What is Money? (Vitalik Buterin) | AI Podcast Clips

So let's ask the high philosophical question about money.

Yeah.

What at the highest level is money? What is money?

It's a kind of game, and it's a game where we have points. And if you have points, there's this one move where you can reduce your points by a number and increase someone else's points by the same number and these.

So it's a fair game, hopefully.

Well, it's one kind of fair game. Like, for example, you know, you can have other kinds of fair games. Like you could have a game where if I give someone a point and you give someone a point, and instead of that person getting two points, that person gets four points. And that's also fair. But no, money is easy to kind of set up and it serves a lot of useful functions. And so it kind of just survives in society as a meme for thousands of years.

It's useful for the storage of wealth, it's useful for the exchange of value.

And it's also useful for denominating future payments. A unit of account.

A unit of account. So what if you look at the history of money in human civilization, just if you're a student of history, how has its role or just the mechanisms of money changed over time in your view? Even if we just look at the 20th century or before and then leading up to cryptocurrencies, that's something you think about?

Yeah, And I think the big thing in the 20th century is kind of we saw a lot more intermediation. I guess in the first part is kind of the move from adding more of different kinds of banking. And then we saw the move from dollars being backed by gold to dollars being backed by gold that's only redeemable by certain people, to dollars not being backed by anything, to this system where you have a bunch of free floating currencies and then people getting bank accounts and then those things becoming electronic, people getting accounts with payment processors that have bank accounts.

So what do you make of that? That's such a fascinating philosophical idea that money might not be backed by anything. What is that like, fascinating to you that money can exist without being backed by something physical?

It definitely is.

What do you make of that? How is that possible? Is that stable? If you look at the future of human civilization, is it possible to have money at the large scale at such a human, hugely productive and rich societies be able to operate successfully without money being backed by anything physical?

I feel like the interesting thing about the 21st century especially is that a lot of the important valuable things are not backed by anything. Like if you look at like tech companies, for example, like something like Twitter, you could theoretically imagine that if all of the employees wanted to, they could kind of come together, they would quit and, and you know, start working on Twitter 2.0 and then the value of, and just kind of build the exact same product or possibly build a better product and then just kind of continue on from there. And the original, the original Twitter would just not have people left anymore. Right? Like the, there is theoretically kind of code and like IP that's owned by the company, but in reality like good programmers could probably rewrite all that stuff in three months. The reason why the thing has value is just kind of network effects and coordination problems. These employees in reality aren't going to switch all at once. And also the users aren't all going to switch at once because it's just difficult for them to switch at once. And so there's these meta stable equilibria in interactions between thousands of millions of people that are just actual, actually quite sticky. Even though if you try to kind of assume that everyone's a perfectly rational and kind of perfectly slippery spherical cow, they don't seem to exist at all.

This, that stickiness, do you have a sense, a grasp of the sort of the fundamental dynamic, like the physics of that stickiness? It seems to work and I think some of the cryptocurrency ideas kind of rely on it working.

Yes, it's the sort of thing that's definitely been economically modeled a lot. Like one of the kind of analogy of something similar that you often see in textbooks as like, what is a government? Like if for example, 80% of people in a country just tomorrow suddenly had the idea that the laws that are currently the laws in the government that currently is the government are just people and some other thing is the government, and they just kind of start acting like it. Then that way it kind of becomes a new reality. And then the question is, well, what happens if between 0 and 80 people or 80% of people start believing that? And what is the thing you see is that if there is one of these kind of switches happening, this kind of revolution, then if you're the first person to join, then you probably don't have the incentive to do that. But then if you're the 55th percentile person to join, then suddenly becomes quite safe too. And so this definitely is the sort of thing that you can kind of try to analyze and understand mathematically. But one of the kind of results is that the sort of like when the switch happens definitely can be chaotic sometimes. Yeah.

But still, like, to me, the idea that the network effects the fact that human beings at a scale of like millions, billions can share, even the idea of currency, all agree. That's just. I know economics can model it. I'm a skeptic on economic. It's like, so my favorite sort of field, maybe recreational, these psychologies, trying to understand human behavior. And I think sometimes people just kind of pretend that they can have a grasp on human behavior, even though it's such a messy space that all the models that psychology or economics, those different perspectives on human behavior can have are difficult. It's difficult to know how much that's wishful thinking and how much it is actually getting to the core of understanding human behavior. But on that idea, what do you think is the role of money in human motivation? So do you think money from an economics perspective, from a psychology perspective, is core to human desires?

Money is definitely very far from the only motivator. It is a big motivator, and it's one of the closest things you have to a universal motivator. Because ultimately, in almost any person in the world, if you ask them to do something, they'll be more inclined to do it if you also offer them money. There's definitely many cases where people will do things other than things that maximize how much money they have, and that happens all the time. But, like, though, a lot of those other things are kind of much more specific to kind of who that person is and of what their situation is, the relationship between the motive and the action and these other things.

What do you think is in the interplay of the other motivator from like, Nietzsche perspective is power. Do you think money equals power? Do you think those are conflicting ideas? Do you think. I mean, that's one of the ideas that decentralized currency, decentralized applications are looking at, is who holds the power.

