Archive for December, 2013
How Reputation Became the New Digital Currency

Post via Josh Klein @ Popular Mechanics

 

A funny thing happened on the way to the 21st century: Ancient models of exchange such as trade, barter, and gift economies suddenly started popping up all over the Internet. AirBnB began competing with traditional hotels, Uber provided an alternative to existing taxi services, and BitCoin enabled convenient, instantaneous, anonymous purchasing of pretty much anything. The underpinning of these new kinds of commerce is reputation. More specifically, reputation as it is manifest and documented through digital means like cryptography. This is why I coined the phrase “reputation economics,” the topic and title of my recently published book.

 

I try to avoid stating the obvious, but in this case it’s a good starting point: Technology is changing our lives in fundamental ways. Just a few years ago, it would have been hard for many of us to believe that we could speak to our cars to make phone calls, request and receive real-time relevant driving directions, cue up a song based on what our friend’s friends are listening to, and more. So, should we believe that most transactions will continue to rely on cash, credit cards, and systems linked to our bank accounts? The answer is that we shouldn’t, because we’re already moving away from those methods in favor of something far less tangible—which brings us back to cryptography.

 

Most people think that cryptography is important because you must be able to encode information to make it secure from hackers for online and other digital transactions. That’s certainly one of the original reasons for its development. But at the same time, one of the biggest changes this mathematical verifiability has wrought is to allow people to authenticate themselves when they log into a website or share permissions to a third-party app.

 

The implications for commerce are profound. Up until very recently, authentication required some pretty hard-stop tokens. Your address, your Social Security number, your bank account number: These things are difficult or very expensive for you to change, so they were considered good signifiers. If you knew all those bits of information you were likely the person whom people expected to be connected to those tokens.

 

Cryptography changed that substantially. Suddenly, it was possible to use math to verify that the identity that had produced one bit of data had also produced another. It does this by allowing you to use some code to “sign” something, from an email to a forum post to a financial transaction, with a mathematically verifiable signature.

 

The result is that DragonRider15, who posted those really stunning cat photos on Flickr, could now demonstrate in a way anyone could verify—without so much as a real name—that he or she was the same person who had written a particular comment in the Yahoo forum for Toast Sculpturists of America.

 

This “authentication without identification” meant that we were able to invest something far more fluid and intuitive in our accounts than the other, nominally expensive identifiers. That commodity was reputation, and it’s proven to be uniquely advantageous to commerce in the age of the Internet.

 

Consider the way eBay works. Most people simply won’t buy from a seller with few or no reviews, or in some cases without a ranking of near 100 percent, because they risk being ripped off (and rightly so). As a result, a seller account with a long and positive history acquires significant value. That value is reputation, and it has become the new currency of online transactions.

 

AirBnB provides another good example. When I want to learn about a particular host, I can Google the name and get a lot of useful information with which to judge whether or not I’m likely to safely enjoy staying at their place. Reputation means that while I may not know their bank account number, I can be pretty sure that if they’ve invested enough in the identity information I’m looking at to trust the gist of what I see.

 

For any market to work, the buyers must trust the sellers, whether on eBay, AirBnB, or a local service like RelayRides. The existence of online reputation systems, metrics, and personal transparency (or indelible history) has resulted in a new system of value exchange. This reputation-based economy allows me to learn enough about sellers to determine, in a very personalized way, what I’m willing to trade, barter, or exchange with them.

 

This is about much more than eBay seller ratings—an entire ecology of post-financial platforms is emerging. Examples of new reputation economies include EborHood.com, which lets you find a neighbor with a lawnmower who wants to borrow your hedge trimmer. Headliner.fm lets you find the right audience, anywhere in the world, that wants to share your message in exchange for you sharing their message with your audience. StackOverflow.com lets you answer (and get answers to) technical questions, but with a bonus: If you answer enough queries well enough, you’ll get a reputation as an expert, which can mean access to code, projects, or even career options you couldn’t get any other way.

 

There are also a growing number of sites that let you mobilize otherwise undervalued resources, using reputation as a validator. SkillShare.com enables you to build up a reputation as an educator on whatever you’d like to teach, and generate income as a teacher. Taskrabbit.com lets you use your own spare time and capabilities to tick items off someone else’s to-do list—in exchange for a fee. The aforementioned RelayRides.com lets you lease out that car you only use on weekends to someone during the weekdays.

 

Each of those relies on a public accountability of reputation, meaning that the more you participate, the more potential value you can get out of the exchanges, and the more important the account is to you.

