Reputation As Currency: A Blockchain Exposé

The dollar bills in your pocket might as well be tokens in a video game.

In fact, the idea that money holds value at all is a misnomer. The only true item of value in the game of money is credit, which is to say the only possessable value that can be maintained and controlled is one’s reputation.

To understand why, though, you first need to understand when and how money assumes value in the first place.

Money doesn’t hold value until a community of people grants it value.

Money only provides a means of making trade easier.

That’s the bottom line. It allows you and I to more easily agree that a gaming console is worth $100, and a game for that console is worth $10. Money serves as that central anchor against which all items are valued. That’s it.

The only way that money can be used to create value beyond itself (when not used for barter), in fact, is when it is used to purchase a redeemable instrument which gains interest from an issuer.

The reason is risk. When an issuer grants you something like a government bond — or airline miles, or a merchant’s store credit — you’re assuming risk related to the issuer’s ability to pay you back. And risk trades at a premium when the issuer is deemed more likely to default.

In this sense, the redemption-ability of any given issued credit is only as valuable as the branded reputation of the issuer. Which is why reputation is, truly, the only possessable value.

On the blockchain, your reputation is also what validates your transactions.

Let’s take a step back.

Right now, in our centralized world, the process of making transactions and sending money to other people is onerous, at best. If I want to pay someone $25, the transfer is dependent on the third party bank that validates that transaction. If we are both Citibank customers, for example, I can send you money instantly. However, if you are a Chase customer, I am not able to transfer you $25 until Citibank and Chase have had what is called a reconciliation event, in which the two banks confirm that the transaction has occurred.

Citibank and Chase have to do this in order to maintain the Federal Reserve’s denominator of the total amount of money in existence. Because Citibank owns its own database ledger and Chase owns its own database ledger, the two banks cannot maintain the Federal Reserve’s denominator without that reconciliation event.

In this sense, the Federal Reserve’s database and denominator is the source of ultimate truth for all of our U.S. dollar transactions.

The need for a source of truth exists because all the databases in the world reside in centralized environments, siloed off from one another with only reconciliation events to keep them in line — and to keep people from counterfeiting digital objects. Building on our video game metaphor, it prevents the advent of cheat codes. We call this the “double-spend problem.”

The blockchain, however, enables participants to interact with each other on a shared, decentralized database, where all transactions are transparent and the communal denominator is automatically maintained.

In this decentralized environment, reputations are also rendered far less volatile.

Ultimately, what blockchain and decentralized ledgers have done is bring all of those centralized databases with their varying reputations into one shared database so that everybody can agree on the source of “truth.”

With this shared database, there’s no longer a need for a reconciliation event, nor for technical data-risk premiums related to perceived reputations.

Instead, each and every user can immediately trust the database, since its reputation has already been validated.

The decentralized ledger has moved the process of making transactions to a peer-to-peer model that does not require an entity of trust — a bank, broker, escrow agent, lawyer, or even a government.

On the blockchain, we can all agree on what the source of truth is, meaning I can work directly with any other counterparty on the network without the fear of being screwed or caught dealing with counterfeit assets.

Moshe Bucks

What blockchain has also done is create an environment where anyone can issue their own currency — and here, reputation is still relevant. For example, I can create Moshe bucks. You can create Reader bucks. My Moshe bucks can be representative of the value of my house or the value of the money in my vault. I can even create Moshe bucks and call it a Starbucks gift card. At the end of the day, no matter what I create as an issued currency, the decentralized ledger grants me certain authority to state that, as an issuer, there’s intrinsic value to my currency insomuch as the community is willing to grant it a redemption-risk valuation, which is the likelihood that all of my issued currencies can be redeemed for the value they portend to possess.

In this sense, reputation remains the only universal credit. The blockchain simply equips nodes on the network with greater ability to determine who and what to trust.

And that’s the most brilliant part about blockchain: the decentralized ledger paradigm has created an environment where I’m able to rely on the reputation of a currency and its issuer in determining credit risk. All of the information I need exists in a decentralized environment that nobody owns and nobody controls.

The ripple effects of this simple idea have created a worldwide stir about the future of our digital lives — and more importantly, the future of our global economy at large.

But the bottom line is this: in the “video game” of money, credit is still king. Only now, in this burgeoning, decentralized world, it is more valuable and transparent than ever before. The only creditable value that can be maintained and controlled is one’s reputation — and without a trusted, credible reputation and brand, nobody will grant value to anything potentially not redemptionable.

Reputation As Currency: A Blockchain Exposé was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.

Publication date: 
07/12/2018 - 20:32