is the subjectivity of a perspectival score. The karma a user has depends on the person who is looking at them, and their relationship to them. If a group of conspirators decided to award each other a lot of karma, they would form a closed loop. No other users would be connected to them, and hence, each conspirator’s karma would appear as zero to the rest of the network.

A different gaming strategy would be to first try and earn some thanks from other users in the network, and then to start artificially inflating the karma supply to some co-conspirators. On closer inspection, though, this is impossible because the supply of karma cannot be inflated: the more thanks a user create, the less karma each one confers. A user who wants to game the system could never give away more karma than they have in fact earned. Another way to put this is that total karma received is always equal or greater than karma awarded [5]:

kin <= kout

Karma

At the beginning of the post, I defined one of the principles this currency must adhere to as that of increasing returns. Receiving karma should make it more likely (in a non-trivial sense) that other users will want to provide value to them. Perhaps this value provision will take the form of fulfilling specific requests, or sending them new promises for things they might need.

To achieve this, we need the value of a person’s thanks to be proportional to the amount of karma they have. We’ve established that from A‘s perspective, F is the user with the highest karma score (50.) If our currency is karmic, and deserves to be called karma, it must be the case that when F thanks someone, it’s worth more to their karma score than when D or E (with 25 each) do.

This definition presents some issues. First of all, karma is perspectival, rather than an intrinsic property of a user. So a statement such as “F‘s thanks is worth more than E‘s thanks” needs to be qualified accordingly. There is no objective sense in which F‘s and E‘s thanks are worth anything: it’s only from the point of view of users connected to either F or E that those gestures mean something. However, to make sense of this statement we need a neutral way of comparing the value of F and E‘s thanks. We can do this by assuming a neutral observer O, who is connected to both F and E in the same way.

Let’s add O to the graph in relation to F:

In this graph, the theoretical user O (he doesn’t actually need to exist to make this point) can be connected to both F and E in exactly the same way: via a single thanks from either F and E, to him. That is, from A‘s point of view, the only factor which could create a difference in O‘s karma would be F and E‘s relationship to A, not to O.

Clearly, F‘s thanks to O is worth more to O than E‘s, from the perspective of A. Assuming F thanked O, O‘s karma from A‘s perspective is calculated as follows:

KA->O = (1 x KA->C) x (1/2 x KC->F) x (1/3 x KF->O) x 100

= (1 x 50%) x (1/2 x 100%) x (1/3 x 100%) x 100

= 8.25

In comparison, if E thanked O instead, his karma from A‘s perspective would be lower:

KA->O = (1 x KA->B) x (1/2 x KB->E) x (1/3 x KE->O) x 100

= (1 x 50%) x (1/2 x 50%) x (1/3 x 100%) x 100

= 4.12

In other words, from the perspective of a neutral observer, it would be better to receive a thanks from F, in order to win favour with A, than it would E. This is significant because it establishes that this currency is karmic: due to F‘s better position than E, his thank you has more value. It’s more likely that O will want to help F, as a result of his relationship to A, all else being equal. Value flows according to merit.

Weighted thanks

The final constraint we defined for this currency was the ability to express gradients of value. I’d like to be able to send a thanks to person A for putting me up in their home for a night worth a hundred times the thanks I’ll send B for retweeting my blog post. This is also no problem given the definition outlined above.

In practical terms, instead of requiring a #PunkMoney user to send a hundred thank you tweets, we’ll allow them to add a number to the thank you note, for example:

“@someone thanks for putting me up +50 #punkmoney”

Now all we have to do is divide up the user’s karma proportionately. A single thanks will be worth 1/50th of this one. The total value will be equal to 100. Assuming two thanks, where one is worth 1/50th of the other, we simply adjust the ratios accordingly:

KA->C = 50 x KA->B
KA->B + KA->C = 100

50 x KA->B + KA->B = 100

KA->B = 100/51 = 1.96
KA->C = 100 – 1.96 = 98.04

Plugging these weighted ratios into the graph will allow us to take into account that A intended his thanks to B to be worth a great deal more, and to cause a greater impact on his karma score.

Conclusions

This defines the basic approach. As I mentioned before, it’s a bare structure which could probably be significantly improved upon, assuming its logic is sound. I’ve deliberately left out factors like time-decay, how to represent a user’s karma back to them, and the computational cost of calculating karma in a large, densely connected network. I’ll hopefully address those in a second post. In the meantime, I’d be grateful for feedback.

To summarise: the basic idea is to introduce a peer-to-peer accounting mechanism which is debt and commitment-free, but which helps to allocate value in a network efficiently, according to merit. If it worked, it might reasonably replace money in some situations. Karma would not have the full force of a monetary claim: having it only makes it more likely that a value will flow back to a user through incentives, but won’t guarantee it. Still, if it works the implications are good enough for #PunkMoney.

Notes

[1] See Splitting the Social Currency Atom for my take on social currencies, and a potential ambiguity in the way the term is used.

[2] The term asymmetric accounting was coined by Gregory Rader, to describe “systems that record and track the provision of value rather than the volume of money transacted.”

[3] See A Broader Definition of Currency for a discussion on expanding the concept of currency beyond money.

[4] First explored in a A Perspectival Trust Metric for Ripple. Thanks to Jordan Greenhall for pointing me in this direction.

[5] This is similar to the approach taken by PieTrust for resisting “reputation inflation.”

PunkMoney 0.22: Money as Language

Published on April 15, 2012 in Gift Economies and PunkMoney. 3 Comments Tags: .

This weekend I released the next iteration of #PunkMoney, version 0.22. It introduces three exciting new protocols – thanks, needs and offers – designed to increase the expressiveness of #PunkMoney. Increasingly, I’ve started thinking of #PunkMoney as a kind of higher-order language. More on that in a bit.

Let’s look at each of the new protocols in turn…

Thanks [ Tx ]

‘Thanks’ is the new name for what was formerly the redemption syntax [ R ]. It has exactly the same functionality: replying to a promise with ‘thanks’ redeems (and therefore closes) an outstanding promise. The word ‘thanks’ replaces ‘redeemed,’ as in the following example

“@someone Thanks #punkmoney”

Thanks also functions outside of promises. You can tweet a thank you message to anyone, for anything, and the tracker will acknowledge it. For example:

“@someone Thanks for the chocolate #punkmoney”

This is a nice way to send a public, recorded ‘thank you’ note. It will also become more important in the future, in the calculation of a karma score for each user, based on their acknowledged generosity to other users.

Offers [ 0 ] & Needs [ N ]

One piece of feedback on #PunkMoney which I heard from several different people (at least four times) was: how about broadcasting a generalised offer or request using the #PunkMoney protocols?

As of this version, it’s possible to do both, again using a simple syntax. To offer something, tweet

“I offer guitar lessons #punkmoney”

For needs, the syntax is the same, but with the word ‘need’, e.g.,

“I need feedback on my project #punkmoney”

Both of these statements show up in the #PunkMoney tracker alongside all the others. Both make it easy and convenient to tweet what you need or have to offer out loud, and have other people find it. This could be particularly useful, for example, in a small community like #Occupy using their own deployment of #PunkMoney.

You can close a need or offer – making it inactive – by replying to it with ‘close offer/need’ in a tweet, for example,

“@myself close need #punkmoney”

Finally, needs and offers also take optional expiration parameters, in the same way that promises do.

User profiles

The other big change is user profiles, which have been tidied up and now contain all of a user’s #PunkMoney statements, issued and received. Here’s a screenshot:

#PunkMoney statements are organised into tabs, making it easier to sort through a user’s activity, including their needs and offers. Part of the value of this exercise is making people’s role in a community visible, by relying on their actions, which speak louder than self-descriptions.

#PunkMoney as language

#PunkMoney now consists in 6 basic protocols: promises, transfers, thanks, offers, needs and expirations. You could look at these protocols as a set of rules about how to use ordinary language in a tweet to express higher-order meanings.

