What is Money? (Vitalik Buterin)

00:00:00.000 | So let's ask the high philosophical question about money.

00:00:07.160 | What at the highest level is money?

00:00:09.960 | What is money?

00:00:12.200 | It's a kind of game and it's a game where we have points and if you have points, there's

00:00:17.920 | this one move where you can reduce your points by a number and increase someone else's points

00:00:21.360 | by the same number.

00:00:23.000 | So it's a fair game, hopefully.

00:00:26.640 | Well, it's one kind of fair game.

00:00:29.240 | For example, you can have other kinds of fair games.

00:00:31.880 | You're going to have a game where if I give someone a point and you give someone a point,

00:00:35.080 | then instead of that person getting two points, that person gets four points.

00:00:38.600 | And that's also fair.

00:00:41.040 | But money is easy to set up and it serves a lot of useful functions.

00:00:48.400 | And so it just survives in society as a meme for thousands of years.

00:00:54.640 | It's useful for the storage of wealth.

00:00:57.440 | It's useful for the exchange of value.

00:01:00.880 | And it's also useful for denominating future payments, a unit of account.

00:01:06.880 | A unit of account.

00:01:08.240 | So if you look at the history of money in human civilization, if you're a student of

00:01:15.560 | history, how has its role or just the mechanisms of money changed over time in your view?

00:01:22.360 | Even if we just look at the 20th century or before and then leading up to cryptocurrencies,

00:01:27.440 | that's something you think about?

00:01:28.840 | Yeah.

00:01:29.840 | And I think the big thing in the 20th century is we saw a lot more intermediation, I guess.

00:01:38.320 | The first part is the move from adding more of different kinds of banking.

00:01:45.400 | And then we saw the move from dollars being backed by gold to dollars being backed by

00:01:53.880 | gold that's only redeemable by certain people to dollars not being backed by anything to

00:01:59.960 | an system where you have a bunch of free floating currencies and then people getting bank accounts

00:02:09.560 | and then those things becoming electronic.

00:02:11.640 | People getting accounts with payment processors that have bank accounts.

00:02:17.160 | So what do you make of that?

00:02:19.240 | That's such a fascinating philosophical idea that money might not be backed by anything.

00:02:26.800 | Is that fascinating to you that money can exist without being backed by something physical?

00:02:32.320 | It definitely is.

00:02:33.320 | What do you make of that?

00:02:36.280 | How is that possible?

00:02:37.280 | Is that stable?

00:02:38.280 | If you look at the future of human civilization, is it possible to have money at the large

00:02:42.600 | scale at such a hugely productive and rich societies be able to operate successfully

00:02:49.320 | without money being backed by anything physical?

00:02:51.720 | I feel like the interesting thing about the 21st century especially is that a lot of the

00:02:58.040 | important valuable things are not backed by anything.

00:03:01.240 | If you look at tech companies, for example, something like Twitter, you could theoretically

00:03:07.480 | imagine that if all of the employees wanted to, they could come together, they would quit

00:03:13.800 | and start working on Twitter 2.0 and just build the exact same product or possibly build

00:03:26.600 | a better product and then just continue on from there and the original Twitter would

00:03:32.680 | just not have people left anymore.

00:03:37.240 | There is theoretically code and IP that's owned by the company, but in reality, good

00:03:42.240 | programmers could probably rewrite all that stuff in three months.

00:03:48.320 | The reason why the thing has value is just network effects and coordination problems.

00:03:54.120 | These employees in reality aren't going to switch all at once and also the users aren't

00:03:59.680 | all going to switch at once because it's just difficult for them to switch at once.

00:04:05.280 | There's these meta stable equilibria in interactions between thousands and millions of people

00:04:12.840 | that are just actually quite sticky, even though if you try to assume that everyone's

00:04:18.720 | a perfectly rational and perfectly slippery spherical cow, they don't seem to exist at

00:04:23.040 | all.

00:04:24.040 | That stickiness, do you have a sense, a grasp of the fundamental dynamics, the physics of

00:04:31.600 | that stickiness?

00:04:33.120 | It seems to work, and I think some of the cryptocurrency ideas kind of rely on it working.

00:04:41.840 | It's the sort of thing that's definitely been economically modeled a lot.

00:04:48.440 | The kind of analogy of something as similar that you often see in textbooks as like, what

00:04:56.280 | is a government?

00:04:57.280 | Like if, for example, 80% of people in a country just like tomorrow suddenly had the

00:05:04.000 | idea that the laws that are currently the laws of the government that currently is the

00:05:08.280 | government are just people and some other thing is the government and they just kind

00:05:12.800 | of start acting like it, then that would kind of become the new reality.

00:05:16.480 | And then the question is, well, what happens if between zero and 80% of people start believing

00:05:24.520 | that?

00:05:25.520 | And the thing you see is that if there is one of these kind of switches happening, this

00:05:32.400 | kind of revolution, then if you're the first person to join, then you probably don't have

00:05:39.720 | the incentive to do that.

00:05:40.920 | But then if you're the 55th percentile person to join, then suddenly it becomes quite safe

00:05:45.600 | too.

