Money Wants To Be Free

The history of money has been one of centralization, but money always wants to go where it can best be used.

Money Wants To Be Free

The freedom for individuals to allocate funds wherever they can best be used is a basic principle of capitalism, but the nature of the TradFi system means that money and financial opportunities are restricted in various ways—making money itself worth less than it could be and should be.

The DeFi movement holds out the promise of a revolution in the way people manage their money, and even in the nature of that money, potentially making financial services as accessible as any other online platform, from search engines to social media. But DeFi currently suffers from a number of problems that arise from limitations in its technologies.

The Caging Of Money

Ask any monetary economist and they will tell you that currency has three main functions: It's a store of value, a medium of exchange, and a unit of account. In other words, you can save it, spend it, or price things with it.

$1 coins (Pixabay)
Whatever form it takes, money should be a store of value, unit of account, and medium of exchange.

There are different theories about how money arose. One idea is that money was developed as a means of making barter economies more efficient; it's easier to sell a commodity for cash than to find someone with the right quantity of a different commodity to make a direct swap. (What happens if you don't have the right number of fish to swap for an axe head? Or if you have a valuable cow, but only want to buy a pair of shoes?) Another is that it arose as a means of accounting for and settling debts.

What is known is that there have been many, many different forms of money throughout history, including cowrie shells, barley, cattle, gold and silver pieces, animal pelts, and salt. Each of these made sense in their own context, given their properties and the circumstances of those who used them. Money is, essentially, a meme: It's anything a group of people collectively agree is money.

Like internet memes, money works best when it operates on a peer-to-peer basis, without external control or interference (there's no centralized authority that ensures memes are funny before they are distributed, or that limits the number of new memes that are created). But the history of money is a story of progressive centralization, as cash came under first state control, and then additionally under the purview of an increasingly complex financial system.

That process may have begun as early as the 7th century BCE, when the first coins were minted in Anatolia, an area roughly corresponding to modern-day Turkey. Before this, money often took the form of ingots or lumps of gold or silver, assayed for purity and weighed out at the time of the transaction. This was the case as far back as Sumerian times, where silver was weighed out by the shekel, a word still in use today as the currency of Israel.

The use of coins of predetermined weight and purity made dealing with cash faster, but introduced a point of centralization. The issuer—in this instance, the Anatolian king—could debase them to profit from seigniorage, the difference between the face value of the coin and the cost of minting it. This became a favorite trick of state leaders through the centuries, which typically led to runaway inflation. Henry VIII became known as "Old Coppernose" after debasing the penny so much that the thin layer of silver easily rubbed off the high-relief parts of the design to reveal the copper core.

Meanwhile the financial system was developing rapidly. With the rise of banking (in something close to its modern form) in Renaissance Italy, banks gained ever greater power. Besides issuing paper notes that—in theory—were backed by gold held in their reserves, the advent of fractional reserve and central banking introduced further complexity, consolidation of financial power, and risk.

As the influence of the financial sector grew, so did its potential for abuse. New developments and technologies brought improvements, but also new dangers to customers and ordinary citizens. Just as the convenience of coinage introduced a point of trust and almost inevitable debasement, the trust placed in banks as custodians raised the prospect of bank runs and defaults. In 1971 President Nixon canceled the convertibility of the US Dollar to gold—effectively a default on foreign dollar obligations—ending any pretense that the state had anything less than full control over its citizens' money.

Money Wants To Be Free

"Information wants to be free" is a famous quote, attributed to American writer Stewart Brand in a conversation with Apple co-founder Steve Wozniak:

On the one hand information wants to be expensive, because it's so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.

The quote is not as contradictory as it sounds. The value of information can be higher when it is shared freely. The open source movement realized how valuable it can be to give useful software to everyone. The crypto and DeFi movement is an extension, or subset, of that movement and principle. It's only by giving up the centralized control exercised by the TradFi industry that blockchain is possible at all.

Money is just another form of information. The vast majority of money exists electronically, after all, and it also wants to be free. The freedom of money to move where it can best be deployed is a basic tenet of capitalism. Despite this, centralized financial services have always sought to limit the movement of money, due to the erroneous belief that they can only capture its value when they control it.