This relates to how the Philosopher Ludwig Wittgenstein described language, as a family of language-games. In his later work, Wittgenstein rejected the idea that meaning had an independent, metaphysical relationship to words. Instead, the meanings of words arises from their use according to a system of rules, often implicit in conversation.

A chess game is a good analogy for this. In the context of the rules of chess, moving the ‘King’ one step forward has a special significance which it doesn’t outside of it. It’s only in the context of these rules that the move has meaning. ‘Meaning’ something in a language is like making a move in a game. The move doesn’t make sense (‘mean’ anything) outside of those rules. The rules themselves depend on social acceptance to work in this way.

From this angle, we can see #PunkMoney as a very simple higher-order language game, which gives additional meaning to a tweet. Outside of the rules of the #PunkMoney game, tweets are just statements. Within them, they represent moves in a game. The nature of this game is much like the game of the gift economy, which humans have been ‘playing’ for thousands of years.

Hopefully, as #PunkMoney evolves, I expect new protocols will be added to the basic set, and additional ones might be layered on top, providing more subtlety and granularity of meaning. (Perhaps this relates to what the MetaCurrency project call the expressive capacity of valuation systems.) In the meantime, I hope you find the new protocols interesting (dare I say useful?) and please feel free to leave feedback.

I am grateful to a number of individuals who have supported #PunkMoney with feedback and encouragement, and who I will not individually name. (I have sent them some #PunkMoney though.)

PunkMoney 0.2: Latest developments

Published on March 25, 2012 in Code and PunkMoney. 4 Comments Tags: , , .

A community is a group of people who honor each other’s gifts, who can trust that their gifts will be reciprocated some day, in some way. – Bernard Lietaer

#PunkMoney is a Twitter-based promise currency anyone can print, transfer or redeem on Twitter, using a simple syntax. The idea began in October last year, around the time of Occupy Wall Street and the Contact conference in New York. Since then it has undergone some refinement, and the PunkMoney tracker has been deployed. Last week, I did an interview for Dowser magazine, where I explained some of the sources of inspiration and ideas behind the project.

This led to #PunkMoney receiving some renewed attention, while I happened to be working on the next version of the tracker. I’ve finally deployed the second version today (PunkMoney 0.2.)

So this post is all about new features, and developments to the project. (For an introduction to #PunkMoney, read this.)

Nomenclature

The first small change is about naming conventions. The currency protocol, which nobody owns and anyone can use, is called #PunkMoney (e.g., with a ‘#’ in front.) Think of this as the currency code. PunkMoney (without a ‘#’) will be the name of the tracker: the tool for finding, interpreting and storing #PunkMoney statements. I’ve spent the last month re-writing the original PunkMoney tracker, and building in several quite cool new features.

#PunkMoney (the currency) remains largely unchanged, except for one thing. More on that in a bit. On to what’s new…

Refactored, open source code

The first version of PunkMoney was a prototype written in a hurry, on a plane to New York, in several cafes and on a park bench. The new version of the code is much leaner, better organised and makes use of Object Orientation. This will make it easier to maintain, build on and share. The code is also now an Open Source project, available on GitHub (under an MIT license.) If you’re a developer, feel free to check it out.

It was always my intention to open source the code at some point. It’s an important part of the project that anyone with the skills can, in principle, set up their own tracker. The more trackers, the merrier, leading to less reliance on any single point in the network, and provides better coverage of the Twitter API. A second reason to do this was to support communities who want to setup their own #PunkMoney-based currencies.

If you’re a developer, or interested in using PunkMoney for your own community, I am happy to support you with setup and installation, as long as I am not too busy. Likewise, if you’d like to contribute to the code base in any way, feel free to submit pull requests on GitHub.

A new way to redeem

The first new feature makes it a lot easier to redeem a #PunkMoney promise. The old method, which is still supported, is to reply to the original tweet with ‘redeemed,’ like this:

@someone Redeemed #punkmoney

Although this method works, it would be nice if there was an even simpler one, which reduces friction and room for error completely…

The new redemption syntax is so simple it would be difficult to get it wrong. As of PunkMoney 0.2, any promise can be redeemed by its recipient by favouriting the tweet:

This is nice an intuitive, and easy to do from a mobile phone as well. For the time being, it is an experimental feature. Starred tweets will take on average 30 mins to show up in the tracker, versus the old method which should take about a minute. (The slower time is, unfortunately, due API rate limitations, and the fact that Twitter doesn’t have a direct way to check who favourited a tweet.)

A trust score

A second major new feature is the introduction of a trust score for each user. Although I’ve done some previous thinking on perspectival ways to measure trust, I opted for naive representation of trust for the time being. So your trust score just means, for now, the number of people who trust you, who are part of the #PunkMoney trust network already:

While this is definitely simplistic, it’s a start. As (and if) the network grows, I’ll explore how this can be updated using a hubs and authorities algorithm to measure influence more precisely. For the time being, it’s meant as a quick way to find out how many people trust a given user, and who they are.

Finally, the trust map

The most exciting new addition to the tracker is the trust map. This is a network graph, which represents each user in the #PunkMoney network as a node. The connections between two nodes indicate a trust path. At a glance, it shows who’s in the trust network and how they’re connected to each other. Clicking on a user shows all the relevant information about them.

This replaces the previous global trustlist, which didn’t provide any insight into the actual relationships between users. Although the map is fairly simple for now, it’s a starting point for a more complex version.

Next steps

The feedback and interest in #PunkMoney has been encouraging, so I plan to keep working – and collaborating – on the next iterations of the tracker. There are some very cool new ideas to work on already, though I’m cautious about over-complicating the project. Meanwhile, I’ll be presenting #PunkMoney at the Digital Money Forum in London next week. If you have any questions or suggestions, please feel free to leave a comment. Thanks!

Building Currencies for Open Collaboration

Published on February 19, 2012 in Uncategorized. 3 Comments
I’ve been thinking about some of the major obstacles to online collaboration, and how currency design might be able to help overcome them. As Guillaume Lebleu has pointed out, a currency can be thought of as a tool for enabling collaboration between a group of people. Markets would be unable to function without money, which provides a unit of account and a way for people to agree on the relative value of different goods and services. The ability to exchange, in turn, allows specialisation and the creation of economy: a very large, complex collaboration between millions of agents who do not necessarily know each other.

The idea that we need currencies to catalyse collaboration between people implies that, left to their own devices, they probably wouldn’t collaborate as much, if at all. Obviously though, collaboration between individuals likely existed long before the invention of money, or even writing. The anarchist Peter Kropotkin believed that “mutual aid” – the ability of a species’ members to cooperate with each other – has always been a significant factor in natural selection and evolution:

The animal species, in which individual struggle has been reduced to its narrowest limits, and the practice of mutual aid has attained the greatest development, are invariably the most numerous, the most prosperous, and the most open to further progress.

Peter Kropotkin, Mutual Aid (1902)

If cooperation is such a deep-seated aspect of human behaviour, it seems mistaken to think that we need currencies to help solve collaboration problems. However, there are degrees of collaboration. It is quite hard to imagine a complex, modern economy without markets to organise and incentivise production. It is just as difficult to imagine how markets could work without money. Although markets might not represent the highest ideal for human cooperation, they have nonetheless been effective in motivating and rewarding people to create wealth, in large amounts, for people they have no bonds of kinship with.

A more nuanced argument about currencies and collaboration, which I tried to develop in this post, is that cooperation does occur more ‘naturally’ within smaller, real-world groups. Part of the reason for this, at least, is that in the real world, a group of a few hundred or less will find it easier to develop trust, to organise people according to roles based on their strengths and weaknesses, and to provide recognition for individual and collective achievements. Online, and especially in larger groups, these tasks are much harder: you are often working with people you’ve never met: communication is difficult, roles are not clear, and pre-existing trust may be low.
An economist might think that these collaboration problems should be solved with markets. Would-be online collaborators could define tasks the want to get done, and attach a certain amount of money to each task. That way, they wouldn’t need to trust anybody over the long term, or even work out if they have the skills required to do the job. They could just pay whoever manages to do the job. After the transaction, each party could walk away. Such markets for online work do exist, of course. However, this leaves a lot to be desired: markets are not the right way to go about achieving ongoing collaboration based on trust and mutual aid rather than money and competition.

