We’re trying to evaluate the current and future practical use value of alternative currencies here. It’s a pragmatic approach focused on existing options. (There has been a scientific economic approach already where Eric, Sepp and Alberto talked about highly generic value flow systems.)
This report is a bit unusual, as it’s not centered around any project I’m involved in. Instead, the origin and basis is a discussion about alternative currencies that some of us Edgeryders started over here. Many thanks to James, Lucyanna and Betta for their contributions!
I will now go on to introduce you to three widespread flavors of alternative currency, then talk about some personal experiences with them, and finally I will need your opinion on something …
Barter currencies
How does it work? While there had been barter systems before, it was Michael Linton who developed the variant used most commonly today - called LETS (local exchange trading system). This is a local user group where new users have to apply to the not-for-profit organization managing the system, and then get a barter account in a central, mostly web based accounting system. The account starts with zero, cannot be filled by converting legal tender, and there is no interest rate. Account total and turnover total are public. Transactions are voluntary and prices in barter currency units can be negotiated at will. There's a directory of all offers within the group from which users can select.Economics. Mostly, it is said that LETSs are localized in order to keep value circulating in the local economy (by necessity, as the local currency units are worthless out of this system, or alternatively, some systems allow conversion but have high transaction fees for that). So in effect, you will rather buy that bag of vegetables from a local farmer for LETS points rather than imported from around the world, even if the price in LETS points is somewhat higher because the local farmer might not bee too competitive on the globalized food market. On system level, this amounts to a support for / revival of the local economy. The second acclaimed aspect of LETSs is that they make currency more abundant - great for those who are short in legal tender. That’s because, in economic terms, LETS is a system of mutual credit. Just that debt is not owed to a bank instittion but to the community of users. And the community is willing to give you credit because it trusts you to pay it back with future offers and services in the LETS system. This even works for unemployed people, who otherwise would not even dare to ask a bank for credit. (Fun fact, missed it myself for 28 years: There’s not much difference between a bank and a LETS user, because banks create the money they hand out as credit. It does not exist before. Not kidding!)
Usually, a LETS has limits in place for both assets and debt, meant to prevent both hoarding and defaults and to keep the currency flowing around. Still, as with every credit scheme, trust is a limiting factor, and in this case trust is only within a well-defined group. That’s why most LETS systems are quite small and localized; however there are attempts to connect LETSs together like clearinghouses or CES (an “exchange of exchanges”), Ripple or Circular Multilateral Barter. It should be noted that “local” character means rather “confined to a community”, which can be either really a local community or a social community, for example a web based one. If there’s trust and cohesion in a community, barter currencies can work.
Is it successful? Valuations of success depend, but in practical terms many such barter community systems start enthusiastically but then finally the economic activity comes to a halt. Seems related to lacking sufficient critical mass (enough people) to make this work in the longer term. There are approaches to make a “global LETS” possible (see above), but none of them is established so far as a comfortable one-stop solution so that trading with users of other LETSs is quite a difficult interaction so far (and thus, rarely done).
However: barter currencies tend to spring up in cases of economic trouble, and tend to be way more successful in these times (maybe not beyond, but it’s a great self-help mechanism anyway). The most interesting developments in this area are going on in Greece at the moment (see the BBC documentary embedded below, also appearing in this good overview article on sharable.net, which is a platform run by our fellow Edgyryder Neal Gorenflo). Greece recently even passed regulation that allows and supports these “alternative economic systems”.
How do I start one? Starting such a local currency is more a matter of finding critical mass, socially, because the technology is all there for free; see an overview of software for alternative currencies on my site, also including more links about background concepts.
Time banking
How does it work? Pretty much the same as LETS, just that the unit of exchange is one hour of work with an egalitarian "all time is equal" principle. (There are other variants that value time by qualification or mutual agreement, but these ae really no different from LETS.) There are also "time saving banks" where people can save up time, by helping others, to later be redeemed for old age care for example.Economics / practical use. Using work time as the basis of value is based on the “labor theory of value” - quite a fringe concept these days, as the competing “subjective theory of value” has been broadly adopted. However that’s not too much of a problem: currency is a social construct, so it can be designed to deviate from whatever we intuitively / most commonly use to determine value. If a group adopts this new concept, the currency works. Also, I think there are good reasons to argue that the labor theory of value should be adopted again as being more fair: in an untouched world, everything of value to humans is either free or created by investing time. Another note: 1:1 exchange of time has, to my knowledge, a taxation advantage at least in some jurisdictions: it’s considered as “not directed towards gain”, so does not constitute taxable economic activity. While producing own goods and trading them in a LETS system large-scale without operating a company might get you into trouble with tax authorities.