00:05:46.600 | And so it definitely is the sort of thing that you can try to analyze and understand

00:05:52.760 | mathematically, but one of the kind of results is that the sort of like when the switch happens

00:06:03.240 | definitely can be chaotic sometimes.

00:06:05.520 | Yeah.

00:06:06.520 | But still like to me, the idea that the network affects the fact that human beings at a scale

00:06:11.640 | like millions, billions can share even the idea of currency, like all agree.

00:06:19.040 | That's just, I know economists can model it.

00:06:21.920 | I'm a skeptic on the economic.

00:06:25.080 | It's like, so my favorite sort of field, maybe recreationally, psychology is trying to understand

00:06:30.360 | human behavior.

00:06:31.920 | And I think sometimes people just kind of pretend that they can have a grasp on human

00:06:35.880 | behavior, even though it's such a messy space that all the models that psychology or economics,

00:06:42.080 | those different perspectives on human behavior can have are difficult.

00:06:48.200 | It's difficult to know how much that's wishful thinking and how much it is actually getting

00:06:51.960 | to the core of understanding human behavior.

00:06:55.220 | But on that idea, what do you think is the role of money in human motivation?

00:07:02.800 | So do you think money from an economics perspective, from a psychology perspective is core to like

00:07:12.520 | human desires?

00:07:15.360 | Money is definitely very far from the only motivator.

00:07:18.880 | It is a big motivator and it's one of the closest things you have to a universal motivator.

00:07:27.000 | Because ultimately in like almost any person in the world, if you ask them to do something,

00:07:32.600 | like there'll be more inclined to do it if you also offer them money.

00:07:37.640 | And that's like, there's definitely many cases where people will do things other than things

00:07:44.120 | that maximize how much money they have.

00:07:45.720 | And that happens all the time.

00:07:47.400 | But like a lot of those other things are kind of, but much more specific to and of who that

00:07:53.480 | person is and of where their situation is, the relationship between the motive and the

00:07:57.160 | action and these other things.

00:07:59.280 | What do you think is the interplay of the other motivator from like Nietzsche perspective

00:08:03.080 | is power.

00:08:04.760 | Do you think money equals power?

00:08:06.680 | Do you think those are conflicting ideas?

00:08:08.800 | Do you think, I mean, that's the one of the ideas that decentralized currency, decentralized

00:08:13.320 | applications are looking at is who holds the power?

00:08:18.680 | Money is definitely a kind of power.

00:08:21.280 | There's definitely people who want money because it gives them power.

00:08:26.320 | And then even if money doesn't seem to kind of explicitly be about money, a lot of things

00:08:34.200 | that people spend money on are ultimately about social status of some kind.

00:08:41.160 | And I definitely view those two things as an interplaying.

00:08:44.680 | And then there's also money as just a way of like measuring how successful you are,

00:08:52.280 | like as a scoreboard.

00:08:53.280 | Right.

00:08:54.280 | So this kind of gets back to the game.

00:08:55.280 | I mean, like if you have $4 billion, then the main benefit you get from going up, one

00:09:02.280 | of the big benefits you get from going up to $6 billion is that now instead of being

00:09:06.960 | below the guy who has five, you're above the guy who has five.

00:09:10.360 | So you think money could be kind of in the game of life, it's also a measure of self-worth.

00:09:16.760 | It's like how we...

00:09:18.640 | It's definitely how a lot of people perceive it.

00:09:22.480 | Define ourselves in the hierarchy of society.

00:09:25.920 | Not saying it's a healthy thing that people define their self-worth as money because it's

00:09:31.520 | definitely far from a perfect indicator of how much value you provide to society or anything

00:09:40.680 | like this.

00:09:41.680 | But I definitely think that as a matter of kind of current practice, a bunch of people

00:09:46.840 | do feel that way.

00:09:49.440 | So what does utopia from an economic perspective look like to you?

00:09:53.880 | What does a perfect world look like?

00:09:57.080 | I guess the economist's utopia would be one where kind of everything is incentive aligned

00:10:07.200 | in the sense that there aren't enough conflicts between what satisfies your goals and kind

00:10:13.840 | of what is good for everyone in the world as a whole.

00:10:19.120 | What do you think that would look like?

00:10:23.640 | Does that mean there's still poor people and rich people, there's still income inequality?

00:10:29.200 | Do you think Marxist ideas are strong?

00:10:32.200 | Do you think ideas of objectivism, like where the market rules, is strong?

00:10:41.680 | Is there different economic philosophies that just seem to be reflective of what a utopia

00:10:47.120 | would be?

00:10:49.240 | I definitely think that existing economic philosophies do end up kind of systematically

00:10:57.320 | deviating from the utopia in a lot of ways.

00:11:01.360 | One of the big things I talk about, for example, is public goods.

00:11:05.480 | Public goods are especially important on the internet.

00:11:09.840 | The idea is with kind of money as this game where I lose a few coins and you gain the

00:11:16.000 | same number of coins is that this usually happens in a trade where I lose some money,

00:11:20.280 | you gain some money, you lose a sandwich and I gain a sandwich.

00:11:26.240 | This kind of model works really well when the thing that we're using money to incentivize

00:11:32.600 | is a set of private goods, right?

