Virtual currencies are an intriguing concept. A very intriguing concept frankly. As humans, the (relatively) neutral mechanism which we use to transfer value between humans has almost exclusively been one of the main concepts which has remained solely within the purview of sovereigns. So, what happens when currencies are no longer the purview of sovereigns? Will it work? Will it implode without the sovereignty elephant backing a currency? I have no idea, but I'm fairly optimistic that it will work. Here's why.

Currency Ecosystems

First, as some background. Virtual currencies (not unlike “real” or “fiat” currencies these days) exist as bits on a bunch of computers. There is no physical object which can be transfered when you need to transfer some value (pay for something). This is fairly well known by now. The most famous virtual currency, and probably the “reserve currency” of the entire ecosystem is BitCoin. If you want to understand a bit more of the background regarding virtual currencies, I definitely recommend reviewing this site which does a good job of addressing many of the fundamental concepts in a completely approachable way.

So BitCoin was the “mother” of this concept in so many respects. Of course, the creators of BitCoin relied – just as we humans always do – upon concepts developed earlier and in turn extended those concepts. One of the things which BitCoin did, which was necessary in order to prove its reliability to tech savvy early adopters, was to open source itself. The early adopters of BitCoin had increased certainty of the security of the code because they could see it. This was key because those who may be interested in developing an use a virtual currency will largely be those who are very particular about virtual security and other such; seeing the code is important to these people.

One of the externalities of BitCoin opening up its system is that anyone was free to fork the code and to develop their own Coin. And people did just that. What is developing now is an entire ecosystem of AltCoins – and each of which has its own “purpose”. These purposes can be of value to the holders of the Coin, or not. The key to understanding this ecosystem is that currencies only have value because “we” have agreed that there is value within them. There are now currencies which store information (Datacoin), that assist with domain name registration (Namecoin), and lots of other different purposes. Of course there are such coins as Sexcoin and Potcoin. Over time, we the networks using such coins will determine what their value is via exchanges.

Exchanges to Reduce Friction

What is developing within the AltCoin communities is a broad based ecosystem. Really it is a recursive ecosystem of ecosystems. This decentralizes much of how we think about value as different people and communities and ecosystems will value different things. It is like we are in the 1880's America when each Bank published its own notes; see here. The difference between the decentralized nature of the 1880's America (and Europe at the time I suspect) is that now we have exchanges to go to that allow us to easily exchange any AltCoin listed on that exchange for BitCoin – the reserve currency. This means that by quickly checking the exchange rate for the currency which someone wants to pay for something against BitCoin, anyone can easily price out their goods or services properly.

These exchanges are incredibly interesting because they help to reduce the overall friction within the ecosystem when I have a value proposition that I want to transfer to another person – because I can store and keep my value in whatever way makes sense to me and then transfer that to another user who can exchange it for whatever value proposition makes sense given their current situation. We are still in the very very early days of this, but companies like Cryptsy have a very bright future.

Transactional Certainty

Lastly, the newest AltCoins are being coded to design specific problems that we face. For instance a new Coin I'm excited about working with, Ethereum, is building into its codebase a system of contracts. The basic idea is that a specific transaction can encode the terms of the transaction within the transaction itself. So instead of a receipt from Target which in fine print tells you that you have 30 days to return something you do not like, the transaction itself encodes this. What this allows is an entire system of transactions which previously needed arbitration to figure out.

The arbitration agents of the contract are the entire network of the users of the Coin. The contracts built into Ethereum transactions will be capable of having computer precise responses to external, identifiable, quantifiable events (and I also think more subjective events but I am still trying to find to dig into the code a bit more). What are the applications of this? Tons. Option contracts jumped off the page. Escrow systems also are easy to develop. Phased delivery transactions. Pretty much the entire UCC could be coded into Ethereum and built so that when a transaction occurs it simply references back to the Digital UCC built into the code. I have a lot I want to learn about this because there are some interesting business possibilities here. The arbitration agents of the contract are the entire network of the users of the Coin. The contracts built into Ethereum transactions will be capable of having computer precise responses to external, identifiable, quantifiable events (and I also think more subjective events but I am still trying to find to dig into the code a bit more). What are the applications of this? Tons. Option contracts jumped off the page. Escrow systems also are easy to develop. Phased delivery transactions. Pretty much the entire UCC could be coded into Ethereum and built so that when a transaction occurs it simply references back to the Digital UCC built into the code. I have a lot I want to learn about this because there are some interesting business possibilities here.

I will go into all of this a bit more in future posts, but for now I need to run catch a plane.

~ # ~