How do I start one? Again, it’s about building a sufficiently large group for this to work. But in contrast to barter currencies / LETS, this seems to work also with much smaller setups. Personally, I have two such schemes going on where there are only two of us in each one. For the technical side, again see my overview of software for alternative currencies.
Bitcoin
Of course there's also Bitcoin. It's attractive on its own terms, yet is neither barter currency nor time bank, rather like digital cash.How does it work? This will be a bit weird for those who never heard of it. Ok then … the best first contact with Bitcoin is probably the video embedded below, which happens to be the nice little clip on weusecoins.com. After watching, you know that Bitcoin is free software, works globally, has no transaction costs, and does not need any central authority (which is needed even in LETS systems and time banks). So there’s no third party that you need to trust, as to not interfere with your business (like PayPal does, notoriously) and to not run away with your money.
Technically, this is enabled by a quite ingenious cryptographic scheme: pseudonymous accounts are kept for all Bitcoin owners, and the account balances and transactions are all public and stored on each Bitcoin-enabled computer, in the so-called “blockchain”. Access to transfering funds from one account to another is possible by cryptographic keys stored on your own computer, and a transaction becomes effective by being approved by the network of Bitcoin software clients: they calculate a new “block” for the blockchain, which adds yours and others’ transactions to this shared accoiunting ledger.
This block calculation takes a lot of computing effort from all the thousands of networked computers combined - currently it’s estimated at 137 PetaFLOP/s; compare that with the world’s fastest supercomputer, able to do 11 PetaFLOP/s. The result is just a mathematic “proof of work” that prevents attackers from creating a forged transaction history. And the one computer who found the solution to the proof-of-work problem is rewarded with 50 newly generated Bitcoins. That’s how Bitcoins come into existence, so called “mining”.
Finally, the new block is published and check by each of the Bitcoin network’s computers, including your own if you have the Bitcoin software client running. They check and approve a new block if no double-spending of already spent coins occurs in it, by comparing with the previous transaction history. (And that’s how your encryption key to your Bitcoins loses its validity after you transferred them.) Compromised “evil” clients may accept a block with double-spending, but they are simply ignored by the well-behaving ones. So the behavior of the whole system (defining the correct transaction history) is implemented only in individual decisions of all participants - nice example of emergence, and beauty of P2P.
Economics / practical use. Bitcoin does not have any of the advantages of LETS over money: Bitcoin and Euro etc. are readily exchangeable, and Bitcoin is not created from P2P credit. Both limit its supply, meaning it is just as hard to earn Bitcoin than it is to earn “real” money. Even “worse”, there’s a feature in Bitcoin that cuts of their creation (“mining”) after ~20 million are in existence, meaning there is no way to do Bitcoin inflation by money volume expansion. The design of Bitcoin is tuned to become a “great store of value”.
So unlike LETS, Bitcoin as a system does nothing to overcome money scarcity. But its global instant, no-fee, irreversible and quasi-anonymous transactions have earned it some uses as a better Internet payment system already. And after all, if there is a community that decides to keep their money local, it could also use Bitcoin instead of a LETS system, and profit from getting rid of all system maintenance (not tried yet, this is an own idea).
There’s also a kind of “Bitcoin economy” already, with some hundred small shops trading in Bitcoin and startups offering Bitcoin services; see the list of real things and services to buy with Bitcoin. Also, Bitcoin integrates with major webshop applications, for example there is a Bitcoin module for Magento.
How do I start? To start using Bitcoin, you basically need to install it on your computer and learn how it works:
- Download the Bitcoin client software from bitcoin.org, install it. Wait for some hours to download the so-called blockchain (some hundred megabytes).
- Get some Bitcoins. Usual way is to buy some on a Bitcoin exchange, but you could also sell something on, say, bitmit.net (Bitcoin auction / shopping portal).
- To buy something, you'll have to use the Bitcoin client to send some of your bitcoins to the receiver's bitcoin address, which looks like for example "143PV9zhJUwCiTDD8i7FE16JbfiJvX9zQo". The transaction is more or less instant and basically cost-free, and shows up in the other party's Bitcoin client.
- To receive Bitcoins, hand out one of your Bitcoin addresses shown in your Bitcoin client software.
