Wednesday Wisdom

Who?

Aristotle was born in 384 BC in the ancient city of Stagira overlooking the Aegean. He was a student of Plato and a teacher of Alexander the Great. Arguably the first polymath, his contributions to math, science, philosophy, and culture still resonate today. Aristotle moved to Athens at the age of 17 to attend Plato's Academy and quickly rose to prominence as he rivaled his mentor Plato. Athens at this time was the crossroads of art and education. Aristotle quickly learned the value of his knowledge and services and to monetize it, he needed to understand the value of money.

What he produced

In 350 BC Aristotle produced one of his major works Politics. He provides commentary on political philosophy and provides insights into various aspects of governance, including the nature of the state, types of government, and the roles and responsibilities of citizens. Aristotle discusses various aspects of economics, including the nature and functions of money within a society. He emphasized the importance of money as a medium of exchange, a measure of value, and a means of storing wealth. Aristotle also touched upon the concept of the "artificial" nature of money, recognizing that its value is derived from social agreement and not inherent to the material it is made of. Aristotle analyzed the problem of commensurability, which is a measure of a common standard. He explains that money was introduced to satisfy the requirement that all items exchanged must be comparable in some way. He discovered that money needs to have specific characteristics and must represent a unit that supplies a measure on the basis of which an exchange can take place. Aristotle defined the characteristics of a good form of money as:

1) It must be durable. Money must stand the test of time and the elements. It must not fade, corrode, or change through time.

2) It must be portable. Money holds a high amount of 'worth' relative to its weight and size.

3) It must be divisible. Money should be relatively easy to separate and re-combine without affecting its fundamental characteristics. An extension of this idea is that the item should be 'fungible'. Dictionary.com describes fungible as: "(esp. of goods) being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind."

4) It must have intrinsic value. This value of money should be independent of any other object and contained in the money itself.

2023: Why do we care?

The word Fiat is derived from Latin and originally meant "Let it be done". Fiat Currency is a term that describes sovereign nations that issue a currency that is not backed by a physical commodity like gold or silver. It is issued in the good faith of the government, and they can create more money by waving a magic wand (printing press).

These sovereign nations use their central banks to print money and issue new debt as they face financial burdens. While they issue more supply of money, the value of that money is diminished. Every fiat currency issued has lost 99% of its value in purchasing power over time. The English Pound for example was initially calculated as a pound of silver per note. It currently takes around 100 English Pounds to now buy that same pound of silver.

What might sound money look like? Over the course of time, people considered gold as hard or sound money. Many now consider Bitcoin as sound money or digital gold. In its 14 years of existence has never been hacked or compromised which shows durability. 1 Bitcoin is easily divisible by decimal points into smaller increments called satoshis. Because Bitcoin exists on a blockchain, its portable over the internet, and its intrinsic value are derived from its unique software that limits the supply.

The software works like this:

All bitcoin transactions and data are recorded on a block which has a cryptographic unique key, miners validate the transactions so there is not double spending receive fees for their efforts. The transactions and data are included into a block which is mined by the validators who solve a mathematical problem that adds the new block to the previous block creating a chain. These blocks are created every 10 minutes with the winning miner currently receiving 6.25 Bitcoin for creating the block.

Fixed Supply: Bitcoin's code specifies a maximum supply limit of 21 million bitcoins. This predetermined scarcity is built into the protocol and cannot be changed without consensus from the network participants.

Halving Events: To control the rate of new bitcoin creation, a mechanism called "halving" occurs approximately every four years. During a halving event, the reward for mining new bitcoins is reduced by half. This process continues until the maximum supply is reached.

Mining Difficulty Adjustment: Bitcoin's protocol adjusts the difficulty of mining every 2,016 blocks (roughly every two weeks) based on the computational power of the network. (10 minutes per block is 144 blocks per day over two weeks is 2016) This adjustment ensures that new blocks are added to the blockchain at a consistent rate, maintaining the security and stability of the network.

Decentralized Governance: Bitcoin's monetary policy is not controlled by any central authority or government. Changes to the protocol require consensus among the network's participants, typically achieved through a process of discussion and agreement within the Bitcoin community.

Programmability: While Bitcoin's core monetary policy parameters are fixed, its programmable nature allows for the development of additional layers and applications on top of the base protocol. This has led to the creation of various decentralized financial services, smart contracts, and other innovative solutions built on the Bitcoin network.

Bitcoin's programmable monetary policy distinguishes it from traditional fiat currencies, which are typically subject to the policies and decisions of central banks and government authorities.

It may be a stretch to link Aristotle to the anonymous founder of Bitcoin, Satoshi Nakamoto, but one thing is evident; They both understood the principle of sound money as being durable, portable, divisible and having intrinsic value.

And now you know……

Philosophy is the art of thinking, the building block of progress that shapes critical thinking across economics, ethics, religion, and science.