in a multipolar world, let the people issue the money! - Friederike Ernst

Transcript

[Music] Thank you so much for having me. Fantastic. Thank you guys for showing up despite the fact that we're almost at the end of this day. So, as Sarah said, um I'm going to talk about the question, if we were to reinvent money using today's technology, what would it look like? Okay. So, um if you look at cryptocurrencies, what you usually find is that they are insanely um front-loaded. They're very skewed towards early adopters. And this is something that we're looking to kind of

mitigate with circus. So, this is why the subtitles also uh join late still win the game. Okay, this is actually the premise of this talk and I think this is something that we fundamentally kind of have to reckon with, right? So, money is a technology. So, kind of like usually this is not something that people regular people often think about, right? So, kind of when you ask people, what's your biggest problem with money? Typically, the answer is, well, I don't have enough of it. Okay? It's never well the way that it's issued doesn't really work for me. So we don't really think of money as a technology but really it is

it is kind of a social um it's a social construct that kind of we defined and we kind of wrote the uh uh the architecture for. So in a way money is the world's most ubiquitous uh protocol. um and the way that kind of um its invisible design shapes how people and entities transact is pervasive. So money is very much not neutral but like any tech stack money can be rewired and we can be the architects of that future of money. So what I actually want to talk

about is how does money actually come into the world? Um maybe quick show of hands. How many of you would be able to explain how new money enters um how new fiat monies kind of enter the stage? Okay, about half that's not so bad. Um so um what actually happens is that banks and central banks um create new money mostly against credit. So 95% of all money is actually created against credit. Um and it's very notable that it's banks and central banks, right?

Kind of this this will be a pervasive theme throughout this talk. So kind of bear this in mind. Um and having the control over issuance is profitable and powerful and I'll tell you why. So this was actually very this is a report very helpfully published by uh the good consultants at McKenzie. um it advises banks on how to remain profitable. So I highlighted some parts of the executive summary for your benefit here. So um retail banks um have a return on equity of around 12% um between 20 uh since 2020. Before that

it was around 10%. That is really good return on equity. So kind of having a bank it's very profitable but the good folks at McKenzie are worried for the banks. Um so banks will need to focus on building deep and lasting relationships with valued customers. Um customers with primary relationships to a bank not only keep most of their deposits there but are also open to additional products and services that boost banks fee income. It will be even more important to increase the value of each customer.

So they don't say it quite in these words because they're consultants, but you're being milked. So um banks actually make a lot of money off the privilege of being able to issue new money. So this is actually um a graph from that same report. Oh, okay. I can't I can't point I think but uh you see it. So very profitable to be a bank. And the second thing is not only is it good for banks. Um the world is globalized which you notice because you're here in Prague and most of you are probably not from Prague. You spend

money here that probably you don't earn at home. You have different we have different sort of sort of currencies, right? Um and the globally dominant currency right now is the US dollar. This has not always been the case. So there have been pre previously there have been other globally dominant currencies but currently 50% of global trade is invoiced in US dollars. um 60% of foreign exchange reserves, so kind of that's money held by central banks. So money of other countries held by central banks um is in dollars. It's gone down over the last couple of years,

but it's still pretty uh uh pretty dominant. Um how much is that privilege worth to the United States and its economy? Um so kind of naively you would say okay so 50% of all dollars are outside the United States. So those are kind of like dollars held by entities and people who are not direct beneficiaries of the services that the United States government kind of um performs um for its uh for its people. Um so if you print new money to kind of um pay for these services which you're not a beneficiary of you are being

diluted right so kind of the 50% who are not US subjects or US residents or US entities they're being diluted so kind of the sen senor of on that is kind of the first part of what um the of the money that kind of flows to the United States. um because the dollar is uh de facto um the world currency. Um there's a second and bigger part to this. So if you if you issue the world's reserve currency um you can actually um borrow money at way cheaper cost than you otherwise could have because this is a

counterfactual thing. um you you can't say what what exactly the monetary value of that is. Um but Bajuna who used to be the um executive director of the World Bank Group um estimated last month um that that's between 640 and $800 billion annually. That's 3 to 4% of uh the GDP of the United States. Um just to give you a comparison, the United States spend between two and a half and three and a half% on um military, they spend 5% on education. So this is a huge chunk of money, right? Um and not only is this

not particular, sorry, this is very orange. I see it in your faces. Not only not only is this um not particularly fair, um it's also not particularly stable. So if you kind of look at these headlines from the past uh couple of months um they clearly speak to the fact that the global uh power landscape is changing. So globalization is not dead. It's just changed. C promotes his vision of vain veining US influence. How economic and strategic alliances are changing in a multipolar world. The new world order of the past

