March 4, 2021

Bitcoin 1.0: the ancient stone money of Yap

Another week, another wave of bitcoin surprises. Never mind that the price of the digital…

Another week, another wave of bitcoin surprises. Never mind that the price of the digital currency has gyrated dramatically; or that Elon Musk, the flamboyant founder of Tesla, is reported to be on course to make more profits for the company from bitcoin investment than from the manufacture of electric vehicles last year. This week it was equally striking that Citibank told its clients that the digital currency has reached a “tipping point” and could one day “become the currency of choice for international trade”.

Cue predictable levels of celebration from bitcoin-enthusiasts — and of bemusement or horror from almost everyone else. Yet detractors and fans of the cryptocurrency both seem to agree on one thing: bitcoin is taking finance into the realm of bold 21st-century tech experiments.

Is it though? On a week such as this, it pays to take a wider historical lens — and peek at nuggets from the past, such as some research carried out in Micronesia by Scott Fitzpatrick, an archaeologist at the University of Oregon, and Oregon business school professor Stephen McKeon. The pair have been studying an ancient stone money system that once existed on the Micronesian island of Yap, where local communities would treat large limestone discs as a medium of exchange.

Such stone discs, called rai, “were considered extremely valuable”, the pair noted in a 2019 paper in the Journal of Economic Anthropology. But the stones were so huge that “given their size, weight, and relative fragility, they were not typically moved after being placed in a specific location [and] if a rai were gifted or exchanged, the new owner(s) of a disk may not have lived in close proximity to it.”

That might make them sound pretty useless as a form of money. But the local community maintained an oral ledger so effective in keeping track of who owned which hunks of immovable limestone that Fitzpatrick and McKeon concluded that rai were, as a record of value, “an exemplary ancient analogue to blockchain” (the technology that powers bitcoin).

Parallels between the two are limited. Limestone hunks cannot be subdivided as easily as bitcoin. And, since blockchain ledgers are based on (seemingly) immutable computer code, they appear more durable than communal memory. The circle of participants in bitcoin and blockchain deals is obviously exponentially larger than it was with rai — and pseudonymous to boot.

But there are other thought-provoking similarities between the two. First, rai — like bitcoin — commanded value because of perceived scarcity; just as it now requires vast amounts of effort to “mine” bitcoin (the technical term for the creation of new coins), so procuring rai was hard. The limestone discs were quarried from Palau, 400km away from Yap, then carried across the seas.

This was the most impressive piece of maritime transport logistics seen in the region until the European explorers arrived in the 18th century and mind-bogglingly difficult for the time (although significantly less environmentally damaging than the filthy process of bitcoin mining, which requires using huge amounts of electricity).

The second point of similarity is that rai only functioned like money because there was communal trust. Unlike in the conventional modern monetary system, the “trust” underpinning rai did not operate in a vertical, hierarchical manner — ie, due to faith in a leader or an institution; instead, it was “distributed” horizontally. Everyone in the crowd needed to trust that everyone else would respect the oral ledger.

Bitcoin also rests on the distributed trust of a crowd. For while computer code might seem impersonal, free from capricious human intervention, the system only works if people trust in the sanctity of that computer code. If that ever breaks down — say because of a cyber hack or a shift in norms — bitcoin would command even less value than rai does today.

There is no sign that trust in blockchain is breaking down. Indeed, the recent note from Citi claims the opposite. The key point is this: anyone betting on the currency is not just expressing faith in algorithms, but in a specific pattern of trust too (ie, that computer code means something).

That does not render bitcoin invalid or the blockchain useless; after all, the mainstream currencies on which our lives depend rely on sometimes tenuous social norms as well. One way to frame the contest between bitcoin and fiat currency is thus as a battle of norms — and of distributed versus hierarchical trust.

As the story of the rai shows, when it comes to human economies, nothing is entirely new. In fact, one rumour periodically buzzing round the crypto-world is that this is where the mysterious progenitors of bitcoin got their inspiration (which is why some bitcoin blogs have titles that include the word “Yap”). Perhaps Musk’s next trip should be to Micronesia, where those now-useless stone circles still litter the landscape as a sign of what happens when norms and patterns of trust change

Hear Gillian and Mark Carney, UN special envoy on climate action and finance, former governor of the Bank of England and author, in discussion at the FT Weekend Digital Festival, March 18-20; ftweekendfestival.com; ftweekendfestival.com

Follow Gillian on Twitter @gilliantett and email her at [email protected]

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