 

As cryptography, post-financial exchange platforms, and widespread reputation systems continue to expand, we should expect to see that value grow, and investment in these networks build. It’s not clear how far or wide their use will go, but if the recent Senate hearings on BitCoin are any indication, it’s a fair bet that others are also going to see the potential for alternative exchange platforms and invest accordingly. Does that spell the end of cash as we know it? Not likely. But it certainly points to a diversity of new “currencies” that we didn’t have before coming into play.

 
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Take a Walk Through the History of Money, and How Barter Works

Post via Investopedia

 

Money, in and of itself, is nothing. It can be a shell, a metal coin, or a piece of paper with a historic image on it, but the value that people place on it has nothing to do with the physical value of the money. Money derives its value by being a medium of exchange, a unit of measurement and a storehouse for wealth. Money allows people to trade goods and services indirectly, understand the price of goods (prices written in dollar and cents correspond with an amount in your wallet) and gives us a way to save for larger purchases in the future.

Money is valuable merely because everyone knows everyone else will accept it as a form of payment – so let’s take a look at where it has been, how it evolved and how it is used today.

A World Without Money
Money, in some form, has been part of human history for at least the last 3,000 years. Before that time, it is assumed that a system of bartering was likely used.

Bartering is a direct trade of goods and services – I’ll give you a stone axe if you help me kill a mammoth – but such arrangements take time. You have to find someone who thinks an axe is a fair trade for having to face the 12-foot tusks on a beast that doesn’t take kindly to being hunted. If that didn’t work, you would have to alter the deal until someone agreed to the terms. One of the great achievements of money was increasing the speed at which business, whether mammoth slaying or monument building, could be done.

Slowly, a type of prehistoric currency involving easily traded goods like animal skins, salt and weapons developed over the centuries. These traded goods served as the medium of exchange even though the unit values were still negotiable. This system of barter and trade spread across the world, and it still survives today on some parts of the globe.

Oriental Cutlery
Sometime around 1,100 B.C., the Chinese moved from using actual tools and weapons as a medium of exchange to using miniature replicas of the same tools cast in bronze. Nobody wants to reach into their pocket and impale their hand on a sharp arrow so, over time, these tiny daggers, spades and hoes were abandoned for the less prickly shape of a circle, which became some of the first coins. Although China was the first country to use recognizable coins, the first minted coins were created not too far away in Lydia (now western Turkey).

Coins and Currency
In 600 B.C., Lydia’s King Alyattes minted the first official currency. The coins were made from electrum, a mixture of silver and gold that occurs naturally, and stamped with pictures that acted as denominations. In the streets of Sardis, circa 600 B.C., a clay jar might cost you two owls and a snake. Lydia’s currency helped the country increase both its internal and external trade, making it one of the richest empires in Asia Minor. It is interesting that when someone says, “as rich as Croesus”, they are referring to the last Lydian king who minted the first gold coin. Unfortunately, minting the first coins and developing a strong trading economy couldn’t protect Lydia from the swords of the Persian army.

Not Just a Piece of Paper

Just when it looked like Lydia was taking the lead in currency developments, in 600 B.C., the Chinese moved from coins to paper money. By the time Marco Polo visited in 1,200 A.D., the emperor had a good handle on both money supply and various denominations. In the place of where the American bills say, “In God We Trust,” the Chinese inscription warned, “All counterfeiters will be decapitated.”

Europeans were still using coins all the way up to 1,600, helped along by acquisitions of precious metals from colonies to keep minting more and more cash. Eventually, the banks started using bank notes for depositors and borrowers to carry around instead of coins. These notes could be taken to the bank at any time and exchanged for their face values in silver or gold coins. This paper money could be used to buy goods and operated much like currency today, but it was issued by banks and private institutions, not the government, which is now responsible for issuing currency in most countries.

The first paper currency issued by European governments was actually issued by colonial governments in North America. Because shipments between Europe and the colonies took so long, the colonists often ran out of cash as operations expanded. Instead of going back to a barter system, the colonial governments used IOUs that traded as a currency. The first instance was in Canada, then a French colony. In 1685, soldiers were issued playing cards denominated and signed by the governor to use as cash instead of coins fromFrance.

Money Travels

The shift to paper money in Europe increased the amount of international trade that could occur. Banks and the ruling classes started buying currencies from other nations and created the first currency market. The stability of a particular monarchy or government affected the value of the country’s currency and the ability for that country to trade on an increasingly international market. The competition between countries often led to currency wars, where competing countries would try to affect the value of the competitor’s currency by driving it up and making the enemy’s goods too expensive, by driving it down and reducing the enemy’s buying power (and ability to pay for a war), or by eliminating the currency completely.

Despite many advances, money still has a very real and permanent effect on how we do business today.