35 years is being demolished before our eyes. Shifting world order suits in between economies. Are we heading for another world war or has it already started? Particularly cheering this cheery this one. So it's kind of it's happening. People can tell kind of global power structures are changing. So if you had to bet is the US dollar still going to be the globally dominant um currency in 50 years it would be a tossup right many people many people would uh would uh would say no so let's kind of move this back towards the the crypto sphere right so kind of we now

see that kind of issuance is very relevant it's a very big topic and this is something that kind of Bitcoin um led a paradigm shift for. So kind of the idea of electronic money was not new kind of when Bitcoin came around but this um crossover of public private key cryptography and proof of work um that allowed um protocol-based transactions in and issuance without an actual issuer. That was very much new. That was a first and this is the first time that um that that is kind of the paradigm shift that kind of allowed um allowed us to kind of move the level of issuance

from the banks and retail banks down to the individual people. And the reason why banks and retail banks historically had this was not because anyone was particularly badly intentioned. It was just because you needed a trusted intermediary to kind of make it work. Okay. So, but what Bitcoin kind of drives home is that something that belongs to no one, i.e. this protocol, also by extension kind of kind of belongs to everyone. You probably noticed that the Bitcoin white paper is here on the right hand side and you see that its title is called a peer-to-peer electronic cash

system. We all know that Bitcoin has not become cash, right? It's failed, well, it's failed very successfully. Actually, it's failed very successfully at becoming peer-to-peer cash. It's kind of become peer-to-peer gold instead, right? So, why did Bitcoin not become peer-to-peer cash? I would posit that it's primarily because of its um fixed supply. So the the meme that Alain talked about earlier of the 21 million Bitcoin and that's all there's ever going to be. Um that kind of has this scarcity narrative that doesn't particularly work well for money, right? You you shouldn't um be um

incentivized to hoard money rather than spend it, right? Kind of the the velocity of money matters a lot. Um, this also means that kind of the people who were who were early at seeing Bitcoin, they have huge backs, right? So, kind of like if we were to kind of switch to a Bitcoin economy today, global inequality would be way worse than it actually is today. 96% of all bitcoins have already been issued. Um, and kind of bitcoin issues new coins only to miners, right? So, the issuance is concentrated as well. So, um, I want to do a thought experiment with you guys.

So, imagine you're on a tropical island and you're shipwrecked. Okay? So, you and 100 of your friends or you and 99 of your friends are stranded on an island. You have no contact with the external world. But now you feel actually it would be kind of nice to have some way of keeping record some way of kind of like having money so people can pay for things. So let's invent money from scratch. Okay. So the f very first idea would be okay we just give everyone a thousand units. Okay. And then they can kind of move that around and kind of pay for that for goods and services as they please.

Um but now after say two weeks um 20 of the people um they build a raft and they make off but only after they spend all their money right. Is that fair? So kind of like if people are there for varying amounts of time should they all get the same sort of money. Um so maybe let's do this slightly differently. Instead of giving people a set amount of money, let's just say they can have one unit of money per every hour. Okay, so um here we have two graphs. Look at the first one, the top one first. Okay, so um you can see this is actually pretty long time horizon

just kind of like just to kind of drive home the the the point. Um so there's 100 people in the beginning first 50 years everything is great and then here a major storm um strikes okay and 80 of your 100 people die um and instantly um the amount of tokens per person which is depicted here shoots up. Okay. And then kind of the 20 survivors uh and their kind of offspring not um whose number kind of stays around 20 um stays on that island for yeah another hundred years um and then there's a second shipwreck. Okay. And another 100

people come to this island with nothing. And the 20 people who have been on this island for the past um 150 years um they they kind of say graciously look we will we will integrate you into our system. We will give you the same number of circles that we get we get on a daily basis. Okay. Um and the 100 newcomers they are dismayed at this. They are actually almost mad because they see look the 20 people who are already here they have three million tokens each and we get 8,000 tokens per person per year.

So kind of like all of us 100 together only get a quarter of what one person who's been here before already had. Right? So kind of here here kind of we kind of grapple with the idea that somehow old money should lose value. Right? kind of like money that you kind of made 20 years ago shouldn't count as much as money that you made yesterday. So old money needs to disappear over time. Kind of we call this the leaky memory of money. Okay. And we have this in everyday life usually in the form of inflation. But in circles it turns it around. We don't have inflation but we kind of uh um we have uh we make money disappear. So what we now do um is while

new money is issued continuously um all balances are reduced at a rate of 7% per year and then kind of the exact same scenario that we saw earlier um up here kind of looks like this. So kind of here when kind of like um 80% of the people die the tokens per person kind of spike but then over the next like 20 years or so they kind of normalize down and here kind of the newcomers what you can see is kind of while they actually start with nothing um kind of their money supply kind of um kind of arches upward upwards and after like 20 or so years they are pretty close to what the people who've been in the system forever kind

