Community Currency and the Bitcoin Protocol

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Ever since I read Ron Paul’s call to competitive currencies, I’ve pondered the role of barter, and then community currencies, in bringing to pass the vision outlined.

Yes, I like Ron Paul’s politics. Yes, I lean libertarian on just about every issue.

Yes, I also think sometimes he comes off as your crazy uncle. I look past that to the message. It’s a great message.

And I think there is a silver lining in his message on competitive currencies for the alternative currencies industry, but not in their current form.

Why?

Let’s examine the history of just one segment of alternative currencies – the community currency.

Community currencies exist for much the same reason barter exchanges do, with a little different motivation. They want to utilize unused capacity sitting idle in local businesses, help keep more important currencies in the pockets of local residents, and provide a means of transacting business outside of a quid pro quo barter system. While all of that is true, their main motivation is to strengthen the local economy.

But all currencies generated from the bottom/market like community currencies have specific problems to answer:

What kind of currency do we create? Paper, digital, coinage, or something else?

Do we give it an objective value/back it with a commodity like gold or silver?

How do we get it in to distribution?

How do we encourage local adoption?

How much of the currency do we introduce in to circulation?

How do we discourage counterfeiting?

What kind of organization do you need to manage the currency?

How do we staff the organization?

Do we get volunteers to do the work?

If we issue paper currency, who is going to pay for the printing? Who will design it? Whose image will be on the paper?

If we issue digital currency, what software are we going to have to use to manage transactions? And how much is that software going to cost?

As far as my reading has led me, most community currencies answer many of these questions, but not all of them, and not very well. Some languish because of a lack of adoption, some overwork their volunteers and suffer staffing problems (which seems common among timebanks), some issue too much or too little currency which lead to problems relating to pricing, some can’t come to a consensus about how to get the currency in to circulation.

Which leads me to Bitcoin. Bitcoin is an open source software. Anyone with some programming knowledge can download the core files, make some adjustments and create a new bitcoin-technology-based payment system and currency. The scores of alternative coins based on the bitcoin software, or altcoins as they are called, underline the ease which accompanies this software. Adoption of the currency is as easy as downloading the software, called a wallet, and typing in some letters and numbers, and with a mobile version, scanning a QR code. Transaction fees are whatever the programmer sets up, usually less than 1%, and are paid to volunteer computers who participate in the process of confirming transactions. Anyone with the right computer can volunteer and participate in confirming transactions and get paid for it. All transactions are stored in a ledger called the blockchain, which every wallet/computer connecting to the system stores. Each coin is unique and can be divided in to decimals of varying size, but cannot be counterfeited or double spent. And getting the new currency in to circulation can be done in a variety of ways.

So much for the difficulty of starting a community currency…almost no staff needed (and really the only staff needed is at the very beginning to get the software customized), no counterfeiting, software rules surround the issuance of the currency, no need for a central authority to guide or control the currency, and anyone is free to participate.

There are two such community currency style bitcoin projects that have been recently launched: Auroracoin and Scotcoin.

I consider them both the new wave of community currency. Both are based on the bitcoin protocol, and both are readily available to anyone in those two communities. Both have unique qualities that make them attractive to people in their respective areas.

We in the barter industry should be watching these kind of developments with rapt attention. Our silver lining is in knowing how to recruit business people to participate in an alternative currency. Any alternative currency will fail without businesses to accept the currency.

 

I could go create my own altcoin right now and mine millions of it, but if there is no one to spend it with, is it a currency? We in the industry know that it isn’t a currency, a flow of value and goods and services, until it is flowing. And that is where many of the current altcoins in the bitcoin universe get stuck. Adoption is everything. The protocol may be sound, the idea may be worthy, but without user adoption, currencies fail.

Government backed currencies don’t have that problem, most of the time. Notable exceptions occur when governments abuse their duties and print more of the currency than the market demands. But the problem of adoption, in most cases of government backed currency, is nil if the government issuing the currency has the respect of the citizens meant to use the currency. If not, as in the case of the recent fiasco in Zimbabwe, citizens will flock to other currencies. The same applies to any other currency, but at greater difficulty. Alternative currencies don’t start out with the advantage of government backing…

The barrier to entry in to the alternative currency market has been lowering and lowering over the last ten years, but with the bitcoin protocol any barrier to entry is almost non-existent. And community currencies aren’t the only place the bitcoin protocol is going to affect.