Yeah, money is definitely a kind of power. And there's definitely people who want money because it gives them power. And then even if money doesn't seem to explicitly be about money, a lot of things that people spend money on are ultimately about social status of some kind. So I definitely view those two things as kind of interplaying. And then there's also money as just a way of, like, measuring how successful you are, like, as a scoreboard. Right. So this kind of gets back to the game. Like, if you have $4 billion, then the main benefit you get from going up, one of the big benefits you get from going up to $6 billion is that now instead of being below the guy who has five, you're above the guy who has five.

So you think money could be kind of in the game of life. It's also a measure of self worth. It's like how we.

It's definitely how. How a lot of people perceive it.

Define ourselves in the hierarchy of.

Yeah, and I'm not. Yeah. Not saying it's kind of a healthy thing that people define their self worth as money because it's definitely an of far from a perfect indicator of how much you value you provide to society or anything like this. But I definitely think that as a matter of kind of current practice, a bunch of people do feel that way.

So what does utopia from an economic perspective look like to you? What does a perfect world look like?

I guess the economists utopia would be one where kind of everything is incentive aligned in the. In the sense that there aren't enough conflicts between what satisfies your goals and kind of what is good for everyone in the world, in the world as a whole.

What do you think that would look like? Does that mean there's still poor people and rich people, there's still income inequality? Do you think sort of Marxist ideas are strong? Do you think sort of ideas of objectivism, like where the market rules is strong? Like what is there? Is there different economic philosophies that just seem to be reflective what a utopia would be?

So I definitely think that existing economic philosophies do end up kind of systematically of deviating from the utopia in a lot of ways. Like one of the big things I talk about, for example, is public goods, right. And public goods are especially important on the Internet, right. The idea is with kind of Money as this game where I lose a few coins and you gain the same number of coins, is that this usually happens in a trade where I lose some money, you gain some money, you lose a sandwich and I gain a sandwich. And this kind of model works really well when the thing that we're using money to incentivize this out of private goods, right? Things that you provide to one person, where the benefit comes to one person. But the on the Internet especially, but also many, many contexts and if off the Internet there's actions that individuals or groups can take where instead of the benefit going to one person, the benefit just goes to many people at the same time and you can't control who the benefit goes to. So for example, this podcast, we publish it and when it's published you don't have any fine grained control over like, oh, these 38,000 people can watch it and then these other 29,000 people can't. Once the number goes high enough, then people will just copy it. And then when I write articles on a blog, then they're just free for everyone. And that stuff's even harder to prevent anyone from copying. So aside from that, things like scientific research, for example, and even taking more pedestrian examples like climate change mitigation would be a big one. So there's a lot of things in the world where you have these kind of individual actions with concentrated costs and distributed benefits. And money as a point system does not do a good job of encouraging these things. And one of the kind of other things, even kind of tangentially connected to crypto, but kind of theoretically outside of it that I work on, is this sort of mechanism called quadratic funding. And the way to think about it is imagine a point system where if, like, if one person gives coin. Gives coins to one other person, then it works the same way as money. But if multiple people give coins to one person and they do so anonymously, so it's kind of not in consideration for a specific service to that person themselves, then the number of coins received by that person is kind of greater than just the sum of the number of coins that are given by those different people. So the actual formula is you take the square root of the amount that each person gave, then you add all the square roots, and then you square the sum. Yeah. And then of that. And the idea here would basically be that if, let's say, for example, you just start going off and kind of planting a lot of trees, and there's a bunch of people that are really happy that you're planting trees, and so they go and all kind of throw a coin your way. Then the. Like, there is like, basically the fact that kind of you get more than a sum, you get this kind of square of sum of these square roots of these tiny modes, that this actually kind of compensates for the tragedy of the commons. There's even this kind of mathematical proof that it sort of optimally compensates for it.

What is the tragedy of the commons?

This is just this idea that if there is this situation where there's some public good that lots of people benefit from, then no individual person wants to contribute to it, because if they contribute, they only get a small part of the benefit from their contribution, but they pay the full cost of their contribution.

In which context does this. Sorry, what is the term quadratic what?

Quadratic funding. Yeah.

Like what's in which context is this mechanism useful? So obviously you said to, to combat the tragedy of the commons, but in which context do you see it as useful? Actually, practically, yeah, theoretically.

Public goods in general. Right, so like, like services, like what.

What are we, what are we talking about? What's a public good?

So within the Ethereum ecosystem, for example, like we've actually tried using this mechanism. I wrote a couple of articles about this on Vitalik CA, where I go through some of the most recent rounds and it's been really interesting. Some of the top ones that people supported, there were things like just online user interfaces that make it easier for people to interact with Ethereum. There was documentation, there were podcasts, there were software clients, kind of implementations of the Ethereum protocol, privacy tools, just lots of things that are useful to lots.

Of people when a lot of people are contributing, funding a particular entity. That's really interesting. Is there something special about the quadratic, the summing of the square roots?

So another way to think about it is imagine if n people each give a dollar, then the person gets N squared and so each individual person's contribution gets multiplied by N because you have n people. And so that kind of perfectly compensates for the kind like kind of end to one tragedy of the commons.

I just wonder if the squared part is all fundamental.

No, it is, and I'd recommend you go to. On Vitalik ca, I have this article called Quadratic Payments, a primer and highly recommended. It's kind of, at least my attempt so far and of explaining the intuition behind this intuition. Sam.