of are at so kind of what I'm getting here um what I'm getting at here is kind of like that you kind of need to balance incentives for people who join early and people who join late right so you don't want to be in a situation where kind of like a 100 shipwrecked people come to your island and say look look this doesn't work for us at all we'll just make our own system we'll invent no money right so now that we have kind of the issuance hammered out the second question is who can actually join the system. Right? So we on this fictitious island we have 100 people. We know all of these 100 people. We're stuck with them for the rest of our lives. Um but um this is not the case in the real

world, right? So how do we exclude um bots and sibils if we don't want to have a centralized registry of everyone um uh and kind of who who's an actual human, right? So um the answer to this is everyone can kind of create an an account trustlessly but everyone can also decide whose money they are willing to accept. Okay. So, everyone kind of inherently makes their own tokens and then kind of you say, "Okay, those are my trust connections. Those are the people I know and like and in real life kind of." So, it kind of takes that social fabric from your everyday life and kind of like

transposes it onto this very cipher punk kind of system. Um, and you say these are kind of the 50 people whose circles I am willing to accept. And then kind of you can transact in the web of trust like this. So kind of through transitive connection. So send say um person A wants to send um 100 circles to person C but they are not directly connected. Okay. Um so what would happen and you can actually see that they have different circles. So kind of person A has 300 of their own circles. Person B has 50 um A circles and 350 B circles.

and they're friends obviously and these B and C are also friends and MC has 600 C circles and 200 B circles. Okay. So what actually happens is the system takes 100 of A circles and credits it to B but then it takes 100 of B circles and credits them to C. So kind of um 100 A circles kind of travel from A to B and 100 B circles travel from B to C. So everyone only ever holds circles of people they directly know and trust. But still you can have percolative flow through the network. Okay. So three core rules of circles. Um one circle per person per

hour 7% demorrage. That means that's the rebasing mechanism that I talked about earlier. so as to kind of make it um interesting for people to join the system even if they weren't there from day one. Um and then you have the selective trust system. Okay. So that means everyone's um kind of the balance of everyone kind of the uh goes towards 120,000 um because this is the point where the 7% per year and the 24 circuits per day exactly set each other off. Um so the number of circles for the entire system um converges towards 120,000 times the

number of participants. Okay? So if there's more participants, there's more circles in the system, which is exactly how an econom economy should work, right? So kind of like if 10 people use Bitcoin, there's no more Bitcoin, no less Bitcoin than if 10,000 people use Bitcoin. This is not true for circles. So, you're kind of marrying um the predictive algorithmic issuance of Bitcoin um with an uncapped supply. It's still predictive. You still know how much circles there's going to be. Um it's just um not capped at a certain number.

Okay. So, I'll skip over this. We have one bonus rule. That's groups. So basically you can put you can form groups on on top of circles that let you convert your own tokens into group tokens and for these group tokens you can do things like the group can do things like provide liquidity integrate them into existing financial products and so on. Because if you think about it, if you have your individual token, that token is not going to have a price unless you kind of provide um if unless you kind of set up some sort of um liquidity pool for that token, right? So having group tokens kind of gets you around that also kind of gets you um uh through the thorny issue of kind of

liquidity in the system. So because um even if you have a well-connected system, it's possible that kind of um you can't send money to someone because there's no liquidity along that transitive path, right? So kind of groups make that easier. Um anyone can register a group. So this is fully permissionless and you kind of have to decide um kind of um who's what what kind of groups you uh want to trust. So on one side kind of like um the resilience of the system without groups um kind of contains the risk super nicely. On the flip side transaction can be more um can be more complex. Um and uh circles groups kind of address

this. Um so you can make the circles funible. You can kind of have nested sort of groups. So you could have for instance um a KYC provider that says um look I will I will kind of KYC um citizens of I don't know Vienna um and everyone who lives in Vienna can come to my office and I will verify your passport and your proof of address um and I will test to the fact that you and then I will make you member of this group right and then other people will say oh look this is actually there no bots are in this group it's all it's all real humans, right? So, kind of I I want to trust this group so I can accept more

circles. Okay. Um you can become a member of the ETH Prague circles group at our circles booth. Um, and you can also kind of um talk to us to kind of um find out about um groups and communities and kind of like how to um uh how to make your group programmable um how to program it in a way that it kind of like works for your community.

