Can we, then, find hope in the form of technologies that allow us to trust each other in new ways, through new institutions?

Twitter recently added a feature that lets users identify themselves with an NFT picture, distinguished by a new hexagonal border, rather than just a regular profile photo. An NFT (short for non-fungible token) is a digital commodity, typically an image, whose ownership is recorded on a ledger stored on a blockchain. This definition is probably meaningless to the average consumer; indeed, many businesspeople dismiss NFTs as frivolous and a fad.

But the technology underlying NFTs reminds us of something crucial about the way we function in society. Twitter’s move isn’t just a gimmick—it’s also about trust: the trust people place in new technology, but also the trust we put in one another. NFTs are creating new ways for us to trust, based on self-expression.

My research is on the history of trust, from its hunter-gatherer origins to its fundamental role in the economy today. It is a story about how humans learned to work together across great distances. Vast cooperation entails risk—it is much easier to trust your neighbor than it is to trust a supplier across an ocean—but institutions that facilitate trust have allowed us to form societies that create and innovate at a global scale. Today, trust pervades every part of the modern economy. You can see this in the money we use that is backed by the full “faith” and “credit” of the government (the word credit comes from the Latin word for trust). New institutions, like the ones that allow strangers to get into our cars (Uber) or to sleep in our homes (Airbnb), also build trust.

Blockchain technology and its main application, Bitcoin, were designed to move the locus of trust from centralized institutional authorities to decentralized networks, using a computer algorithm. A blockchain provides a way to store a ledger (think of a spreadsheet) not just on a single computer, but distributed across thousands, so that no untrustworthy bad actor can manipulate the ledger for their own ends. Bitcoin is simply a currency, where the record of the amount of money you have is stored on a ledger distributed across the internet, rather than in a pile of paper bills, or on a computer in a bank.

Many blockchain proponents believe the technology will allow us to manage the exchange of money or property rights without the burden of bureaucratic rules and outdated systems imposed by old institutions. Yet often it tries to solve “problems” that are already held in check by trusted systems. Few of us worry that the banks we use will lose our money, or that the Federal Reserve will debase the U.S. dollar. Also, taking people out of the system, and replacing them with an algorithm, creates its own new set of problems. For instance, while records stored on blockchains are protected from meddling by complicated computer algorithms, accessing your money in these systems often requires just a password or “digital key.” What happens when somebody misplaces their password? Billions have been lost on the blockchain in such instances. And billions have been stolen from blockchains by hackers exploiting mistakes in computer code.

However, blockchain technology can be useful for jumpstarting trust in new institutions in developing countries. Game theory and economic experiments (as well as everyday experience) suggest that trust is earned through repeated interaction, forged through customs and norms that can take generations to develop. The U.S. financial system has had hundreds of years to build up trust, but people in a developing country with relatively new and/or weak legal institutions may be less likely to trust a new bank. New decentralized financial services, powered by blockchain technologies, could be especially useful for building trust in such environments. El Salvador recently became the first country to adopt Bitcoin as legal tender, hoping to capitalize on these new innovations.

New digital geographies also lack histories and institutions of trust, and thus might benefit from blockchain technology. Which brings us back to NFTs.

An NFT allows someone to claim ownership of a particular instance of a digital good. Once created, NFTs can be bought and sold, with fees for every transaction going to the blockchain and associated service providers. Such services could easily have been provided by a government, which already keeps ledgers tracking ownership of digital property rights like patents and copyrights. But governments are slow to adopt new technologies. Similarly, a private entity could also have offered similar services, but creators are less likely to entrust the tracking of their art to a for-profit company or a new organization. Placing NFTs on a blockchain speeds up the process of getting creators and consumers to trust the new system, because the technology helps ensure transactions are transparent and protected from manipulation.

