Credit will exist on a Bitcoin standard – Bitcoin Magazine
This is a transcribed excerpt of the “Bitcoin Magazine Podcast”, hosted by P and Q. In this episode they are joined by John Carvalho to talk about building on top of Bitcoin, Bitcoin philosophy and what’s happening with the Lightning Network.
Listen to the episode here:
Question: Isn’t credit “fiat” in nature, or is there a way to create a healthy credit system with good money? I feel like this is often debated and debated and I don’t act or claim to know the right answer to this, I’m just genuinely curious if you feel there are components of credit that just make it inherently fiat.
John Carvalho: No, I mean, I think it’s kind of — I’m not trying to be rude or anything, but it’s just a word salad. They have definitions; these things had definitions. To you and everyone in the audience, if you want to try to get a better grasp of both the dynamics of Bitcoin and the economics relevant to it, read “Cryptoeconomics” by Eric Voskuil. There is no Bitcoiner who understands these things at that level better. My interaction with him and reading with him helped me understand these things much more deeply as well.
He will describe Bitcoin as a market fiat. It’s almost like how someone would joke and say it’s a headless Ponzi. There are no promises that you will receive a trading value of bitcoin in the future for a specific amount.
As if bitcoin could be gone and no one would be responsible. Bitcoin may be the most popular thing on earth, and you can buy a house with something you only paid $5 for, but there is no enforcement of the price of anything in the Bitcoin system. The only enforcement in bitcoin is just the amount of them you have in the system.
So you don’t know what you’re going to get for your bitcoin until you try to sell it and it’s all relative to the person you’re selling it to. There is no enforcement of the price. In a sense, bitcoin itself is like a market fiat, a new type of fiat because there are no controls, there is no central issuer.
It is something the market created to be able to have this concept, and use this abstracted resource as money. Credit and fiat are just two completely separate concepts. Credit is just saying [that] you have people who trust each other. So you have bitcoin for mistrust. Market fiat, the trustless system, simply says, “If I want a unit of account where I don’t have to trust anyone to use it, the ultimate store of value in the abstract, you have bitcoin. Everything else is credit.”
You can say that fiat is a type of credit where they promise nothing. Fiat is only fiat by decree. You say, “This is money.” You have no promise that the issuer will give you anything for that money. Unless you want to get philosophical and say, “Oh, they’re going to give you an army for that money if you agree to have that money inflated or taken from you at will.” I don’t want to get philosophical, so we’ll just say that there is no actual promise behind fiat, but credit is a reliable system. It is recognizing the fact that two people trusting each other can achieve more than one person alone.
You may have some kind of unique nature. There is a kind of dichotomy with people, you have competition and cooperation. You wouldn’t have a society if everyone competed on everything all the time. When you have collaboration, you have community. Community is trust.
Now if you want to collaborate with people on abstractions of economic concepts, you need credit systems. You need to be able to say, “I have a coffee shop. I have proven to my friends P here that I can run a pretty great coffee shop and I want two coffee shops but my profit margin to open two coffee shops will take me 10 years to open my second coffee shop and I want to open one next year .” And then if he says, “I think John can handle it, I’ll trust John with my money.” Now this is just a form of financing. Credit is like the minimum form of financing. It’s just saying, “I trust you for something in the future.”
I could say, “Okay. I’m Starbucks. And I don’t want to involve P,” I’d say to my customers, “Hey, I’m going to sell coffee, and I want you to buy them for the future at, say, 20% off .” And now you say, “Well, I plan on buying coffee from John’s or Starbucks for the next five years. That’s a good deal, and I’m going to pre-buy them.” I can now take that and I can leverage that trust and I can use the extra money to open the second coffee shop as long as I can meet my coffee redemption obligations.
So you can see how credit is not that much different than finance because you can kind of finance things independently if you take the risk of leveraging your credit obligations.