The problem seems to be that where bonds of trust are weak, such collaboration is very difficult to achieve, despite the best intentions of those who may want to collaborate. Yet, to try to strengthen them would require meeting in the real world. While that might be a good solution for some projects, it belies the power of the Internet as a networked environment to have to take collaboration offline. It seems that, somewhere between markets and mutual aid within the context of real-world relationships, there must be an intermediate state: a way of collaborating which is both complex, requires less trust than real-world teams, but doesn’t resort to money.

The Example of Open Source
In fact, this way of working arguably already exists, where internet-based collaboration works best: the open source community. Open source is a way for people who do not necessarily know or trust each other to collaborate on software projects, where the source code is held in the public domain, for anyone to copy, adapt and use as they wish. Open source collaboration has been remarkably effective in fostering collaboration between people who are basically strangers, and enabling them to create software as large and complex as Linux. Why has it been so successful?
I think there are a number of important insights to be gained from studying how open source collaboration actually works. Some of these insights, at least, could be adapted and applied to the world of non-coding collaboration, to help loosely connected people achieve greater complexity more efficiently.
Source control
One area where insights can be gained in source control software, which open source projects use to organise themselves. The main code for the project is stored in a repository. A project leader, or group of leaders, have the ability to accept code submissions into the main trunk of the repository, although anyone can take the code and start their project with it (called “forking”). Users and non-core coders can submit feature requests, or proposed patches to the code. The project leaders decide which requests they will turn into tasks to do, and which patches they will accept into the source code.
As the code evolves, individual contributions are recorded. Some people who contribute often become more central to the project. Their opinion carries more weight in the community, at least partly because their continued commitment to the project is more important to its success. Some projects therefore have inner circles of core contributors, who have more control over the code than more marginal contributors. The important thing, though, is that collaboration is open-ended: anyone can come to the project, pick up a task, and start earning a reputation within the community in question.
Source control is a useful organisational tool for coding projects; but it also has another (perhaps unintended) purpose which is key to understanding why open source is so successful.
Recorded credit
One of the consequences of keeping a record of contributions is that everybody gets credit, in a way, as tasks are created, completed and accepted back into the project trunk. It’s the fact that credit is recorded which is perhaps so important: each task of work completed is another piece of recorded credit for a contributor. It has the effect that credit doesn’t need to be remembered for a person’s work to receive permanent recognition. As new people come in and out of the project, their contributions remain acknowledged. This creates confidence that people don’t need to rely on each other to remember what they have contributed, and to give credit accordingly. The process is built into the very tools which allow collaboration.
GitHub is a very successful source control site where collaborators can store code and manage projects from. Perhaps one of its major advantages are its integrated, public profiles. Whenever a coder contributes to a project, the code commit appears on their profile, in a permanent way. So every time you wander into a project, even if you might never contribute again, your actions are constantly creating a form of credit which can be used to demonstrate skills and knowledge to others. This is true even if the project collapses, or breaks apart.
It’s in this context that speaking of collaboration currency makes some sense. Each project has currency – this basically consists in the social belief that it is a good project, and that it creates value. So the currency of being a contributor to Linux or MySQL can be significant. Large, meritorious projects can attract increased collaboration because of the cachet the project has. Its reputation credit is worth more. These dynamics, like those of currencies, work particularly well in eco-systems such as GitHub, where coders can jump between projects, earning credit along the way.
Finally, a point which is always worth noting: the creation of ‘credit’ by project leaders is never going to be constrained in the same way that money is. The supply of credit is basically an abundant resource. There is therefore no limit to the symbols of recognition which can be stamped onto anybody’s work. This opens up the possibility of increasing returns: greater collaboration results in increased currency, which strengthens trust and motivation, leading to more collaboration still. This is the major advantage of reputation currencies over money.
Conclusions
The main argument of this post could be summarised like this: collaboration online is harder to achieve than real-world cooperation between smaller groups. The reasons are lack of pre-existing trust, difficulties defining appropriate tasks, and lack of concrete mechanisms for recording reputation. Markets solve the problem of complex collaboration between large numbers of people with money. However, money is scarce, and the market is an impersonal, often temporary form of collaboration. Online collaboration between non-coders needs its equivalent of source control: a system which allows collaborators to define and complete chunks of work, and to be able to walk away at the end with the credit for their contributions permanently recorded in a public profile.

Sketch of a Holonic Credit Network

Published on February 12, 2012 in Credit Networks, Ripple and p2pmoney. 2 Comments Tags: , , , , , .

In several posts about peer-to-peer money, I’ve discussed how a credit network like Ripple needs a concept of community in order to scale. By community I understand more than just a collection of individuals, but an actual entity which is more than the sum of its parts.

This idea has crystallised further as I’ve been learning about the concept of holons and holarchy. A holon is an entity which is both a whole in its own right, and a part of a more complex system. Atoms collectively create molecules, the building blocks of cells, which combine into organs. The organisation of holons in this way is called a “holarchy.” David Korten describe the concept of holons and holarchy as

fundamental to understanding the healthy function of complex living systems, which requires that each of their whole-parts maintain its own identity and boundaries even as it functions as part of the larger whole.

The Post-Corporate World, by David C. Korten

What seems important in the idea of holarchy is that, at each stage, the entity which emerges from its constituent parts is a more complex system in its own right. Its behaviour cannot be explained solely in terms of the interactions of its parts. There is more, for example, to a living organism than some atoms rubbing against each other.

Holonic Credit Networks

Ripple specifies a peer-to-peer credit network in which individuals who trust each other transact using mutual credit accounting, rather than money. The advantage is that such credit can be created abundantly, as and when it is needed, subject only to trust between issuer and recipient. Ripple’s network dynamics come into play with the concept of credit routing, which allows individuals to pay people who are not in their immediate trust vicinity, by sending an IOU through a chain of trusted intermediaries.

While the idea is compelling, Ripple has not yet managed to scale to the point where it can work. Personal IOUs, somehow, seem too limiting. A peer-to-peer credit network would perhaps have better chances of success if it were holonic: in other words, if it allowed for individuals to associate into groups, who could issue their own currencies, backed by the guarantees of their members.

Such communities would be more than the sum of their parts: their members would take joint and several responsibility for their collective currency. This means that if somebody didn’t play fair, the others in the group are on the hook for their default. The advantage, though, is that credit risk is reduced for all the members of such a collective as a result. Creditors, in turn, are more likely to accept its currency with the knowledge that a whole group of people are guaranteeing it.

Such a credit network would become holonic when associations of individuals can form meta-associations, and so on. The resulting network would allow credit to be created at different levels of the holarchy: by individuals, as well as stores, co-operatives, small towns, cities, and so on. Each level of the holarchy would contain internal holons, jointly liable for their parent holon’s credit.

Community partnerships

Chris Cook is someone who has explored the possibility for a type of collective agreement within a Ripple-like credit network. His ideas, which he describes under the umbrella ‘Money 3.0,’ are perhaps most interesting I’ve heard of yet. Among them is the concept of credit clearing, which would allow a partnership within the network to settle debts internally, based on how much credit is redeemed and issued externally, and by whom.

Multilateral clearing allows members to cancel their debts to each other, by finding a closed loop of obligations within the partnership. Such loops can be found automatically using a simple algorithm. Any remaining debts and liabilities can be resolved by each indebted member putting a certain amount of their personal currency into a collective pot, and creditor members taking out what they are owed. The result would be that each holon can become a self-regulating part of a larger, more complex whole.

Trust, backing and routing

Perhaps the advantages of holarchy would become even stronger with the use of trust ratings, which made a particular holon’s creditworthiness visible to other members of the network. I’ve explored one idea of how this could be achieved robustly with a Bayesian approach to calculating trust: the amount of trustworthiness A may appear to have to B depends on who B already trusts, and how much those people, in turn, trust A. Degrees of trust can be expressed in credit limits.

