Virtual currencies are in the news again with all the discussion around Bitcoins, which is limited in supply and can be exchanged anonymously.
Our own long experience with another digital currency, Ven, has made us think about the logical conclusion of these activities, and what it means for money at large. And what it means is the end of money as we know it.
Digital currencies are really just online account books that measure and record transactions of financial value between nodes on the Internet. The first ones—Beenz, Flooz and others, arrived with the first wave of the Internet in the 1990s and failed. By the middle of the last decade, the virtual currency economy boomed on the strength of gaming systems: the Linden Dollar in Second Life, World of Warcraft Gold, Entropia and Tencent’s QQ in China encountered success with volatility. Now Internet currencies are moving out of virtual gaming systems and into the global economy, with Flattr (an electronic tipping currency), Bitcoin, Ripple, Ven and local exchange trading systems (LETS) leading the way. The central differentiation between these digital currencies is whether they operate in a closed loop (Ven, Flattr, Amex Rewards) or open nodal architecture (Bitcoin, Ripple). This distinction determines to a large extent their ability to be managed.
In 2009, Satoshi Nakamoto wrote a paper that outlined a platform for P2P currency—a bit torrent for cash—that would be anonymous, distributed and generated at the ends of the network instead of a central network point, as all currencies have been managed for over 600 years. The concept of a truly P2P currency needed innovative architecture, but the open source nature of what became the Bitcoin has allowed it to take root and develop quickly over the last 18 months. As Bitcoins become more prevalent they are growing in value and represent a fundamental departure from normal currency, because Man does not control this currency, the Algorithm does. Even if Bitcoin and Ripple do not become a huge force (which they will), it sets the course for more such distributed currencies, and sets the stage for a currency free for all: open markets, open currency, open chaos, and a cambrian explosion of value sets. The ultimate impact may come from Facebook, Google and other large social network currencies, which could have larger implied users than the Euro right from the moment of exchange trading.
On 4 July, 2007, the social collaboration network I founded, Hub Culture, released the first application for Ven, a new type of digital currency. It was a watershed moment for us, and a confusing one, because the Ven had no value or exchange rate—it simply existed and could be issued and traded at will to friends. Ven was a new type of money—as basic as picking up pebbles and assigning arbitrary values for favors or to say thanks. Everyone laughed, and we soon learned that for a currency to have relevance, it must be measured against other things. Currency needs an assigned value to be understood, a language to speak.
So in 2008 we assigned Ven a value language—10 VEN = 1 USD—and began to sell it for redemption between members and in Pavilions (retail places developed to accept the currency). The fundamental advance in Ven was that it was global, digital, and could be exchanged to anyone, at little incremental cost. Later we made Ven more stable by pricing it from a basket of currencies, which meant the price moved less than a single national fiat currency. To make it more grounded, we added commodities linking it to hard assets. Then we added carbon futures, creating a carbon component to the value. The language was now efficient, stable and green, and today demand for Ven is growing rapidly.