Nick Szabo, the inventor of smart contracts and Bit Gold, laid the foundation for the creation of Bitcoin. He defined smart contracts 14 years before Bitcoin. Then he theorized bits having value based on proof of work five years before Bitcoin.
With degrees in both computer science and law, and an intense fascination in the history of money, it is no surprise Nick Szabo was ahead of his block time. His ideas on the history and future of money, including the role of cryptocurrency, are well documented on his blog. Satoshi acknowledged that Bitcoin was based on Nick’s work, but many believe that Satoshi is, in fact, Nick Szabo.
History of Money
Nick’s analysis of the origins of money provides insight into the future of cryptocurrency. He explains the logical emergence of currency and the inevitable equilibrium of multiple currencies. Szabo argues that every transaction contains a “mental cost.” In a world of “pure barter,” you would need to memorize roughly N squared prices for N different commodities. For example, imagine a world with only brick, wheat, sheep, and gold. You would need to know the price of each item in terms of each other item. To reduce the mental cost, humans would eventually “converge on a single currency” within that society. Mental costs would dramatically decrease. Now you would only need to know the price of each item in terms of the single currency.
Multiple Currency Equilibrium
As each society converges to their own currency, we end up in a world with multiple currencies. We’ve seen this play out in cryptocurrencies. Historically doing “business in a world of multiple currencies, much less of pure barter, has always led to confusion, error, and overly complex accounting. But with sufficiently low mental transaction costs and sufficiently unpredictable exchange rates, it pays to hang on to multiple currencies, and a world of multiple currencies is the equilibrium.”
Nick argues the exchange rates of different currencies fluctuate and are unpredictable. Therefore, it behooves you to hold multiple currencies. Many want Bitcoin to win out as the one world currency. However, Nick argues technology would further cement the existence of multiple currencies. “Now for a more radical claim: in some cases, computers can drastically reduce the mental transaction costs of comparing prices in multiple currencies, which along with the ‘costless teleportation’ of online markets allows multiple currencies or in some cases even barter to become the equilibrium.”