Why would we want to claim ownership of an instance of a digital image in the first place? Because, increasingly, we live in the digital world. Many of our interactions with other people already happen online. As more of our social lives become digitized, perhaps in the coming metaverse, people will spend more and more money expressing themselves online—just as they do in the offline world today.

They might buy digital clothes. One of the biggest sources of video game revenues is in-app purchases, including digital outfits for a player’s avatar to wear inside the game. Aloy, a video game character, was recently featured on the inaugural digital cover of Vanity Fair Italy. Companies like Nike have sold virtual shoes for players of the game Fortnite and are moving to sell you NFTs of shoes that would only exist in the metaverse.

Buying and wearing clothing is one way we express ourselves. For now, this means publicly displaying our clothed bodies in physical spaces. When someone buys designer clothing today, they don’t own the right to reproduce that clothing item, just the right to show off that particular (expensive) instance of the clothing, and to wear it. Up until now, there has been no easy way to buy a digital designer outfit the same way we’d buy a physical designer outfit. NFTs change that, and open up a world of online expression, by creating a system that protects creators by allowing consumers to distinguish between licensed and unlicensed copies of digital goods.

This kind of expression matters. In some of my research with Jonah Berger and Yogesh Joshi, we find that the brands we buy—in fact everything we buy—conveys to the world something about who we are: our social status, our personality, our trustworthiness. For example, psychological experiments find that people can form surprisingly accurate assessments of someone’s personality just by observing the objects in their bedroom.

Our fashion choices and other purchases—digital or otherwise—are a reflection of our identity. All through history, humans have (for better or worse) used shared identity—shared family, shared ethnicity, shared religion, and shared language, but also shared taste in music, movies, or sports teams—as a way to decide who to trust and, therefore, engage with in business, in romance, in friendship, and more.

The new Twitter NFT feature is designed to allow Twitter users to further customize their social media profiles in the same way our clothes are on display to the world, but with added confirmation of its value. Some lament the energy costs of NFTs and their contributions to climate change, yet those costs are small compared to the emissions associated with other expressive goods like fast fashion.

Others lament the development of NFTs as just another overhyped Silicon Valley tech trend, representing the excesses of late capitalism. I see it as something different—another way for humans to do what we have always done, to find new ways for authentic self-expression and to connect to the people we trust.

The post Can NFTs Build Trust? appeared first on Zócalo Public Square.

The new “Cal 3” ballot initiative, which would create three states, has roots in pre-Civil War days, when the proposal was to split us into a pro-Union north and pro-slavery south. In these and all other cases, would-be splitters of the Golden State make the mistake of using the map to divvy us up, putting some regions into one new California and others into another new California.

Why can’t the splitters see that this geographic strategy is self-defeating?

After all, the fundamental reason for splitting California is that so many Californians feel stuck in a place with too many people who don’t understand us—simply because they are too different. So the splitters seek to tap into a hope—that we would get more of what we wanted if only we lived in smaller Californias where more people were like us.

But this logic simply doesn’t apply here. Our regions are too much like our state—too vast and too diverse. Even with three geographically drawn California states, millions of us would remain trapped with too many people with whom we don’t agree.

To split the state, it’s better to do this democratically, not geographically. Let every Californian choose their state, based on their dreams, not their address. Since California is a state of mind, doesn’t each mind deserve its own state?

The hard part of splitting California would be divining the right categories for division. To start, let’s stipulate that we shouldn’t be divided by age, sex, sexual orientation, national origin, religion, or race, since forming states on a discriminatory basis is probably still unconstitutional, even under President Trump.

When I pose the question of how best to divide California non-geographically, the most frequent answer is, by income. Why not give the billionaires their own state, since they like to decide everything? Wouldn’t states based on income at least solve inequality? Unfortunately, no. Nothing would stop the billionaires from imposing their values and skewing the income curve in the other states that would serve the millionaires, yuppies, the poor, and whatever is left of the middle class.

