Most People Have Absolutely No Idea How Money Actually Works

By backing it with something powerful.

There are three ways to back a currency: value, violence, or a vision.

Value

Currency used to be backed by real assets. Goats, sheep, bread, cheese, land, wives, children, slaves. People gave each other credit because they knew they had the underlying consumables to pay.

For 70+ years, the United States backed its currency with gold. Physical gold, ironically, didn’t and doesn’t have much useful value in the real world — you can’t eat it, build houses with it, or power your car with it — and people are now realizing gold functions better as a currency and isn’t real value. But during the gold standard, its tangibility and limited nature at least gave the economy some stability.

Violence

On August 15, 1971, the United States government under Richard Nixon decided to cross the Rubicon and untether the USD from the gold standard.

It wasn’t inherently a good or bad decision. Mining, after all, is disastrous for the planet. And it isn’t cheap to maintain giant steel safes and pay military personnel to defend shiny rocks in 100,000+ acre complexes like Fort Knox.

Pre-1971, an American dollar bore a promise that you could take it to the Federal Reserve and exchange it for an equal amount of gold. After the gold decoupling, what was the new backing for your pretty piece of paper?

The promise was that the American government would maintain your piece of paper’s face value, even going so far as to seize someone’s property if they fail to pay you back.

In essence, the $USD became a mafia contract. To this day, the $USD is the most powerful currency in the world because, when you boil it down, it’s backed by the might of the American military-industrial complex. Real power.

Other nations do the same thing. I’ve been to North Korea, where it’s illegal to use $USD. I’ve been to China, where they’re now cracking down on crypto while rolling out their own digital surveillance currency. Real power.

Vision

The vast majority of cryptocurrencies aren’t backed by any real value. Nor do they have the musclepower of the state to bully and coerce people. All they can do is share a vision (typically in the form of a white paper) and hope that enough people invest in their dream.

(And by “invest” I don’t mean “buy and hodl coins.” I mean, “develop genuinely useful apps on top of blockchain frameworks that can improve the lives of billions of people.”)

As we’ve established, a currency’s worth boils down to trust. People used to trust in credit and gold and violence, and now they’re trusting in a vision of reality that may or may not come true. In most case, people haven’t even read the white papers. Their vision is simply “This coin will go to $10 by 2025” or “This coin is going to the moon.”

It remains to be seen if BTC/ETH/ADA’s private visions will prove more powerful than the violence of public powers like America and China.

Source: https://medium.com/surviving-tomorrow/most-people-have-absolutely-no-idea-how-money-actually-works-5aa505188d29?source=rss——-8—————–cryptocurrency