Security Notes: Auto-Referential Money: Coming Attractions

Like it or not, Ponzi scheme or otherwise, Bitcoin shook the financial world, and the waves keep rippling forth. The essential revolution here is the abstract notion of “self-referential money.”

Before Bitcoin, money was an entity that had an existence regardless of its role in monetary exchange, and indeed this existence lasted beyond its monetary function. In prisoner-of-war camps during World War II, cigarettes were passed around as currency. These cigarettes were an innovative medium, but they existed before and after they served as such. Bitcoin, by contrast, is a trading protocol that defines a currency that had no whiff of existence before the protocol was specified—and will completely vanish once this protocol stops running.

There are not going to be any ashes to bury. Bitcoin coins come to life and pass on by the protocol that defines them. This is like movie characters that are born when the first frame is beamed, and vanish when the credits are crawling up the screen.

Hold it—haven’t we all been impacted by literary heroes and imaginary characters? I for one became intrigued by the prospect of turning this absurdity into a useful tool. My sense is that this abstract notion introduced by Bitcoin—auto-referential money—is an untapped treasure box with profound social implications. Let me describe this paradox.

Imagine a public mint proposing that the public buy “vanishing dollars,” so that 1US$ = 1V$ (Vanishing dollars). The mint announces that the “vanishing dollars” will disappear at a date certain. Now, who in their right mind will shell out real dollars to buy vanishing dollars?

Before you laugh it off, read on. The mint lures a few sellers of merchandise to offer their goods for sale in a public auction. There is a catch, though. To bid on these items, you need to put up these newly announced vanishing dollars. The highest bidder takes home the merchandise. And what do the sellers get? The sellers divide among themselves the real dollars used to buy the vanishing dollars.

And here is the hook: Real dollars were collected from both the successful bidders and from the unsuccessful bidders. The sellers’ take-home pay is proportional to the level of participation. The more people buy the vanishing dollars, the more compensated are the sellers, maybe much more than if they had sold their merchandise straight on. And this pay is not linked to the amount paid by a winning bidder to buy his vanishing coins.

This vanishing-coins auction may create a paradoxical situation. The seller gets paid more than the market value of his goods, while the buyer pays less than the same market value. This seeming paradox is resolved by considering the vanishing dollars bought by the losers.

This Paradox Trade (BitMintcash.com/paradox) is just one example. This novel concept of auto-referential money is a remarkable tool challenging our most advanced imagination. It looks like payment will assume a much bigger role in society than it does today (which is quite big as it is).

The technology that enables all these soon-to-arrive platforms is the technology for privacy-preserving, quantum-resistant digital currencies. This new technology has the power to bring together strangers, establishing collaborations between remote people around the globe. Hopefully, the heavy hand of the regulator will not choke off this promising future.

Come to think of it, auto-referential money bears some similarity to auto-referential “God” who is held up by believers who do great things by his name and who then, like many ancient believers, vanish. Believers and their God. As to auto-referential money, let’s focus on the great things to be done.

—Gideon Samid gideon@bitmint.com