Just as the history of money follows a path of increasing centralization, so it is filled with examples of abuses based on the principle of limiting the freedom of money. One of the most egregious examples of this is the phenomenon of the Company Town, often associated with 19th century America. Remote mining towns might be controlled by a single company, and have little access to the outside world. Not only would the company own all the local amenities, but it would issue its own form of money ("scrip"), which could only be spent at the Company Store—which, since it had a monopoly, could charge whatever it wanted. Needless to say, these towns were synonymous with exploitation, perhaps most famously articulated by Tennessee Ernie Ford in his version of Merle Travis's song Sixteen Tons.

Even today, money is hamstrung and lock-in is achieved in various ways, direct and indirect. Setting aside the fact that central bank policy is to inflate the supply and decrease the value of money every year, it's difficult to move money across borders efficiently using the legacy financial system. Banks impose punitive exchange rates and delays. In a globally-connected world, it can still take 3-5 working days for funds to clear. The stated reason is often to reduce fraud, but outdated systems account for part of it. In any case, there's little reason to address the issue when banks can earn money on funds they hold.

DeFi: Money Set Free?

As the first form of peer-to-peer electronic money, Bitcoin began to reverse this process of ongoing centralization. With the rise of Ethereum, smart contracts, and decentralized applications, DeFi offers open financial services to anyone with an internet connection.

The theory is good: Decentralized financial applications on a decentralized blockchain infrastructure remove critical points of failure, inefficiency, and abuse. But there are still frictions, and to realize its promise of truly open, accessible financial services, DeFi must remove as many of these as possible.

One of the major sources of friction is the gas fees on Ethereum L1. Because block space is limited, users compete to pay miners to process their transactions. At times of peak use, an ERC20 token transfer can cost upwards of $50, and more complex contract interactions like adding or withdrawing liquidity to a DeFi protocol can cost hundreds of dollars.

These gas fees exclude smaller users, just as TradFi prioritizes the globally wealthy and excludes those who are already economically and socially marginalized. Average per capita income worldwide is just over $10,000, meaning interacting with a smart contract might cost the equivalent of a day's wages or more for half of the world's population.

Ethereum 2.0 aims to solve this issue with an ambitious series of updates to address the "scaling trilemma" of throughput, security, and decentralization. (In short, it's easy to have one or two of those but difficult to ensure all three. For example, Ripple is fast but lacks decentralization. Bitcoin is incredibly secure and decentralized, but slow.)

In the meantime, L2 solutions seek to address Ethereum's throughput limitations and high gas costs. But there are problems moving funds into and out of these L2 solutions. Just as with blockchains themselves, there is a trade-off between different factors. Bridges tend to be secure but slow, or (in some cases) opt for speed but use a centralized model that means they could be shut down.

Moving funds into Optimism is fast, but transactions from L2 back to L1 are subject to a delay of a week to ensure they are fraud-proof. Faster alternatives are possible but require some degree of trust. Similarly, moving funds into Arbitrum takes between 10 minutes and an hour, but moving them back to L1 takes at least seven days. Polygon has several different official and third-party bridges, and withdrawals can take anything from a few minutes to a week depending on the provider and model used. The lower end of that range is a vast improvement on the higher end, but—even assuming it does not come at the cost of security or centralization—it's still many times the block interval of Ethereum mainnet.

While improvements are being made all the time, none of these options allows common use cases such as arbitrage between exchanges on different chains. Market movements can mean a loss of value over the course of just seconds, let alone hours or days.

SKALE's IMA Bridge is simple, transparent, decentralized, and secure. Transfers between Ethereum main chain and SKALE Chains take just a few minutes, at most. Transactions between SKALE Chains are as fast as a regular transaction, and completely free. This essentially reduces bridged transfers to the minimum possible time, eliminating delays and allowing users to move quickly to take advantage of opportunities as soon as they see them.

Screenshot of IMA bridge from Ruby.Exchange
The SKALE IMA Bridge is fast, decentralized, and secure.

It's now clear that there will not be "one chain to rule them all", but many different blockchains and DeFi ecosystems, with Ethereum L1 remaining a key hub for a large proportion of these. Chains that lack fast bridges are destined to become financial backwaters, as capital moves to the most convenient location, where it can be deployed with the most flexibility. The combination of cross-chain speed and security is vital if DeFi is to live up to its promise of enabling funds to flow freely wherever they can best be put to use. Ultimately, SKALE's bridge and other solutions like it should facilitate frictionless movement of capital between different L2 chains, avoiding high gas costs without forcing money into siloes.

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