Another concept it would be worth exploring (which I’ve already used implicitly) is self-issued credit, as opposed to mutual credit. Under a self-issued credit system, an ongoing relationship between two holons is unnecessary. A self-issued credit note, once accepted, already implies trust in the issuer. The need to declare trust in the first place therefore becomes redundant. Credit notes issued in this way could be backed by promises of convertibility into assets with use-value, such as energy, rent or phone credit, based on whatever a particular holon may be able to provide.

With self-issued credit, a declaration of trust from A to B can become a way for A to signify willingness to automatically convert their credit into the credit of other members they also trust. Credit routing would become more like running a currency exchange. Members would be free to specify the amount of credit they would be willing to convert automatically for their users, and even rates for conversion. Incentives based on fee structures could encourage nodes to become hubs, facilitating the flow of credit between all parts of the network, like the flow of blood through a body.

Conclusions

Though many technical and architectural questions remain open – for instance, how holons decide on new membership and credit limits – it seems to me inevitable that a successful peer-to-peer credit network will incorporate such ideas. In combination with a decentralised payment architecture such as Bitcoin’s, a self-regulating peer-to-peer credit network could form the basis of a genuine alternative to the banking system.

What is a Gift Currency?

Published on February 6, 2012 in Gift Economies, Gift currencies and Reputation currencies. 0 Comments Tags: , .

Last year I built a Twitter-based currency called #PunkMoney, which some people described as a gift currency. My initial intention was to find a way for people to print their own money on Twitter, taking inspiration from the self-issued credit of the Middle Ages. However, #PunkMoney became a useful way to promise friends beers, meals, places to stay or help with projects. Without intending it, this is how people decided to use it, so I went along with it.

But what is a ‘gift currency’? On the surface, the idea can seem paradoxical. Money and gifts usually don’t work well together: it’s considered absurd to charge someone for a gift, obviously. It also seems strange that a form of money could be backed by gifts, particularly because money is a means of payment. In my view, it makes sense to think of a gift currency as a kind of abstraction of an actual gift, which circulates according the rules of the gift economy, rather than those of the market. Gift currencies might be a useful innovation for kickstarting gift economies between groups of people, for example.

Before going on to why, here’s an attempt at defining what a gift currency is…

A definition…

A gift currency is a social symbol which can be used to encourage the flow of gifts between a group of people. These might take on many forms, but the most likely one is a simple promise to deliver a gift to the bearer. The promise can be issued on a piece of paper, e-mail, or perhaps even a tweet. Once issued, it should be able to circulate like money does. Rules might govern when it must be redeemed by, and who it can be transferred to – for example, the members of a particular group or scene.

Once issued, the promise of a gift can circulate much like the gift itself. An important feature is that gift currencies are not denominated in an abstract unit of account, like dollars or pounds. If that were so, the gift would inevitably become a mere means of payment. Stripped of its social significance, the gift currency would no different from money.

Gift currencies are like money insofar as they act as a means of exchange and store of wealth, but they are deliberately not units of account. The idea might seem strange, but as this blog has argued before, the notion of what a currency is (in contrast to money) is perhaps changing. We already speak of shared symbols which measure reputation as reputation currencies, even though they do not act as means of exchange at all. Why not gift currencies too, for the opposite reasons?

Beyond markets

Economists may object that gift currencies are a bad idea simply because they are inefficient. One of the advantages of money, they would say, is that it is fungible: a common unit of value which allows people to compare the value of two things precisely. Without this ability, markets would be unable to function.

However, this objection misses the point. It’s not obvious that we should always prefer markets to other modes of economic organisation. We might, for example, prefer the “inefficient” gift economy over the market in some contexts, because gifts promote relationships and community, and markets don’t. In fact, communities and families depend above all on the flow of gifts.

There is no objective reason why efficient allocation of resources is always to be preferred over the inefficient but relationship-building effects of gift-giving. Further, it’s not necessarily true that markets are always efficient, in the long term, if they undermine or destroy assets such as community, which are a significant factor in people’s wellbeing. Neo-classical economics may promote a mantra of efficiency, but it does so by ignoring the value of other non-market modes of exchange.

Now that we’ve established that a ‘gift currency’ is not a theoretically absurd idea, what exactly could they be used for?

Complex gifts economies

To understand this better, we could compare gift currencies to gifts by themselves. The relationship between gift currency and gift might be something like that between money and barter. Gift currencies enable new levels of complexity to be reached, which wouldn’t otherwise be possible, much like markets enable more complex allocations of resources than barter. The abstract gift can be used in ways which a physical gift can’t…

A promise issued by a person to deliver a gift has similar effect to a gift, without having to actually become one. It creates social wealth, even though the physical wealth it promises hasn’t yet changed hands. If Bob creates a promise to cook Mary a meal, she probably already thinks slightly more of him as a result, even though he hasn’t done anything yet. This is good for Bob, obviously, and perhaps also for Mary.

The gift promised may never ultimately materialise. Yet, somehow, the recorded promise of the gift (i.e. the gift currency) has changed a relationship: two strangers become friendlier. This isn’t to say that the point of gift currencies is to get out of giving real gifts. Rather, it points to the fact that gift currencies can create social value before they’ve even been redeemed.

A consequence of this, which is perhaps even more important, is that the value of a gift can multiply many times as a gift currency circulates, even though the gift itself only really changes hands once. For instance, imagine that Suzy promises Bob a beer, who transfers to to Jane. Bob has still received a gift from Suzy, with the benefits that brings, even though he never really received the beer. Furthermore, Bob has also made Jane’s day, even though all he did was pass on an intangible promise.

Reputation flows

Another dimension of gift currencies is that they make it possible for people to earn reputation and trust within community, around specific offerings that they might have. Let’s imagine a community where gifts issued and redeemed are recorded publicly. It might become a lot more useful for someone to give away their time as a decorator or baker, if it results in building a reputation based on their skills more quickly.

In fact, such feedback loops might be a strong incentive for individuals to use gift currencies online. #PunkMoney automatically creates a user profile based on gifts promised and redeemed. The added benefits of recording transactions encourages people to give their gifts, which in turn creates more wealth. Reputation acquired through gifts can create reputation currency which people can leverage to attract new opportunities, including market-based.

A new idea

The idea is definitely new and somewhat untested, though if #PunkMoney is any indication, it seems there might be a place for gift currencies as a tool for networking and community building.

Reputation Currencies and Hybrid Economies

Published on January 28, 2012 in Collaborative Consumption, Gift Economies, Markets and Reputation currencies. 2 Comments Tags: , , , .
Reputation currencies have probably been around for a long time, but they have begun to proliferate in electronic form on peer-to-peer collaborative consumption sites of all kinds, from AirBnB to WhipCar. Reputation symbols help these platforms to function, by providing incentives for honourable behaviour, and discouraging abuse. Their rise can sometimes be regarded as a panacea: a new way to enable gift economies to flourish between all kinds of groups which will overtake traditional markets. In this post, I want to suggest an alternative: that reputation currencies are enabling platforms in a new space, somewhere between gift economy and market place. The introduction of reputation currencies into markets can help to make them more humane and altruistic; by contrast, reputation accounting can help to scale gift economies, at the expense of making them less personal.
To begin with, let’s start with some background to clarify what these categories mean, before going on to the main argument.
Markets vs. Gifts
Gift economies and markets are two mechanisms for distributing wealth. The flow of gifts tends to be informal, complex and to depend on an assumption of shared membership in a community, even as broad as humanity itself. Symmetry of exchange is not always obligatory: other principles such as mutuality or hierarchy may also determine who gets what. [1] By contrast, markets are characterised by formalised, synchronous and mostly impersonal transactions, governed by a principle of exchange.
The impersonality of markets can perhaps be described like this: when you turn up in a shop, as long as you have money to pay for the goods you want to purchase, it doesn’t matter to the shop-owner who you might be, or whether he will ever see you again. Having the money to pay him is enough for the transaction to proceed. It might be that the shop-keeper does in fact have a personal relationship with you, but it’s not essential for a market transaction to take place. The gift economy works entirely differently: where it predominates, relationships between individuals determine the patterns according to which goods and services change hands. Money doesn’t enter into it.

