Dave Birch, Consult Hyperion

Same Bitcoin

like” in the FT, when it had none of the basic characteristics of Bitcoin at all. And trying to explain the mathematics is not going reach either the layperson or the lay journalist.

So, if it is so hard to understand, how can I explain it? I like to draw an analogy with the famous (to people like me) stone currency of Yap. This was explained by the economist Milton Friedman in a famous 1991 paper called “The Island of Stone Money”. Here’s my summary.

The nation of Yap is a group of four islands in the South Pacific. The islands have no gold or silver or any form of precious metal that could serve the function of money that we are used to. Consequently, where we developed the habit of using metal ingots as stores of value, the inhabitants of Yap used stones. A few centuries ago, they discovered a particular kind of limestone on another group of islands about 250 miles away. Since this limestone was not available on Yap, the supply was limited. From time to time, the tribal chiefs would organise expeditions to these distant islands to quarry and bring back new stones carved into disks. The disks were of various sizes, some only a few inches across and weighing a pound or two, while others could be 12 feet across and weigh thousands of pounds. At the end of a successful expedition the chief who organised it would keep the large stones and 40% of the

smaller stones, the remainder being divided between the expedition members. A long-lived and successful chief might therefore have many very large stones outside his house.

Now, suppose that chief engages in some form of trade or has to pay a large dowry or give a gift to a neighbouring chief for some reason. These large stones are too big to move without considerable effort, so the Yap islanders came up with a practical solution to the problem of minimising transaction costs. Since the stones were too big to move, they didn’t bother. The tribes just agreed that the particular stone no longer belonged to Chief A and now belonged to Chief B instead. Everyone was happy. Over time the stones might be traded again and again, each time staying exactly where they were but with all the tribes agreeing on their new owner.

The system worked even when the stones were invisible. Here’s what I mean. Suppose the expedition quarried some stones but on the return journey, as would happen from time to time, their raft got caught in a storm and to survive they had to chuck one of the stones off of the raft. When they got back to the Chief, they told him about the stone which was now five miles down at the bottom of the Pacific. Everyone agreed that the stone still belonged to the chief and when he used that stone in a trade all of the tribes agreed that the stone

belonged to the payee. Not only does the stone not go anywhere, none of the participants in the trade have ever even seen it. In a way, and this was Friedman’s point, it doesn’t really matter whether the stone actually existed or not. Everyone agreed it did, and therefore it was money.

The tribal chiefs were the central bankers of this system because they organised the quarrying of the stone that brought the new money into existence and the distribution of the stones that formed a rudimentary system of taxation. It all worked reasonably well. It is very interesting to me that the stone money survived the arrival of fiat currency and reports from a few years ago seem to indicate that the value of the large stones had remained fairly stable over time. Interestingly, the 12 foot stone disk weighing thousands of pounds had one very significant advantage over a bar of gold, which is that you can steal a bar of gold but even the most skilled burglar isn’t going anywhere with a 12 foot limestone ‘coin’.

Here, then, is my analogy with Bitcoin. In Bitcoin, instead of expending manual labour to find a kind of stone that is rare, we expend computing power to find sets of numbers that are rare. These sets of numbers have a particular mathematical property that makes them difficult to find but once you have found them it is easy to check that they have that property, just as the Islanders could easily

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