Erik Weijers, a month ago

Money, debt and Bitcoin

Many economists see money as a human invention that followed barter. But according to anthropologist David Graeber, in his book Debt: The First 5,000 Years (2011), it is not the case that we first bartered eight chickens for a goat and then invented money. No, debt existed before it all. What does this tell us our financial system and about Bitcoin as an alternative?  

As crypto enthusiasts, we are fascinated with money, so this is interesting stuff. What is money in our system anyway? The mortgage that finances the purchase of your new house is created by a bank, as debt. You could even say money is debt in our financial system. 

How did we get to this point, which is despised by some Bitcoiners? Graeber is an anthropologist and took a closer look at economist Adam Smith's now standard assumption: 'first barter, then money'.

Debt as Layer 0

But according to Graeber, debt is the 'Layer zero' that preceded the invention of hard money. Money made it possible to exchange goods and services with people who were not from your own circle. What about barter? That, according to Graeber, only happened between societies that had little contact. In those cases, the 'economy of service and reciprocity' was not possible. Nor did money work because peoples used different moneys. Only in that extreme case was there no alternative but to exchange sheep for goats. 

Money as Layer 1

According to Graeber, money - be it shells or, later, gold - made debt 'scalable'. And 'debt' does not have the heaviness it has with us. View it as offering a service and the implicit expectation of getting one in return. There was no amount attached to the debt and no bailiff's order. 

And that explains how people in prehistoric times could keep track of debt while they still had no money. They could because debt that preceded money need not have a precise measure. That still holds true today. If I give my neighbour a lift to the airport, I have some 'credit' with him. And so, he may help me babysit my child on another occasion. Are the two services worth an equal amount of money? There's no way to tell but small societies can function just fine that way anyway. Credit does not have to be expressed in a currency. 

But scaling up this system from small communities to large societies where people don't know each other required physical money, a 'Layer 1' on top of the 'Layer 0' that was debt. 

DeFi is debt-free

Journalist Byron Gilliam of Blockworks gives Graeber's finding, namely that imprecise, unsecured borrowing works just fine in a society, a nice twist. He contrasts this with the ideal in crypto circles of Decentralised Finance (DeFi):

"As it exists, DeFi is a precision financial system of overcollateralized lending where every debt is extinguished before it can turn into a loss for the lender." 

DeFi has received high praise for the robustness of its protocols. During the June and November 2022 crashes, DeFi protocols like Aave continued to run just fine. There were no 'holes in the budget'. No one went bankrupt because everyone's loans were secured by collateral.

But one can wonder how widespread the need for borrowing money with collateral is. Why would I want to borrow $1,000 if I must put in 1,000 euros as collateral? Then I might as well exchange those euros into dollars.

Is the system DeFi proposes of precise, overcollateralized borrowing really what we want? The primal system of economic interaction between people seems to be based on debt. That is perhaps one reason why DeFi is now experimenting with lending without collateral. 

The role of Bitcoin

What about Bitcoin, the hard money, the digital gold? Is Bitcoin going to make debt unnecessary? That is probably asking too much, when debt is so deeply embedded in how people treat each other, as the book shows. 

But Bitcoin is arguably the best money, the 'Layer 1' on top of debt. Why? Like gold before, it enables transactions between parties who do not know and may not trust each other. It is trustless and can function in a place where debt does not work (Russia will not trust the promises (debt) from the US and even their dollars but will accept their Bitcoin). 

Perhaps debt creation itself is not the problem, suggest books like Graeber's. What is problematic, according to the author, is a government's monopoly of violence over money and debt. It can force the use of a certain kind of money. The Central Bank alone has the 'money printer'. Everyone close to it gets richer and everyone else gets poorer.

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Bitcoin is the first cryptocurrency ever to be invented and it introduced the blockchain technology. It gave birth to a whole new area and this is the very reason why there are so many events in its past that are considered to be memorable or important.

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