I’m not pretending to be amazing at reading the tea leaves and seeing in to the future, but I would expect to see bitcoin and altcoins take over specific niches as time passes. Dogecoin has in short time become one of the most usable tipping currencies on the internet. Bitcoin itself makes international money transfers quick and easy. There are and will continue to be others who fill niches in the money transfer and property exchange space. All this and I haven’t even said anything about the advances that the blockchain technology brings to so many other areas…

One thing is for certain: cryptocurrencies like bitcoin  and community currencies are here to stay. They may change, they may take different forms, but they aren’t going anywhere. And community currencies, in my opinion, are benefitted greatly by the invention of bitcoin.

8 COMMENTS

  1. Bitcoin has risen and dropped in value quite dramatically and there are many people buying them to speculate on price gains. People priced out of the Bitcoins have been speculating on many of the other offerings too.

    One of the benefits of community currencies is that hoarding is pointless, you can’t bank them and you don’t get interest on them so you may as well spend them. This keeps the currency circulating where it does the most good.

    If there is any likelihood that the value of the altcoin will rise people may be tempted to hold onto them rather than spend them.

    Can you get an altcoin with demurrage?

      • I take your point.

        When bitcoins first came out most of the discussion was how to go about mining your own bitcoins at times when your computer sat idle.

        Then the discussion started on how to build a computer for optimal bitcoin mining and computer enthusiasts got to have a bit of fun optimising computers for mining, that’s when it started to get a bit more expensive.

        Now there are bitmining ‘farms’ whole rooms turned over to the production of bitcoins and the chances of anyone using their home computer to mine a few bitcoins here and there is long gone.

        So in a sense, people have been priced out of the mining of bitcoins due to the cost of the computer parts.

        I have seen on eBay that people will sell you a mining contract where you can pay them to mine on your behalf. This stops you having to pay out for the expensive equipment but I have never looked into it any further.

        As you point out, you are more than welcome to buy a fraction of a bitcoin and hope that it goes up in price.

        Or you can buy some of the other altcoins and hope that they take off the same way bitcoin did.

        We are starting to see a few more places accepting bitcoins for goods and services so hopefully it will move away from being a speculative vehicle and might be used more often to buy things.

        • Mining contracts are expensive, in my exploration of them. You can buy used mining gear that is faster than your contract and mine on your own… We will see the consolidation of most bitcoin mining happen in the next couple of years. Mining alts will be the favored vehicle of smaller mining operations, and we’ll see how that goes. It’s not just the hardware that is pricing out miners though, it’s also the price of electricity. I know a guy that has a mining operation in Venezuela specifically because power is much cheaper, so even if he mines much less coin, his operation is more profitable than my similarly powered operation.

          • I hadn’t even thought of the cost of electricity!

            Our went up 20% last year and has gone up 13% only recently.

            We switched to solar, so the electricty companies just put the prices up to recoup the difference and lowered the amount they will pay for the solar inputs.

    • Haha, I just realized that your supposed benefit of community currencies is really not a benefit. It’s an admission that community currencies don’t serve very well as a store of value. Barter currencies aren’t great at storing value either, in my experience.

      • You picked up on a very important feature of community currencies.

        Some Community Currencies are specificaly designed NOT to work as a store of wealth.

        If you want to store wealth then use the national currency in a bank where it can get you interest (but lose a little through inflation) or you can start stacking gold, which may or may not go up in value but is generally seen as a safe haven.

        Community Currencies exist for many reasons and as such they operate in many different ways.

        One of the ways that they work best is often described as the “Velocity of Money’ combined with the “local Multiplier Effect” and if you haven’t already come across these terms then wikipedia will do a far better job of describing them than I can.

        Suffice it to say, the community currencies work best when they are being spent in the local community and keeping local workers active, they do no good sitting in a drawer.

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