So kind of you can you can do different things about issuance. you can do different things about kind of like who who can um who can exchange their tokens for group tokens um who can redeem them and so on. Um and uh yeah, so this is this is kind of how circles scales. Um if you haven't yet downloaded metry, that's the app that kind of lets you use circles do so. It's a progressive web app and you can come to it um if you uh scan that QR code. Um you can also come to the um about circles group page kind of learn more about groups can build on circles. So circus actually gives you um

a decentralized identity system kind of as a web of trust that is self-correcting because everyone is incentivized to only trust people that are real because otherwise you end up with worthless civil or bot circles. Um, and you can also follow us or Twitter, join our Discord. And I hope you guys uh found this interesting. I think kind of it's time that we kind of bring back some of the kind of crypto idealism from a couple of years ago because I think we've all become a little bit jaded and we talk too much about TVL and uh all kinds of things. We don't think about

kind of like um the we don't think enough anymore of kind of like the way that kind of um these technologies can add real value to actual people's lives. Thank you guys. Thank you so much. Round of applause. Thank you. I love that. I absolutely love that. And um uh there's a fantastic book if I can recommend to everyone. Pierre Bodier um an anthropologist from the 70s wrote about like uh social capital, cultural capital and different types of capital that we have apart from the financials.

So if you're an anthropology nerd, even if you're not, I suggest reading that. I've got a million questions for you, but I want to give a chance to audience. Yes, the gentleman in black. Yeah, thank you for the presentation. Um you said somewhere in the presentation that uh the users can mint tokens. Yes. What does it mean can and why is the reason why they wouldn't do it? Is there any reason for not doing it? Everybody wants tokens. Yeah. Everyone wants tokens. Everyone wants free money. So kind of I mean the the reason why people don't do it is because they don't see any sense in it, right? So kind of like

you can only ever mint for the past two weeks going backwards. Um, so you have to kind of open the app at least once every two weeks to kind of get your full allocation. But if you believe it's worth something, absolutely you should do it and you should do it every two weeks at at a minim minimum. Yeah, I was just thinking that if you would just assign regularly uh these tokens to the users and they don't do don't have to do anything about it if there is no reason for not but you want participants to be rewarded, right? kind of like you because not only kind of like in a way kind of money has the ultimate cold start problem, right? So kind of like pitching someone free money is super easy. Um getting someone to accept free money as payment is not as easy, right?

So kind of you need to balance out supply and demand side. So kind of like yes in a way kind of circuits can be framed as the biggest airdrop in history 100%. Um but it's not just that. It's kind of a switch from kind of this um topdown money issuance to kind of a communal money money issuance. And yes, there is some value that kind of will then acrue to the actual people that currently acrews to the banks, but it's on the order of kind of 7% of what what a regular person kind of spends a year.

Um it's not a basic income. It's kind of like because I mean it's just kind of like profit that kind of currently accrus to the shareholders of banks. Okay. Thank you. And one more thing, how about the civil entities? Maybe I didn't hear the the civils. Yeah. How you want to prevent them? Yeah. How how do you so kind of um this is on everyone themselves kind of you say whose circles you accept. Okay. So kind of you have a comprehensive list of all the people's circles who you accept. um and you're not going to accept any bot circuits. So the bot kind of you can you can you can kind of register 100,000 bot um uh personas and kind of mint 100,000 times

24 circles per day but they won't be able to send them to people if people don't trust them. But are you sure about it? Yes. Really? I think that this might be the concern that there will be a way how to how to make a civil and how they create the artificial clusters of the users that will resp I kind of we've actually done extensive modeling to this. I'm happy to kind of to address this um kind of off this stage. So the idea is kind of like even if you have one gullible user who kind of trusts a bot in a in in in a bot network kind of the maximum that the bot network will be able to extract is the the number of the tokens that the user holds um kind of uh

that that that kind of the user holds themselves. That's the only thing that they'll be okay. Thank Thank you. Just one more thing. Uh I will have a presentation on 4 Thursday 4:30 about social capital. So maybe you can attend. Is related as well to this? Thank you. Uh we've got one more question because this was Thanks a lot Freedi. Uh the question is there like universal circle token or are there multiple tokens? There are multiple tokens. So kind of everyone creates their own token. So I create 24 free ROS circus and um a day. Um and then the way to make them funible is by trusting people. So what what that means

is kind of like if I I don't know you but I know say a hundred other people and kind of I'm just as happy to hold their token as I am to hold my own token. Um, so the idea would be that if you wanted to send me circles, but I don't accept your circles right away because they they are not in the list of circles I trust. Um, that the network would find a path to kind of have several hops to kind of send your circles to someone um we both trust for instance and then send me that person's circle. And the person we both trust, he's happy to have your circle because circles because he he trusts you. uh but he's also happy to kind of um to to to to um to have my circle. So in a way they're kind of like this kind of it it

um the flow of circles through the network is percolative. Um thank you so much. Thank you for a fantastic answer. Thank you for great questions and one more round of applause to circles and to Frederick and catch her outside if you can. Thank you.