Housing might offer a more effective divide. We could divide the place up by preference on that most divisive of issues—density—with those who like tall buildings near transit no longer forced to share a government with devotees of the single-family home.

Or why not exploit the way that Prop 13 has divided us by property taxes, with new homeowners paying more and effectively subsidizing longtime homeowners? You could divide the state according to the decade in which your current home was purchased, and the tax base set. Renters would get their own separate state.

Negotiating traffic is something that all Californians have in common, but how we do it is a point of contention. Why not one state for those who drive to work alone, and others for carpoolers, bicycle riders, and scooter enthusiasts? A small state could also serve the 5.3 percent of Californians who use public transit.

And if the internet is polarizing American democracy, why not deepen the digital divide by setting up states based on our preferred social media platform, smartphone brand, or by whether you rely on Netflix, Hulu, Amazon Prime, or—the inhumanity!—basic cable.

Health is another area where Californians have both high standards and very different practices. Take exercise—practitioners of traditional yoga, hot yoga, barre exercises, jogging, and walking all deserve their own states. So do smokers, nonsmokers, pot smokers, and vapers. And why not stop fighting about food and just let vegans, vegetarians, meat eaters and devotees of the latest faddish diet all govern themselves? We might divide up the state based on childbirth preferences—with competing states of Doula and Midwife and Ob-Gyn.

Ideas matter in California, and the personal can be political. So we could split up under the competing banners of Second Wave, Third Wave, and Fourth Wave Feminism, with yet another state for those who say they’re pro-woman but just don’t like the word “feminist.”

And for a state so devoted to leading in climate change, a split based on energy usage feels like an opportunity for leadership. You could live in a different state depending on whether you prefer solar, wind, geothermal, nuclear, or fossil fuels. This wouldn’t be much of an adjustment. People who live in the Petroleum State already have long commutes and high mortgages that keep them breathing exhaust, while the people in Solar State have subsidized panels and enjoy the good vibes of government-bedazzled credit. Residents of the Nuclear State could just leave the AC on all the time to keep their cores cool.

Now that I think about it, consumption so defines Californians that it might be the best way to separate us. Why not a different state—Ralphs, Vons, Safeway, Dollar Value, Albertsons, Whole Foods, Stater Bros—depending on where you do your grocery shopping? (I’d happily live in Trader Joe’s.) Or in coffee-crazed era, we could separate based on allegiance to Starbucks, Peet’s, The Coffee Bean & Tea Leaf, and McDonald’s—with a breakaway republic for those who prefer the hyperlocal.

Since Californians take their entertainment so seriously that we elect stars to high office, why not four different Californias, each ruled by a stunning musical diva? I’d live in Beyonceland, but would respect those who chose to reside in KatyPerryville, TaylorSwiftopia, or The State of Rihanna. We also could split into four states called Star Wars, Star Trek, The Matrix, and “Sorry, But I Actually Have a Girlfriend and a Life.”

The fairest way to create new Californias would be to assign each of us to a different state by lottery. The downside of such random splitting: Each of those states would end up looking like a smaller version of the California we have today.

And if you don’t like any of these ideas, why not try placating Tim Draper, the Silicon Valley venture capitalist bankrolling the current “Cal 3” ballot initiative?

I saw Draper recently in San Mateo, where he had closed down 3rd Avenue outside his private entrepreneurial university (Draper University for Heroes) for a “Blockchain Block Party.” Draper, like most rich people, thinks a lot about money. He’s a big believer in digital currency, which he sees as a positive force for disrupting economies to spur new ideas. Breaking up California geographically would inspire similar new thinking, he says.

At his party, he handed out chocolate Bitcoins (which were delicious) and revealed a giant banner reading, “Tim Draper Predicts…. Bitcoin Will Go to $250,000 by 2022.”

Of course, Bitcoin trades at $6,500 as I write. But this is California—to each their own. We could give Draper and his cryptocurrency disciples their own state, while also having states for those who pay with their phones or with credit cards.