- ((Important: before you get involved in Bitcoin with larger sums of money, ask or learn about securing your Bitcoin wallet. Theft has happened and equates to accessing an unencrypted wallet.dat file on your computer. And, theft is irreversible!))
Bounty: your first Bitcoin. I am into Bitcoin for a year now and like to introduce people to it … so may I give you a little incentive? I will send 1 Bitcoin (ca. 4 EUR currently) to the first person from Edgeryders who is new to Bitcoin and manages to post their Bitcoin receiving address in the comments.
Personal Experiences
My problem with local currencies so far is that they are local (because I’m frequently changing places, so involvement on the local level is not sustainable for me). However I did some experiments to find my place in all this:
- Internationally: fail. Opened an account at the Global Groups Exchange group at CES. This is their only time-based international group, so it seemed quite appropriate. Yet it's not busy there: the social critical mass is missing to make it a success. Also they don't have an egalitarian "all time is worth equal" principle there, means you can charge more than 60 minutes per hour if you like; I'm not too much of a fan of that idea.
- Among friends: fail. Once I had installed Cyclos on an own server (which is an impressive and free time banking and LETS software by the way). Had planned to use it among friends as a compensation system for time spent in neighborly help, to maintain fairness here. However those friends friends were not too enthusiastic about it, and anyway, just a groups of friends would not provide the necessary group size for the system to take off.
- In our startup: win. We have a time based compensation system going in the startup company that I'm involved in. Every one of the founders records their working hours, enters it into a (self-developed) web based software, and the system always attributes a share of the company's total gain according to the total work hours. So, all time is valued equally, including re-valueing past work times as the company's financial results change. It's my best experience with practical time banking yet, works really smooth and we never had to talk about or even quarrelled about money in our startup.
- Bitcoin: interesting. As another part of alternative currencies, I'm involved in Bitcoin - but not mining or speculation, which are the main activities in the Bitcoin economy so far. So for now, I'm experimenting with it a bit, like buying things on bitmit.net for Bitcoins, and also I plan to accept Bitcoins in a webshop that I'm running.
Note to Policymakers
As shown above, Local Exchange Trading Systems and timebanks are value transfer systems that overcome personal liquidity issues entailed in the bank-centered system of legal tender. They offer economic development options amidst all the current economic collapse and high unemployment, potentially also triggerig a revival of the formal economy. So it is proposed here to enact EU-wide regulation that gives non-profit status to local currency initiatives, not taxing any transaction happening there. (This exemption can be limited to individual self-supply transactions; there is no need to allow big business, as local currencies are intended as a means of self-help in tough times.)Such policy has already been exemplified in Greece in September 2011. Quoting the NY Times:
“Last week, [Greek] Parliament passed a law sponsored by the Labor Ministry to encourage the creation of “alternative forms of entrepreneurship and local development,” including networks based on an exchange of goods and services. The law for the first time fills in a regulatory gray area, giving such groups nonprofit status.” [source]
Call for Opinions: Timebanking on Edgeryders?
This nice idea was raised by lucyanna in the original discussion:“It would be great for this community to actually test a time-banking system, this will help us all understand in a practical way how alternative currencies work.”[source]
Personally I’d welcome an Edgeryders time-bank - because I’d fill more into the “haves” and “needs” profile sections if I knew that mutual compensation is ensured.
Now, fellow Edgeryders, we need your opinions: Do you think this is feasible, do we have the “social critical mass” together for it? Do you think this experiment would provide valuable insights and / or relevant practical use value by means of mutual help? Would you want to participate? Alberto is open for such an experiment on Edgeryders in principle, but I’m not an expert to know if we as a community are in a position to make this a success. So please tell us what you think!
(What I could contribute is the tech part. I found a comfortable and free software that just fits: mutual_credit Drupal module. Drupal is the software behind the Edgeryders site, and this is a program tailored for Drupal to provide time banking and / or a barter point system.)
Alternative economics is way simpler than everything you already understood about the mess we’re seeing in real-world economics and finance …
(Satoshi is the mysterious anonymous hacker who developed Bitcoin). But he or she seems to have had an analogy to gold in mind. It would’ve been simple to design a steadily inflating currency with the same crypto scheme, but Satoshi did not; others may do so in the future. On the other hand, some claim that it’s unfair that Satoshi and the few early adopters during the first 1-2 years could generate 2-3 million Bitcoins at ridiculous computing difficulties, possibly making them rich. These are unspent so far, and are indeed a serious risk for price fluctuation should they come to the market. Just like any huge volume that hits the exchange market at once (like during the