Markets, like gifts, occur in different areas of the economy, though economics as a discipline has been primarily concerned with the former, while gift economies have been studied by anthropologists. Markets encourage certain values to predominate over others: for instance, those of self-interest and materialism; empirical studies show that the mere suggestion of money changes people’s mode of behaviour, encouraging them to be less helpful or generous, and more self-interested. [2]  Gifts, as could be expected, encourage warmer feelings of generosity and kinship.

Things get interesting when market values or behaviour are introduced into contexts where the gift economy is predominant. For example, paying your partner to do the washing up, or trying to barter with an elderly person for help carry their shopping. Taking a market view of those interactions would be awkward to say the least, because it would violate expectations about how value circulates within relationships. In general, where personal relationships are strongest, the gift economy is most likely to be active.

The Market-Gift Continuum

It would be naive to think that there are islands of pure gift economy in a sea of markets, or vice versa. It’s unlikely that there is a discrete difference between areas of the economy which are governed by market norms, and areas which are governed by gift norms. Even inside businesses, as David Graeber observes, we see gift economy dynamics operating in collaboration between workers: here, mutuality is the basis for collaboration inside the firm, even if the firm itself competes in the market:

If two people are fixing a pipe and one says “hand me the wrench,” the other doesn’t say, “and what do I get for it?” (That is, if they actually want it to be fixed.) This is true even if they happen to be employed by Bechtel or Citigroup. They apply principles of communism because it’s the only thing that really works. [3]

Similarly, gifts oil relationships, which are in turn part of success in business, and hence the market.

It’s more likely that there’s a continuum between pure gift economy and pure market place. Assuming that a context can be more or less of a gift or market economy, we can also make some other conjectures. At one end of the continuum, the strongest gift economies will predominate where relationships are closest: for example, within families. Perhaps we could find the gift economy in a broader community to be slightly more formal and less personal. It’s also likely that the bigger the community, the less can be expected of an individual within the norms of gift-giving. You might ask a friend for a lift somewhere, but settle for directions from a stranger.

The Role of Reputation currencies

With these background assumptions laid out, I can come back to the main point of this post: to argue that reputation currencies belong in a hybrid gift-market place. In other words: they enables patterns of exchange which are neither fully gift-based, or market-based, but somewhere in the middle of the Market-Gift continuum.

To establish this, let’s first define a reputation currency precisely:

Reputation currency: a generally accepted symbol of reputation within a community.

The canonical reputation currency is the eBay’s feedback score. The more positive experiences other eBay users have transacting with a given user, the higher their reputation score goes. This is a type of currency which enables a user to demonstrate their trustworthiness to people who they’ve never dealt with before, and have no real-world connections with.

I argued in this post last year that reputation currencies do not enable gift economies to scale. The more nuanced form of this argument, which might be more convincing, is that they don’t allow gift economies to scale without changing them, at least partly, into something closer to a market economy. That isn’t to say that the use of reputation currencies necessarily creates a shift to market mode, only that it pushes exchanges closer to those norms. There are a number of reasons why this is plausible.

Incompatibility with pure gift economy

First, consider what would happen if you tried to introduce reputation currencies into areas of life where the gift economy is deeply embedded: families or small rural communities, for instance. Let’s assume a family gave each other points for doing jobs around the house, like cleaning windows or washing up. Most people would probably think there was something bizarre about this behaviour: it doesn’t seem right to do formal reputation accounting in these types of settings. That doesn’t mean that reputation accounting doesn’t occur, even within families: rather, it occurs in an implicit, less precise way, and according to different norms.

Much like money, reputation currencies upset the implicit accounting dynamics of the gift economy. This much seems obvious. In a gift economy such as a family, we expect reputation dynamics to be subtle: if someone doesn’t do the washing up for a few nights in a row, they might incur some annoyance. That is quite a different thing from ‘keeping score’ in some formal way: the need to keep track immediately implies a level of distrust: i.e., that people won’t do their fair share. Making reputation explicit has another consequence: it shifts us into market mode, making us more likely to seek precise equality of exchange, and to ignore the asymmetry which normally occurs in a gift economy, due to uneven needs and abilities.

Incompatibility with pure market economy

The second leg of this argument is that introducing reputation currencies into what would otherwise be strong market economies fundamentally alters market dynamics. If we think of a market exchange as a transaction characterised by the lack of requirement for ongoing relationship, reputation currencies are bound to change it. Once you start making reputation explicit where it was previously less obvious, market behaviour changes to become more geared towards reputation preservation. If your reputation currency affects your ability to do business in the future, your interactions will be less cold, impersonal and self-interested as you consider the consequences of your actions on your reputation score.

Reputation currencies also imply a personal investment in community, and hence more gift-giving. It’s intriguing to think – perhaps because it appears so counterintuitive to the logic of the marketplace – that former employers take time to share employee references with their future employers, even though they may not stand to gain anything from it. However, there is effectively a gift economy surrounding the creation and sharing of references, which buffers the labour market, and helps it to allocate labour more effectively. In a similar way, feedback on eBay has a gift component to it: it is given freely for the benefit of the community, and therefore implies the existence of at least a minimal gift economy surrounding everyday buying and selling.

Some examples: StackOverflow and AirBnB

Finally, it’s worth considering some examples of how reputation currencies are actually used, in practice, where wealth is changing hands in the form of goods and services. Communities like StackOverflow, CouchSurfing, AirBnB and many others all have something in common: they combine elements of the market, with elements of the gift economy. [4] They are not entirely one or the other.

Taking the example of StackOverflow: we have community, in the sense that people who use it identify as members, which in turn shapes their generosity to other members. Nobody is paid money for their contributions: they are gifts. However, they are paid for, in a sense, with StackOverflow’s reputation currency. This means that answers to questions are an odd combination of self-interest and altruism: people provide them partly to earn reputation scores, which lock in trust and respect, and can be leveraged in the employment market, for example. Because reputation is recorded, they are willing to extend these gifts to people they have very little personal relationship with, perhaps other than that they are both members of the site. In other words, the norms of the market and the gift economy are active, in combination.

AirBnB, a site for short-term lettings in people’s homes, is another example of such a hybrid. AirBnB is mainly a market place: money changes hands in exchange for a place to stay. However the transaction is quite different to checking into a hotel. The experience of someone’s home, and their hospitality, lie partly outside the transaction, in the gift economy: there is a personal factor involved. Further, the feedback system encourages and rewards this generosity: hosts can earn valuable feedback, which helps them to attract more guests, and even charge more. The reputation currency provided by feedback enables this complexity to occur: without it, people would be unwilling to trust strangers in their homes.

Neither of the communities above would be able to exist without reputation currencies. Yet, interestingly, in both cases it doesn’t quite work to describe them as market places, or as gift economies: they are something in between.

Why is this?

The theoretical limit to the number of personal relationsips we can have–the Dunbar number–is sometimes placed at around 150. Wherever it lies, it’s likely that there are cognitive limitations which constrain how large a gift economy can really get, before the complexity of reputation accounting becomes too difficult for our brains. Presumably, this is why we find money useful: it allows for economies to scale, as we no longer need to keep track of the people we interact with (at least, to nowhere near the same extent.) Imagine having to work out if a person ‘deserved’ the ice cream they were trying to buy in a supermarket, based on the history of their contributions to the rest of the world. Money makes this task trivially easy: by boiling it down to a question about whether they can afford to buy it, or not.

However, money and markets can also undermine community, by encroaching on the gift economies which define them. [5] Perhaps reputation currencies preserve gift-like behaviour because their effects are less radical. Whereas the exchange of money requires no ongoing relationship or community membership between parties, reputation currencies do require an ongoing relationship to the community which issues them: your CouchSurfing reputation is not that much use unless you plan to continue giving and receiving from the community. However, reputation currencies don’t allow relations to become too gift-like: behaviour is still partly motivated by the representation of generosity (the currency) rather than bonds of relationship.

