The philosophy of currency

karthik · updated · flag

Let’s say you are a rockstar potter who makes the best pots in the world. Your potter wheel needs repair and you go to a woodworker to fix it. That guy spends 2 hours of his work and fixes it for you with a heartwarming smile. And lucky for you, he needs some pots. So you give him 2 pots for his service.

The next day, your potter wheel breaks again. And you take it to the kind woodworker again. He fixes it in 2 hours. But this time when you give him 2 pots, he says, “Hey, I already have two pots. I don’t need pots. But I do need an axe. Do you have an axe?”

You don’t have an axe. So what you do? You walk two kilometres to a blacksmith. Lucky for you, he needs some pots. You are happy and you trade your two pots for an axe. And then you come back to the woodworker and give him the axe. Problem solved right?

Well, what if the blacksmith didn’t need your pots? What if he wanted a scarf and the one guy who makes it is 10 kilometres away? You can’t keep on doing this right?

And then you hear about this place called Market where people give out a blue round shell like this 🔵 for whatever goods you got to sell. So you go there, sell 40 pots and come back with 40 🔵.

Next time when your stupid potter wheel breaks again, you just visit the woodworker and once he fixes it, you give him 2 🔵 instead of bartering 2 pots and say, “Hey, I know you don’t need pots. But I also don’t care what else you need. So keep this 2 🔵. This is equal to the value of my two pots. Trade this for whatever thing you need in this place called the market.”

He agrees and you all go on your ways. So when the woodworker needs a tool, he uses the 🔵 you gave in the market.

But there’s a problem!

The blacksmith fella comes to know about this and instead of earning it the right way he somehow makes his own 🔵 shells. Thousands of it. This is called counterfeiting. With these new 🔵 shells in circulation, the value of the shells has now decreased. Your 38 🔵 is not equal to the value of 38 pots anymore.

So to avoid this issue, you all form a central body, like a government, and give the body the power to control the 🔵 made and circulated. And this body takes proper steps in making the 🔵 unique, hard to counterfeit, and punishing those who counterfeit, and making sure the value of it remains fair.

This is the whole concept of the currencies that we use every day. With this knowledge, understanding digital currencies is easy peasy lemon squeezy! :) Proceed to the next lesson.