00:11:34.320 | Things that you provide to one person where the benefit comes to one person.

00:11:40.400 | On the internet especially, but also many, many contexts off the internet, there's actions

00:11:45.960 | that individuals or groups can take where instead of the benefit going to one person,

00:11:53.160 | the benefit just goes to many people at the same time and you can't control who the benefit

00:11:57.840 | goes to, right?

00:11:58.840 | For example, this podcast, we publish it and when it's published, you don't have any fine

00:12:05.440 | grains control over like, "Oh, these 38,000 people can watch it and then these other 29,000

00:12:12.000 | people can't."

00:12:13.000 | It's like once the number goes high enough, then people will just copy it.

00:12:17.240 | And then when I write articles on a blog, then they're just free for everyone and that

00:12:22.480 | stuff's even harder to prevent anyone from copying.

00:12:26.560 | Aside from that, things like scientific research, for example, and even taking more pedestrian

00:12:33.480 | examples like climate change mitigation would be a big one.

00:12:38.480 | So there's a lot of things in the world where you have these kind of individual actions

00:12:44.640 | with concentrated costs and distributed benefits and money as a point system does not do a

00:12:50.560 | good job of encouraging these things.

00:12:54.040 | And one of the kind of other things even tangentially connected to crypto, but kind of theoretically

00:13:01.600 | outside of it that I work on is this sort of mechanism called quadratic funding.

00:13:06.520 | And the way to think about it is, and if imagine a point system where if one person gives coins

00:13:17.240 | to one other person, then it works the same way as money.

00:13:20.480 | But if multiple people give coins to one person and they do so anonymously, so it's kind of

00:13:27.800 | not in consideration for a specific service to that person themselves, then the number

00:13:33.200 | of coins that are received by that person is greater than just the sum of the number

00:13:38.840 | of coins that are given by those different people.

00:13:42.220 | So the actual formula is that you take the square root of the amount that each person

00:13:46.000 | gave, then you add all the square roots and then you square the sum.

00:13:49.200 | Yeah, and then you give that.

00:13:51.280 | And the idea here would basically be that if, let's say, for example, you just started

00:13:58.560 | going off and kind of planting a lot of trees and there's a bunch of people that are really

00:14:03.200 | happy that you're planting trees and so they go and all kind of throw a coin your way,

00:14:09.200 | then there is basically the fact that you get more than the sum, you get this kind of

00:14:15.920 | square of square roots of these tiny amounts, that this actually kind of compensates for

00:14:23.160 | the tragedy of the commons.

00:14:25.200 | There's even this kind of mathematical proof that it sort of optimally compensates for

00:14:28.640 | it.

00:14:29.640 | What is the tragedy of the commons?

00:14:30.880 | This is just this idea that if there is this situation where there's some public good that

00:14:39.680 | lots of people benefit from, then no individual person wants to contribute to it because if

00:14:44.280 | they contribute, they only get a small part of the benefit from their contribution, but

00:14:49.080 | they pay the full cost of their contribution.

00:14:51.680 | In which context is this, sorry, what is the term?

00:14:55.640 | Quadratic funding.

00:14:58.640 | In which context is this mechanism useful?

00:15:02.560 | So obviously you said to combat the tragedy of the commons, but in which context do you

00:15:08.360 | see it as useful, actually, practically speaking?

00:15:10.160 | Yeah, theoretically, public goods in general.

00:15:12.760 | So like services, like what are we talking about?

00:15:15.960 | What's a public good?

00:15:16.960 | Yeah, so within the Ethereum ecosystem, for example, we've actually tried using this mechanism.

00:15:23.480 | I wrote a couple of articles about this on Vitalik.ca where I go through some of the

00:15:28.840 | most recent rounds and it's been really interesting.

00:15:32.040 | Some of the top ones that people supported, there were things like just online user interfaces

00:15:41.120 | that make it easier for people to interact with Ethereum.

00:15:45.400 | There was documentation, there were podcasts, there were software clients, implementations

00:15:56.680 | of the Ethereum protocol, privacy tools, just lots of things that are useful to lots of

00:16:05.040 | people.

00:16:06.040 | When a lot of people are contributing, like funding a particular entity, that's really

00:16:11.800 | interesting.

00:16:12.800 | Is there something special about the quadratic, the summing of the square roots?

00:16:18.520 | Yeah, so another way to think about it is like, imagine if N people each give a dollar,

00:16:24.160 | then the person gets N squared.

00:16:28.000 | And so each individual person's contribution gets multiplied by N, right?

00:16:31.960 | Because you have N people.

00:16:33.560 | And so that kind of perfectly compensates for the kind of end to one tragedy of the

00:16:38.040 | commons.

00:16:39.040 | I just wonder if the squared part is somehow fundamental.

00:16:42.640 | It is.

00:16:44.320 | I'd recommend you go to, on Vitalik.ca, I have this article called "Quadratic Payments

00:16:50.840 | a Primer" and highly recommend it.

00:16:53.960 | It's kind of at least my attempt so far and of exploiting the intuition behind this.

00:16:58.560 | Thanks.

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