The post Let’s Split up California Into Separate States of Mind appeared first on Zócalo Public Square.

This waste is energy. The media organization Diginomics estimates that the energy consumption to fuel bitcoin is equivalent to the consumption of just under 2 million average U.S. households. Add in the energy for other digital currencies like Ethereum, then figure in the resulting environmental pollution, and it’s clear that such currencies have great social costs.

For clarity, let me keep the discussion here to bitcoin, which consists of two separate pieces. The first is a mathematical hashing algorithm, which drives its mining feature; the second is a storage feature, called the “blockchain.” Although the blockchain is not particularly efficient, either, it is the mining that is the disaster.

Mining is what creates bitcoins in the first place. It is the running of a computer algorithm to solve a mathematical problem. Mining consumes about 18 TWh of electricity costing about $1 billion a year (plus more for hardware costs). This is less than the estimated $3 billion in value of all bitcoin (though the value changes every day), so market forces have been pushing more investment into bitcoin mining—in economics-speak, entry is profitable until the marginal cost equals the marginal revenue.

For the record, mining has absolutely nothing to do with making the currency secure. No, the purpose of mining is perverse: to solve a problem whose only purpose is that it is increasingly difficult to solve. If it were easy to solve, everyone could manufacture bitcoins aplenty. It is the difficulty that effectively creates bitcoin’s scarcity, and the expectation of even more difficulty and future scarcity has attracted speculators.

Why does scarcity matter? Anything that exists in unlimited amounts cannot be worth very much. Sand is not worth a lot in California. There is too much of it. But the reverse is not the case. Scarcity in itself is not enough. For example, my left thumb print is scarce, but it has no intrinsic real value.

Bitcoin mining takes considerable energy. Photo courtesy of Wikimedia Commons.

Bitcoins are scarce, but they have no intrinsic value. When one pulls back the curtain, the bitcoin hashing problem really has only its one nefarious purpose: It exists to provide the mystery of complex mathematics to confuse and help hide the true benefits of the hashing solutions (i.e., the bitcoins), which is zero. An important part of the deception is that mining is mathematically guaranteed to become ever more expensive, as it gets harder to mine new bitcoins. That difficulty creates the false impression that today’s value is a bargain compared to what it will be in the future. Bitcoins are the ultimate Ponzi scheme.

But aren’t there some real uses of bitcoins? Proponents of digital currencies often argue that bitcoins make transactions more efficient and thereby create value. But even if you believe that, bitcoin has much higher costs than better alternatives. We already have plenty of good currencies and near-currencies (such as credit) that can play transaction-cost reducing roles. And, unlike official currencies like the U.S. dollar, which is ultimately backed not only by legal tender rules but also by its ability to pay taxes, bitcoin has no fallback uses.

Today’s prime use of bitcoin, other than for naive speculation, seems to be black- and gray-market transactions. Using bitcoin is especially attractive in countries like China and India that have imposed currency controls that individuals want to circumvent. A Chinese local can purchase bitcoins on the local market, move them anonymously to the United States, and convert them back into dollars (or store them). It can be argued whether the ability to avoid currency controls creates social value (or not). But it’s clear that such transactional anonymity is not particularly useful to most legal transactions. Bitcoin also brings risks. Standard channels of payment afford some safety against anonymous hacks. Banks offer some protection. Bitcoin does not.

Eventually, authorities will crack down on the illegal channels of currency controls with bitcoin, and the value of bitcoin will fall. Speculators and miners will then further drive down the value, and the bubble will collapse. The last ones in the game of musical chairs will have nothing.

So I have a proposal that solves both the inefficient (nay, stupid and useless) creation of scarcity through mining, as well as the lack of a connection of bitcoin value with reality.

Rather than destroying electricity in order to hide the nefarious schemes of the bitcoin hustle, we should design a new kind of electronic currency that works almost like bitcoin but without the mining algorithm. A designated entry-exit server could hand out unique and verifiable “bittokens,” instead of wasting electricity.