Conclusions

This post is a bit of a speculative sketch to lay the outlines of a theory: that reputation currencies enable a new kind of hybrid gift-market place, with complex norms. The strength of such communities is that they rely on a symbolic unit which can be created abundantly: contributions will never be limited by a lack of reputation currency to measure them with. However, if the arguments in this post are correct, we shouldn’t expect currencies to be a panacea for converting the world into a giant gift economy. Their role is likely to be more complex: introducing more humane values into traditional markets, while also allowing gift economies to grow beyond Dunbar-limits.

Related posts

Notes

[1] David Graeber, On the Moral Grounds of Economic Relations, Debt

[2] Merely Activating the Concept of Money Changes Personal and Interpersonal Behavior, in Current Directions in Psychological Science

[3] David Graeber, Hope in Common, The Anarchist Library

[4] See this recent article in Shareable magazine for more examples of platforms using reputation currencies.

[5] Charles Eisenstein, To Build Community, An Economy of Gifts, Nation of Change

Ripple, Bitcoin and Peer-to-Peer Money

Published on January 24, 2012 in Bitcoin, Ripple and Social currencies. 10 Comments
How could Bitcoin and Ripple complement each other? Until 1971, the international monetary system relied on a combination of gold reserves and paper money issued by governments. The paper notes were convertible to gold on request, although the rates of conversion varied, and were sometimes suspended. Until the post-war Bretton Woods accord, this system emerged without central design or protector institutions, and saw the lowest period of inflation in British history between the 18th and 19th centuries, and a signficant growth in international trade.

The relationship between Bitcoin and Ripple might be similar. Bitcoin is a special type of commodity money, like gold. A limited quantity of Bitcoins will ever exist – 21 million, of which 8.1 million have already been mined. Like gold, Bitcoin involves no counter-party risk: owning it doesn’t require the bearer to trust another person. Bitcoin transactions are also irreversible and don’t depend on a centralised authority to authorise or remember them. Once the thing, or bits have changed owner, it’s permanent. Bitcoin went through a large speculative bubble–perhaps inevitably–garnered by hype and media attention. Its critics dismiss it as flawed, yet it is still around and, at the time of writing, a Bitcoin is worth six dollars.

Ripple is a different kind of system: a proposal to create a peer-to-peer credit network, in which anyone can create their own money as IOUs, subject to other people’s willingness to accept them. The creation of new money as IOUs is made possible by people’s willingness to believe that the issuer will accept them back in exchange for goods and services at a later date. Alternatively, Ripple users can pay people who don’t explicitly trust their IOUs, by routing payments through a chain of intermediary users who do. If Alice wants to pay Paul, who doesn’t know her, she can still send him an IOU via John, who is trusted by both of them. This idea forms the basis of what could potentially be a digital, peer-to-peer credit system. Rather than merely providing us with a new way of lending old money to each other without banks, Ripple would allow its users to create their own.

Current challenges

At the moment, Bitcoin is entering its third year. It has received generous media attention, however its main users are mostly hardcore hackers and libertarians. It hasn’t yet caught on to the mainstream, for a number of reasons, including usability, scarcity, legal ambiguity and the lack of goods and services currently on offer for Bitcoin. It is interesting to see that despite this, Bitcoin has not yet collapsed. The network has stayed true.

Ripple has not yet successfully scaled beyond the level it needs to in order to become useful as a means of payment, rather than just an IOU tracking tool for friends. Part of the reason is that is suffers from unusual bootstrapping difficulties: its network only becomes really useful after reaching a certain size and density. Before that point, the network effects are not that strong. You might have a number of friends on a Ripple system, but it’s unlikely they’re the kind of people you need to do business with. Yet in order to get big enough to enable impersonal transactions to happen, lots of people need to join it.

Perhaps Bitcoin and Ripple can help each other, much like paper and gold complemented each other in the gold standard arrangements before they collapsed in 1971. However, this time, the technologies can be fundamentally peer-to-peer. A synthesis of Ripple and Bitcoin would create a sophisticated monetary system fully outside the control of any government or corporation. Such a system could provide a stable source of liquidity to people and businesses around the world, without having to rely on the monetary policy of governments, or lending habits of banks.

How exactly might this work?

Bitcoin as reserve currency

The most obvious starting point is to create a peer-to-peer credit network based on genuinely decentralised technology. Much like Bitcoin, such a network would process and record transactions in a totally peer-to-peer manner, without the need for a central book-keeper. However, in the case of Ripple, individuals would be creating their own money as IOUs, rather than mining it. A decentralised design would mean that each node in the network would know about every node it was connected to through a trust relationship. The software would work as a protocol, like email, rather than as a hosted service.

This proposal already exists as the theoretical latter stage of Ripple’s development. However, it’s possible to imagine something further still. It would be interesting if Ripple’s international unit of account became Bitcoin. Self-issued credit currencies in the Middle Ages were often denominated in gold or silver bullion. Most of the time, notes were redeemed in an equivalent amount of goods or services, as gold and silver were hoarded in temples and monasteries. The metals were used to periodically settle accounts, particularly large ones. The gold standard which followed later allowed international trade to take place thanks to a similar principle: currencies were pegged to a quantity of gold, but were often redeemed in goods and services. Gold only changed hands when deficits needed to be settled between countries. This, in turn, imposed discipline to keep control of their balance of payments, lest they run out of gold.

A similar option might be available to a decentralised Ripple network. Users could hold bitcoins in ‘reserve’ accounts, with the ratio of credit issued to bitcoins held exposed to other users of the network. Such transparency would allow everyone to see how leveraged any given user was. People would accept credit from other members who didn’t necessarily produce anything they wanted, because they would be able to convert credit into Bitcoin on request. Bitcoin would provide a level of security and confidence in the credit system. Such a set up seems to have worked for gold and paper for centuries.

There is nothing wrong with users extending credit in excess of their Bitcoin reserves: credit is denominated in Bitcoin, but redeemable in all kinds of goods and services, as well as Bitcoin, if necessary. What matters is that users have confidence in each other’s credit, whether they intend to redeem it for Bitcoin or not. With the ability to create credit denominated and backed by Bitcoin, users are no longer artificially limited by its supply. Credit can expand and contract according to confidence, but still stay within credible limits.

Transparent reputation

The last ingredient to this hybrid model is a trust metric, which would allow users to share information about their confidence in users with their neighbours. In the informal gift economy, the checks and balances of reputation accounting ensure that free-riders are eventually outed, while people who do their fair share (or more) win trust and respect. Similarly, a good trust metric will make credit-worthy users well regarded, further extending their ability to create money. People who don’t honour their promises should see their trust ratings drop, discouraging others in the network from accepting their credit.

In principle, this is how many trust measurement systems work: on eBay, judgements of individuals about a person’s trustworthiness are aggregated into points. This rating system makes eBay work: it gives people who don’t know each other sufficient reason to engage in time-delayed transactions, where fraud would otherwise be easy to get away with. Reputation currencies create confidence.

However, an eBay-ratings model would almost certainly be gamed in a monetary system (and already is to an extent on eBay). How do you design a trust measurement system that can’t be? It sounds like an unlikely task, but ideas about how it can be achieved exist.

With a Bayesian approach, trust can be measured perspectivally. If Alice trusts Bob, and Bob trusts Jane, Alice is more likely to trust Jane as well, though perhaps not as much. This dynamic is already at work informally in social networks. Jane has no intrinsic trust score floating above her head; rather, different people will trust her to different degrees, depending on their relationship to her. A Ripple trust metric can work in the same way.

When people connect on Ripple, they declare a trust relationship which is quantifiable, because it is expressed in terms of credit limits. If Jane trusts Bob with 50 BTC and Adam with 25 BTC, it’s possible to infer that she trusts Bob’s credit twice as much as Adam, and so on. These decision can then be used to weight calculations about who Jane can trust, based on who Bob or Adam trusts. A perspectival trust metric, as I’ve argued in this post, might be the missing ingredient which helps Ripple to scale beyond personal trust relationships, as it needs to.

