The worth of all currencies from stone coins to Bitcoins is based on people trusting the transaction system. Just ask the people of Yap, writes Dr Karl.
Last time, I spoke about that strange new virtual currency called Bitcoin, and how the very first commercial transaction of Bitcoins was to buy pizza — and how those 10,000 Bitcoins later increased in value to over US $12 million.
The truly brilliant thing about Bitcoin is the underlying technology — the blockchain. The blockchain, that transparent and open register of ownership, is trusted by the user.
Trust is essential to every currency. Currency has its value first because the state willed it into existence, and second, because the citizens trust the state.
As an example of trust, the people of Yap have so much faith in their currency, that it can sit, unreachable, on the ocean floor — and still accepted as valid.
Yap's stone coin economy
The four Yap islands sit inside a surrounding coral reef, and carry a population of 11,000, spread over some 100 square kilometres. These islands are about 1,200 kilometres North of New Guinea and 1,200 kilometres East of the Philippines — and have no native metals or ores.
So for over a thousand years until recently, their currency was based on stone coins, which they called 'rai'.
The rai are fashioned from shiny limestone rock — available only on another island called Palau, nearly 400 kilometres away.
The Yapese sail over, quarry the limestone (without metal!), and fashion it into a wheel with a hole in the middle. They load the rai onto a raft and tow them back to their home island of Yap, to use as money.
These stone coins range in size from a clenched fist up to 3.6 metres and can weigh up to four tonnes.
This is their currency. The stone coins hold their value quite well because they are difficult to get, and quite hard to counterfeit.
Their value is complex — it depends on the size, how hard it was to quarry and bring back, how many died in getting it home, if somebody famous was involved, and a whole host of other factors.
You might have a big stone coin sitting outside your house — and one day, decide to spend it all to buy several pigs from a merchant. You and the merchant come to an agreement, and pretty soon, everybody knows that you swapped your stone coin for some pigs.
Now here's the weird part. The coin doesn't shift — it's still outside your house, but everybody knows it now belongs to the merchant. And if the merchant then sells that specific rai to buy some more pigs, the seller of the pigs will probably leave the coin outside your house. Rai are big and heavy, and hard to shift, and you don't want to damage them.
Money held in collective memory
So in Yap, the 'money' is actually— which in turn, is the collective register of ownership.
Now here's something even more weird. Sometimes, as the Yapese return from Palau with their hard-won rai, they get hit by a big storm. They have to jettison the coins so their tiny boats won't sink. But it took a lot of work to make those coins. So when they return safely, they tell everybody what happened, and everybody trusts them and then assigns the ownership of that rai to the person who quarried it.
Even though that specific coin is sitting many kilometres down on the bottom of the Pacific Ocean, it can still be traded as legal tender. Why? Because the people in the Yap society have trust in their currency, and in the register of transactions — which in this case, is the collective memory of the citizens of Yap.
We have a completely different system in the West. It began in Renaissance times, with the Medici bank in Florence. Thanks to the popularisation of the balance sheet, that Medici bank became the place where all the different credits and debts of the citizens of Florence were gathered into a single register. This system worked because the citizens of Florence had trust in the integrity of the Medici bank.
But the Yap currency of stone coins is very different. There, the trust lay in the collective memory of the Yapese citizens.
And this brings us back to the blockchain. This is the register of all Bitcoin transactions that have ever been made.
Thanks to the paranoia of the times in which it was devised, the blockchain gets its integrity not from a single group of people, nor from the entire community of people. No, the blockchain relies on strange one-way mathematics, which is easy to verify, but effectively (just like a big stone coin) impossible to fake — and I'll talk more about the Bitcoin, next time ...
1. What was the first ever bitcoin transaction used to buy?
2. Explain what gives money (currency) its value?
3. Describe the ‘money’ that has been used in Yap for thousands of years.
4. How do the people of Yap prove that they have ownership of their rei (currency)?
5. What did the Medici bankers of Florence use in the 16th century that started modern banking?
6. Explain the different systems of trust that underpin the currency of Yap and the bitcoin blockchain.
Vocabulary. Explain the meanings of the following words or phrases as used in the text
quarry the limestone
Summary. In 300 – 500 words summarise the main points of DR Karl’s talk.