Creating these bittokens would cost about 3 cents, batteries included. But, because the bittoken should be worth $3,000 (like bitcoin), we could sell them for $2,999.99 and put the remaining $2,999.96 into a trust account.

Like bitcoin, we guarantee that new bittokens can be purchased at the same and ever-increasing price as it costs to mine bitcoin. Unfortunately, we cannot guarantee that our bittokens can be sold for the same price as bitcoin on the open market (which we cannot control). Who knows, the original bitcoin may go even crazier for a while longer, with a price of $1 million (or drop to $0).

This is not all bad. On the open market, bittokens may sell for more or less than bitcoins. But bittoken can guarantee something important that bitcoin cannot: we can guarantee that the bittoken can always be redeemed for its original purchase price. The original bittoken buyer cannot lose!

Of course, there is a risk. There is one unique entry and exit site that administers and verifies new bittokens, manages the real dollar trust fund, and honors all redemption requests. If the trust fund were to go bust, so would the bittoken redemption guarantee. But this risk is trivial when compared to bitcoin’s guarantee of nada at exit.

Any transactional efficiencies of bitcoin would apply to bittokens, too. Society would be better off. By not wasting electricity and using the money to make productive investments, the trust can produce social goods—creating jobs, fighting disease, building infrastructure, or encouraging energy efficiency.

And, best of all, JP Morgan could do it tomorrow and make a fortune!

The post Bitcoin Is an Energy-Wasting Ponzi Scheme appeared first on Zócalo Public Square.

Not so, you may protest. We have Apple Pay, Paypal, Google Wallet, Mastercard, Visa, M-Pesa, Bitcoin, hundreds of alt-coins spawned by Bitcoin, all of which claim that they will dethrone good old-fashioned cash off its mantle. But not so fast. Despite all the hype around the supposedly new-fangled digital alternatives to money, these remain either expensive or inconvenient. Credit card companies charge retailers two to three percent of any transaction, which we’re all paying for in the form of higher prices, passed on by merchants. Direct withdrawals from bank accounts are cheaper, but have traditionally taken a long time to clear, sometimes as long as a day.

The drawbacks of these digital alternatives are evidenced by the resilience of cash. Eighty-five percent of all transactions globally (and 40 percent in the U.S.) are still carried out using cash, particularly transactions involving small amounts of money. There are good reasons why that is the case. Cash is convenient. Cash is private. Cash is intuitive. Cash does not incur explicit transactions costs.

And yet cash is also cumbersome to carry and store. It can be stolen and forged, remains uninvested and usually loses purchasing power over time, and most importantly, cannot be transferred easily across large distances. And so, there is a pressing need for a digital currency that works.

If you are a cryptocurrency enthusiast, you are probably reading this with great impatience, eager to get to the discussion of how Bitcoin and its alternatives are the answer. Cryptocurrencies, which are digital, encrypted currencies that operate independently of a central bank, are almost costless to move instantaneously, offering both privacy and security. I am also a cryptocurrency enthusiast. But I am not ready to declare victory. At least, not yet.

First, transactions using cryptocurrencies are not convenient. They are not intuitive. Just watch someone pay for coffee at a coffee shop that accepts bitcoin as payment (there are some). Only geeks are likely to find it simple and easy to use. You may protest that this is what people said about email and Internet 20 years ago and look where we are now. Perhaps so. But the transition to electronic money will not be as easy or as simple. Why? Because we are talking about money. Bitcoin’s “blockchain” technology keeps a permanent, public, and seemingly inviolable record of all transactions, which is distributed publicly across many private computer servers around the world in a decentralized fashion. It’s brilliant, elegant, and revolutionary—but also, to quote the author Nathaniel Popper, “one big hack away from total failure.”