Could it happen?

Perhaps the way money has worked in the past–as a combination of commodity and promise–is the key to creating a successful monetary system. A Bitcoin-Ripple mash-up would combine the scarcity of Bitcoin with the power of credit creation. All the technology to build such a hybrid model already exists, after all, so it is perhaps only a matter of time until someone creates it.

Related posts

Bibliography

Philip Coggan, Paper Promises (2011), ch.3 “Going for Gold”

Self-Issued Credit in the Middle Ages

Published on December 18, 2011 in Uncategorized. 1 Comment

In the Middle Ages, Roman bullion money ended up hoarded inside churches and monasteries, leading to a shortage of money in circulation. This led to the creation of new, improvised forms of paper money, issued by the people rather than their rulers. Esoteric types of credit money, such as ‘tea checks, noodle checks, bamboo tallies, wine tallies’ emerged China [1]. In England, money was issued by ‘shopkeepers, tradesmen and even widows who did odd jobs.’ [2] All over the world, money took on unprecedented forms as credit tokens issued by peers in relationships of trust, or ‘self-issued credit.’ In Europe, such forms of money were often denominated in Carolingian money, but did not rely on it as a basis for issuance.

Self-issued credit may have been widespread in the Middle Ages, but the history of money seems to be denominated by bullion. This is partly because objects like paper notes and tally sticks don’t survive as well as coins do, even though they may have been used a lot more at a given time in history. Traditionally, money is conceived of as something created by monarchs, or their central banks, and not by people. However, today we face cash problems which are similar to those at the onset of the Middle Ages in Europe: money is becoming scarce again, as banks are contracting, leaving people who are able and willing to earn a living without the means to pay for it. Perhaps we can learn some lessons from the abundant self-issued credit of the medieval era.

What is self-issued credit?

First of all, what is self-issued credit precisely? It could be defined as a recorded promise to deliver an equivalent amount of goods or services to the bearer of the note. Such a promise would usually come with an expiry date, which limits the issuer liability in case of non-redemption over an extended period. Here’s an example: a “labour note” issued in the 19th Century: [3]

Notes would typically be denominated in a unit of account: in this example, three hours’ labour “in Carpenter’s Work” from Joseph Peters. This particular note is non-transferable, however most notes would be. Usually, the community of people who are willing to trust the issuer to make good on their promise defines the boundaries of circulation. A typical medieval market would involve trading with notes issued by bakers, butchers and farmers. Promises issued from one source could circulate through many pairs of hands before returning to their issuer for redemption, providing a supply of money even for people who didn’t intend to redeem them. As confidence begets confidence, self-issued credit becomes money.

From this description, it’s obvious that money like this is heavily dependent on trust between individuals. The credibility of a given producer literally determines their access to money. This creates a virtuous feedback loop in the system: people who don’t redeem their promises loose credibility, and their money starts to trade at a discount, or not at all, as other people factor in the risk of accepting it. On the other hand, issuers who are honourable benefit from the fact that people who don’t necessarily want to buy their produce will accept their cash, because it is highly trusted. It’s these dynamics which regulate the supply of self-issued credit – the amount of money a person can create depends on people’s faith in their promises, and vice versa. [4]

The advantages

From the above description, self-issued credit might sound like a risky idea. This is true, insofar as relying on promises – even State-backed ones – always involves an element of risk. What is interesting about this particular type of money is that the risks are transparent and distributed: people issue their own money, which they’re responsible for redeeming. The bearer would probably not have legal recourse if something went wrong. In fact, in the medieval Islamic trade routes, disputes over self-issued credit notes could only be referred to voluntary courts mediated by merchant guilds or civic associations. The courts’ ability to impact a merchant’s credibility, and hence their access to credit, was their main source of power. [5]

The greater risk transparency means that there is less moral hazard in the monetary system: people who accept self-issued credit are aware of the risks that they are taking in doing so, and bear the consequences if something goes wrong. In the case of a national money supply, bad debts lead to monetary crises which affect everybody who uses the currency. Similarly, in a mutual credit system, money issued by people who don’t keep their promises creates problems for everybody else using the system, as it exists as a collective liability, rather than a personal one. Self-issued credit systems, by contrast, create resilience through diversity.

Another benefit of accepting greater risk is liquidity. Unlike forms of money which originate from hierarchical institutions like commercial banks, or government mints, self-issued credit is never in short supply relative to need. As long as people are able to produce things, and convince other people to accept their promises to deliver them as payment, money can be created. The ability to produce, and trust within a community, are the determinants of the money supply, rather than the other way around. Douglas Rushkoff recently coined the phrase “radical abundance” to describe this tendency in medieval monetary systems. [6]

As well as risk transparency, and abundant liquidity, we could also add to the list that self-issued credit is not debt-based, like other proposals to replace the financial system are. Specifically, transactions do not necessarily create debts, they create potential liabilities. The difference might appear semantic, but isn’t. Debts are exchanges which aren’t yet brought to completion, and which linger on when not completed. We are naturally averse to going into debt to people we have close relationships to for good reasons: they change the balance of power within relationships, and potentially undermine them. In a centralised financial system, the banks act as mediators between borrowers and lenders, absorbing the bad Karma of debt-ridden relationships. In mutual credit, debt can also be a problem if it is left hanging, without possibility of escape, because nobody wants to buy anything from the debtor.

A self-issued credit note creates a different type of relationship. A note issued is a potential liability, because a promise to deliver something only has to be redeemed if the bearer wants it to be. If they don’t, there is no feeling of an incomplete transaction hanging over the relationship, as there would be in an accounting system. Expiry dates also allow issuers to limit the extent of their exposure, creating a safety against accumulating potential debts. Another significant factor is the narrative associated with self-issued credit. Issuers feel like they are creating a unit of money, rather than accumulating debts. This, in turn, encourages participation among producers.

What is to be done?

Recent research has led me to the conclusion that self-issued credit is a really powerful invention, which seems particularly well suited to a networked era. It’s money that arises from relationships between peers, and which depends on trust, rather than state coercion of fear of destitution. It transcends the corrosive logic of debt, and it also works particularly well for communities. Another appealing aspect is the simplicity of such systems: ancient technologies like paper, seals and ink were sufficient to create credit notes, and should be again today. What has worked well in the past might prove very useful now, particularly with the help of modern technology. [7] Something to explore in more depth in a future post.

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Sources

[1] David Graeber, Debt, p. 270. During the Song Dynasty (960-1279 AD,) in periods of financial collapse, people resorted to ‘tea checks, noodle checks, bamboo tallies, wine tallies, etc.’ Graeber also notes these forms of popular money resembled the ‘token’ money seen in Europe in the Middle Ages.

[2] David Graeber, Note worthy: what is the meaning of money?, Guardian

[3] The example labour note is from Wikedia’s article on barter. Self-issued credit as well as mutual credit can sometimes be referred to as barter, in the sense that the goods promised are being bartered in the future for goods received now. This is also called ‘virtual barter.’

[4] Paul Grignon’s animated video The Essence of Money: A Medieval Tale gives a good account of the mechanics of self-issued credit in medieval European market fairs.

[5] David Graeber, Debt, p. 276.

[6] This phrase comes from a talk called Radical Abundance given by Douglas Rushkoff in 2009, in which he describes the abundance-based grain-backed currencies of the European Middle Ages.

[7] Mark Frazier has written several interesting proposals for how personal currencies might be implemented using modern technology.

Thoughts on the MetaCurrency Project

Published on December 3, 2011 in Currency and Definitions. 8 Comments Tags: , , , .

I’ve written before about the need for a broader definition of currency when I first starting blogging. That post was inspired by a video in which Art Brock, the founder of the MetaCurrency project, talked about his conception of currency as symbols for shaping flows. In October, I had the chance to meet up with several people involved in the MetaCurrency project in Fort Lee, New Jersey for the ‘MetaCurrency Collabathon’ – a memorable gathering of people thinking about the future.

