Have you ever ever seen one thing unusual about our favourite fictional worlds?
Lord of the Rings. Sport of Thrones. Harry Potter. Even Tremendous Mario Brothers — all of them use gold cash as cash.
Not as a result of the writers collaborated, however as a result of we instinctively acknowledge gold as actual worth. Even in imaginary economies, it’s the default.
Which raises an fascinating query Alan Hibbard explores in Episode 5 of Hidden Secrets and techniques of Worth: Might we design one thing higher than gold? One thing with all the identical properties, however extra moveable, extra digital, simpler to transact.
Cryptocurrencies promised to be that answer. But none has surpassed gold’s endurance.
Why?
The Excellent Cash Trilemma: Choose Two (However By no means Three)
Based on Alan, designing cash includes a basic trade-off referred to as the Excellent Cash Trilemma.
Any financial system can have two of those three properties:
Scalability (quick, straightforward transactions) Safety (no counterfeits, no fraud) Decentralization (no central authority that may corrupt the system)
You may decide any two. However you may by no means have all three.
Consider it just like the outdated saying: “Good, low-cost, quick — decide two.” Need one thing finished properly and low-cost? It received’t be quick. Need it quick and good? It received’t be low-cost.
The identical logic applies to cash.
Gold, silver, and Bitcoin all made the identical selection: safety and decentralization. They sacrificed scalability to maximise the opposite two. That’s why you may’t purchase a espresso with a gold bar — however it’s additionally why gold has held worth for 1000’s of years.
Why Most Cryptocurrencies Aren’t Really Decentralized
Right here’s the place issues get fascinating.
Many cryptocurrencies declare to have solved the trilemma. They are saying they’re safe, decentralized, and scalable.
However Alan’s analysis into dozens of those tasks revealed one thing shocking: they’re redefining the phrase “decentralized.”
True decentralization means no one has particular permissions on the community. Everybody is totally equal. That is true of gold (anybody can mine it, anybody can refine it — it’s simply atomic quantity 79) and Bitcoin (no person has particular permissions that others don’t have).
However most cryptocurrencies? They’ve a subset of customers with particular validator privileges. This makes them distributed, not decentralized.
What’s the distinction?
The Federal Reserve is an ideal instance. It has 12 regional banks unfold throughout the nation. That’s distribution. But it surely’s nonetheless a centralized system — a small group has privileges the remainder of us don’t.
Most cryptocurrencies work the identical approach. They’ve simply distributed duties throughout a number of nodes whereas sustaining central management.
And right here’s the kicker: if a crypto challenge claims it is going to “turn into extra decentralized over time,” Alan says don’t consider them. To do this, they’d need to sacrifice both safety or scalability — and so they’re unlikely to surrender both.
Layer 2 Options Don’t Resolve the Core Drawback
Some individuals argue that Layer 2 applied sciences clear up the trilemma.
However Alan explains why this misses the purpose.
Layer 1 is the inspiration — gold, silver, Bitcoin. It has no counterparty threat. No guarantees hooked up. It simply is.
Each layer above that may be a promise to pay the layer under it:
Bank cards (Layer 4) promise to pay financial institution deposits (Layer 3) Financial institution deposits promise to pay banknotes (Layer 2) Banknotes used to vow to pay gold (Layer 1)
Every layer makes completely different trade-offs. Layer 1 prioritizes safety and decentralization. Greater layers prioritize scalability.
Right here’s the issue: As of August 15, 1971, the US greenback is now not backed by gold.
The bottom layer of our financial pyramid was eliminated. And in keeping with Alan, that’s why our financial system has been in slow-motion freefall for 50 years. With no stable basis, the whole lot constructed on prime turns into unstable.
In the event you really feel such as you’re on a monetary treadmill — working tougher simply to remain in place — Alan says it is perhaps as a result of your vitality is dissipating by forex.
The answer?
Convey Layer 1 a reimbursement into your financial pyramid.
Use gold, silver, or Bitcoin as absolutely the base of the whole lot you construct your monetary life upon.
Not as a approach to purchase espresso. However as a strategy to retailer worth that doesn’t leak vitality over time.
As a result of whether or not we’re speaking about Center-earth, the Mushroom Kingdom, or the true world, the sample is evident: sound cash at all times circles again to the identical place.
Watch the total episode to see Alan break down the Excellent Cash Trilemma intimately — that is one in all his clearest explanations but.
Investing in Bodily Metals Made Straightforward
Folks Additionally Ask
What’s the Excellent Cash Trilemma?
The Excellent Cash Trilemma states that any financial system can solely have two of three properties: scalability, safety, and decentralization. Gold, silver, and Bitcoin all select safety and decentralization, which is why they’ll’t be used for on a regular basis transactions like shopping for espresso — however it’s additionally why they preserve worth over time. Study extra in regards to the trilemma in Alan Hibbard’s Hidden Secrets and techniques of Worth sequence.
Why do fantasy worlds like Lord of the Rings use gold cash?
Fantasy worlds default to gold cash as a result of we instinctively acknowledge gold as actual worth, even in imaginary economies. This isn’t a coordinated determination by writers — it displays a deep cultural understanding that gold represents wealth and buying energy. Alan Hibbard explores this phenomenon and why gold stays the usual in his newest video on designing the proper cash.
Are most cryptocurrencies decentralized?
No, most cryptocurrencies are distributed however not really decentralized. True decentralization means no person has particular permissions on the community, which is barely true of Bitcoin and gold. Most cryptocurrencies have a subset of customers with particular validator privileges, making them much like the Federal Reserve system — centralized with distributed duties.
What’s Layer 1 cash vs Layer 2 cash?
Layer 1 cash is the inspiration of an financial system with no counterparty threat — examples embody gold, silver, and Bitcoin. Layer 2 and better are all guarantees to pay the layer under (banknotes promise gold, financial institution deposits promise banknotes, bank cards promise financial institution deposits). Since 1971, the US greenback has had no Layer 1 backing, which Alan Hibbard argues is why the financial system has been unstable for 50 years.
Are you able to design a cash that’s higher than gold?
Not if you need true safety and decentralization. Any try to become profitable extra scalable (simpler to transact) requires sacrificing both safety (permitting counterfeits) or decentralization (permitting central management). This is the reason gold, silver, and Bitcoin stay the most effective shops of worth regardless of being much less handy for every day transactions. Watch Alan Hibbard clarify the design trade-offs.