Money attracts both fraud and regulation. And uncertainty. Financial regulators are conservative, wary of any new technology that is easy to use and accessible, unless it be proven completely fraud-proof (an impossible standard).

And so, regulators are over-zealous in clamping down on innovation. They will reflexively (and absurdly) invoke “Know your customer” (KYC) regulations and “Anti Money-Laundering” (AML) requirements every time someone proposes something new. It’s as if regulators never want to hear the benefits that might come from financial innovation, however much they might offset any potential downside. But someone who designs a faster car should not be prevented from manufacturing and selling it lest thieves use it get away after robbing a bank. We need to rely on other means of deterring crime.

When we discourage innovation and proliferation of convenient, secure, and costless digital alternatives to money for fear of money-laundering and related crime, we are continuing to disenfranchise nearly 3 billion poor people in the world who would benefit the most from the financial inclusion that frictionless digital money and payments will generate for them.

Here is a concrete example. Imagine that a woman working as a day laborer in India earns 100 rupees on a given day. She may go to a grocery store on her way back home to buy goods worth 80 rupees. If technology made it possible for her to deposit the remaining 20 rupees (which is only about 30 cents) immediately in an account that earns interest or put it immediately in an investment that is expected to grow, without incurring any transactions costs, this could transform her life. Even “small” transactions costs of 5 or 10 cents per transaction would induce her to keep the money in the form of cash, which would not only fail to grow, but may be spent in an impulse purchase by her husband or children.

Similarly, a migrant worker should be able to send money he or she earns nearly free of transaction costs to the family that may live in a different city, or even a different country. Nearly $600 billion of such remittances are currently made across borders. And they are expensive, outrageously so. Nearly 7 percent is lost in intermediation.

How about services such as the mobile phone money transfer business M-Pesa, which is ubiquitous in Kenya? Given the lack of banking alternatives that exist in many African countries, M-Pesa services have deservedly received attention and acclaim from media, policy makers, and global development advocates such as Bill Gates. But even services such as M-Pesa have high transactions costs.

Given the revolution in communication technologies, and how they’ve transformed so many non-monetary domains, it seems reasonable to demand that in the near future we do away with most everyday transactions costs, which are unnecessary. We should shoot for a one- or two-tenths of a percent as an acceptable fee, whether we are seeking to pay with our Apple Watch at the corner deli or seeking to pay for a meal in rural India.

How do we get there?

First, financial institutions need to abandon the stupid idea that every transaction, no matter how small, must be verified. Every time I buy a cup of coffee using some form of electronic money, the retailer need not check with Visa or my bank if I have money or I am credit-worthy to be offered an implicit credit of a few dollars. Such verification should happen infrequently, only when the aggregate amount in question has reached a large predetermined amount. After all, most people have reputation capital these days; in our increasingly interconnected world, even sellers on e-Bay from far-off places like Guangzhou in China can be “trusted” given their reputation scores.

Second, the new digital money needs to feel simple, intuitive, and easy to use even in even the most illiterate parts of the world. You often hear experts advocating financial literacy and educational programs to “teach” people how to use new technology-based money. But the most effective adoptions happen when people learn by imitation. So, this electronic money must become ubiquitous. People should see it being used by rich and poor alike and in developed and developing countries in essentially similar ways. No one offered cell phone literacy classes or programs when the technology was introduced, but cell phones quickly went from being aspirational objects to being widely adopted as the costs fell sufficiently low. Now more people use cell phones than toilets in the world. In the same way, electronic money is likely to grow when middle-class consumers start using it regularly, even when transacting with the poor.

Lastly, the dream of the libertarian cryptocurrency enthusiasts that money will become totally anonymous, far from the reach of the government and inept regulators, is not practical. We want technology that empowers individuals, but we need shared institutions such as the courts and regulators that protect people and the integrity of the currency being used. After all, 7 billion people aren’t going to make the transition purely on faith.

The post Show Me the (New) Money appeared first on Zócalo Public Square.