Thinking about MetaCurrency has influenced my own understanding of what a currency is. However, I am not totally convinced by their definition: although I agree that a broader definition is useful, there are limits to how broad the concept can be before it becomes problematic. This post is an attempt to explain my own opinion about what a currency is, by critiquing MetaCurrency’s definition. However, some credit is due here: my own definition builds on their thinking.

What is a currency?

The MetaCurrency project’s proposal is that the definition of currency should be expanded to include new types of informations systems. In their own words, “money is still certainly a type of currency, but currencies are much more.” [1] Their definition for an expanded definition of currency (C) is:

C: Currency: a formal system used to shape, enable or measure currents. [2]

To make sense of it, we have to dive into a rabbit hole: the MetaCurrency project has a philosophical stance about the fundamental nature of reality, and not just of currency. This can be described as the “flow-centric” view of the universe, in contrast to the “object-centric” view which modern societies are accustomed to. According to this ontology, there are no objects, only flows of matter. What we consider objects are really the culmination of flows; it’s a tendency of human thought to see objects where there are really flows.

A good way to illustrate this view is to think of a river. As Heraclitus observed, “you cannot step twice into the same river; for other waters are forever flowing onto you.” [3] This is literally true of any river: the particles which are the river at any time are constantly changing. What defines the river is not the water it’s made of, but a way in which water flows. The same way of thinking might be extended to things which we’re more used to thinking of as ‘things’, like tables, machines or human beings. From a certain point of view, all of these ‘things’ are in a state of flux, constantly changing and, as the second law of thermodynamics tells us, evolving towards entropy.

With this context in mind, we can see that what the MetaCurrency project means by the word ‘currency’ is something very broad. Since ‘flows’ encompass everything the universe is, there are potential currencies for almost anything, both in and outside of the domain of value. Reputation points acquired on exchange systems like eBay shape the flow of value by measuring and acknowledging reputation in a socially agreed way. The movement of traffic through a road network is a flow, which is shaped by the ‘currency’ of traffic lights, and the highway code. The interactions of cells in the human body are another example of flow, shaped by the signalling systems cells use to coordinate activity with each other.

Language and community

What should be clear from the explanation above is that MetaCurrency are proposing to alter the way we habitually use the word ‘currency.’ A currency, to repeat their definition, is any information tool we use to “shape, enable or measure currents.” This definition goes against the grain of what most people understand by the term, as those involved in the project clearly know. As they point out themselves, currencies are rather like languages, insofar as the words in a language gain their meaning thanks to social agreements. It’s because of a consensus within a community of language users that when a person says ‘chair,’ it is interpreted to mean the type of object ‘chair’ describes, and not something else.

Community ownership of language is important, but not entirely sovereign. The fact that somebody starts using words like ‘currency’ in a way which makes other people uncomfortable is not in itself an argument against them. We would never be able to learn anything new about the world if we weren’t prepared to face uncomfortable revisions to the meanings of words we ordinarily take for granted. It’s partly the function of literature, for example, to stretch our understanding of reality with new language, even though this might be a daunting or uncomfortable experience.

However, there is a downside to challenging the social agreements underlying the meaning of words. If one group of people start using a word in a different way to the rest of a linguistic community, it creates an obstacle to understanding. The wider community has to get their heads around what the language-revisionists mean by what they say, otherwise they can’t have a discussion. It won’t be enough to say ‘your definition of currency is wrong, because that’s not how we use it.’ So, in order to engage with the ideas of MetaCurrency, I find myself needing to explain why I don’t want to use the word ‘currency’ quite in the way that they propose…

Meaning as use

In defining a currency as broadly as a formal system to “shape, enable or measure currents,” we’re opening the door to all sorts of things being considered currencies. These include things like traffic lights, thermometers, air traffic control systems, communication protocols between biological cells. In fact, it gets quite difficult to distinguish language from currency, according to this definition. If saying ‘thank you’ to someone enables a flow of gratitude we must accordingly think of those words as a currency too.

So far, I suspect that the MetaCurrency project doesn’t see a problem with that result. However, I see several: it’s not intuitive to most people that those things are currencies. Furthermore, the definition risks become so expansive that it loses meaning: when the distinction between language and currency begins to collapse, I wonder if we even need the word ‘currency’ anymore. However, a broader definition of currency can be useful without becoming as expansive or as challenging as this. The definition needs some tweaking.

Adapting the definition

There is a way of adapting the MetaCurrency definition of currency to mean something broader than just ‘money,’ but to not stray so far into the counterintuitive usage just described. The first step is to limit the definition of currency to the domain of value:

C’: A currency is a formal system for measuring, shaping or enabling the flow of value.

As a result of this definition, we no longer need to think of traffic lights and cell signals as currencies. On the other hand, we can continue to use the word ‘currency’ to describe symbolic systems which aren’t necessarily money, but which do “measure, shape or enable” the flow of value. For example, it makes sense to talk about reputation currencies under C’, because those types of symbols do in fact shape the flow of value. Reputation points on eBay help to convince strangers to transact with me. A university diploma helps me to get a job. Money also fits into C’, as a special class of currency which enables value exchange, storage and measurement.

It might be argued that by pinning the definition of currency onto the concept of value, I’m still left needing to define what value is. However, I don’t think this is a problem. As I was taught by an old philosophy tutor, either all of our concepts have to be defined in terms of each other, leading to circular definitions, or we have to accept some concepts as primitive. Ludwig Wittgenstein argued in his Philosophical Investigations that we don’t need to be able to define a concept in order to be justified in using it: what matters it that we can use it consistently to mean the same types of things, within a community of language users. I think we can make sense of why ‘value’ describes the flow of goods, services, trust and reputation between people, but the flow of cars, air traffic, cellular behaviour, does not. [5]

So far, I think C’ is a more convincing definition of currency, but it still needs improvement. One of its weaknesses is appealing to the concept of measurement. I don’t think it’s enough to say that a currency is a formal system for measuring value. There are many types of metrics used to quantify value which aren’t currencies. For example, I could invent my own unit of measurement which is 1/8th of a kilogram, and use it to measure the weight of something, like gold. Clearly it can be used measure value, but it isn’t a currency. It’s important, I think, to recognise that currencies shape the flow of value in virtue of the fact that they have common acceptance within a community of users, and not because they only measure the flow of value. There can be many ways of measuring the flow of value which do not shape it at all. So, this leads us to a distilled definition C”

C”: A currency is a commonly accepted formal system which shapes the flow of value.

This definition proposes that the only essential characteristics of a currency are that (a) it is a formal symbol, (b) that it shapes the flow of value, and (c) it does this because it has common acceptance within a community.

One of the advantages of defining currency in this way is that there is a compelling analogy with money. Currencies, like money, are ways of accessing value, including goods and services. They also depend on confidence in the same way. Their meaning, and hence their value as symbols, can be undermined through improper issuance. I think it’s also consistent with the growth in usage of terms like “social currency” and “reputation currency.” In the future, as the MetaCurrency project suggests, we might regard these new forms of currency as equivalent or even superior to money.

Conclusions

My reason for writing this post is that language matters. It’s important to recognise the social basis for the meanings of words when proposing to change them. Such changes can be useful if they stretch our understanding, and open up new ways of thinking. However, I think it’s also possible for language differences to become an obstacle to sharing and evolving understanding. For the concept of currency, I propose to take the middle ground: we do need a broader definition of what it is, but it should stay within the domain of value.

Notes

[1] ”In everyday English, we use the words money and currency interchangeably. However, we are reclaiming the word “currency” for something much more powerful than money alone. Money is still certainly a type of currency, but currencies are much more. They are the creators of currents — part of the language of living systems.” – metacurrency.org

[2] Ibid.

[3] Heraclitus (535 – 475 BC) was a pre-Socratic Greek Philosopher who held a ‘flow-centric’ view of the universe. (See the Stanford Encyclopedia of Philosophy.)

[4] “For a large class of cases—though not for all—in which we employ the word ‘meaning’ it can be defined thus: the meaning of a word is its use in the language” – Wittgenstein, Philosophical Investigations, 43

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