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The Great Awakening

The move from “medium of exchange” to direct exchange

By David Parsons co-founder of TrustMe Property Exchange

伟大的觉醒 从“交换媒介”向直接交换的转变

Example of long term personal credit given, figure 1

ith the advent of blockchain technology and digital assets, trust in the execution of business transactions is approaching the level of confidence of one to one exchange with known parties. This level of trust in dealing with commercial transactions existed since the dawn of trading between peoples. We will examine the past benefits of direct exchange and how blockchain technology and digital assets are enabling the same level of trust we had in the past.

In the past or even during current times, obtaining goods or services in a society between known or unknown parties, goods were exchanged for other goods or services the two exchanging parties needed. This system of direct exchange (or trade of value)  in which participants in a transaction directly exchange goods or services for other goods or services without using a medium of exchange, such as gold, silver or paper currency.

Transactions were not always immediate reciprocal exchanges, some were delayed in time. In most developed countries, direct exchange usually existed parallel to monetary systems only to a very limited extent. Today’s market actors use direct exchange as a replacement for money as the method of exchange in times of monetary crisis, such as when currency becomes unstable such as hyperinflation or a deflationary spiral or simply unavailable for conducting commerce.

No studies have shown any present or past society has used direct exchange without any other medium of exchange or measurement, and anthropologists have found no evidence money emerged from barter. They instead found that credit extended on a personal basis with an interpersonal balance maintained over the long term was the most usual means of exchange of goods and services. This means of exchange coupled with interpersonal balances works very well for small communities where all the actors are known such as a village. As the scope of exchange expanded past the village's boundaries to lesser known market actors and corresponding diminished willingness to give credit in interpersonal exchanges to lesser known parties, exchanges tended to happen in an immediate manner.  Despite this, economists often inaccurately surmised early societies as examples to use the inefficiency of direct exchange to explain the emergence of money, of "the" economy, and hence of the discipline of economics itself. It's more likely money emerged as the possibilities for interpersonal balances became less and less possible as exchanges extended to more unknown market actors as the trust factor with unknown market actors severely reduced or removed the possibility of interpersonal balances. Money effectively replaced the interpersonal balances since money had little counterparty risk to accept.

Deep Dive into Direct Exchange

As depicted in figure 1 above, the farmer in a remote podunk[1] town after the autumn harvest is depicted asking the newspaper editor to accept two chickens (perishable after 2 days) in exchange for 52 weekly editions. The newspaper editor has: a pumpkin (perishable after 30 days), a basket of autumn root vegetables (perishable after 180 days), a piglet (perishable after 2 days), and 2 salt cured hams (perishable after 730 days). The newspaper editor also has employees: a typesetter and an apprentice. The editor is determining the value of two chickens before making an acceptance decision. Presumably he is taking into account the following components of the direct transaction:

Long term interpersonal credit allows direct exchange transactions to take place amongst known participants. The transaction’s reciprodic exchanges sometimes happen not at the same time, but over a period of time. The measurement of counterparty risk for each participant is done on an interpersonal basis without third party involvement. Each participant gains the other's trust typically through a long history of previous transactions.

The newspaper editor in the above example is making a relatively complicated decision in accepting the farmer’s foodstuffs in lieu of payment with US dollars. Factors which include longevity, value, acceptability as units of payments to employees and cost of storage all factor into his decision process. What appears as a simple exchange takes into account a diverse and exhaustive  amount of factors into the decision process.

Benefits of Medium of Exchange with redeemable currency

Gold Coin Bank Notes

Source: Wikipedia

The payment of the yearly subscription in US dollars would be a much easier decision process without the long list of factors to take into account. US dollars (a commodity medium of exchange) would reduce the factors from about 10 decisions to just 1. This certainly would be the preference of the newspaper editor. However, US dollars would need to be available in the local economy and exchanged for the farmer’s foodstuffs thus converting his foodstuffs into US dollars.

A Brief history of non-asset backed currency

A political cartoon from the USA’s 1864 election depicting the Lincoln administration operating "Chase's Mill" at left to flood the country with fiat money or what is called Greenbacks. Two other modern day memes showing the same thing in Europe and US 160 years later. In fact, both Chase and Legardere were both attorneys before becoming banking leaders.

The Money Printer Go Brrr is a popular meme on Reddit and among Robinhood traders. Source: SeekingAlpha

Running the machine: Source Wikipedia

European Central Bank meme illustrating reckless monetary supply inflation.

Source: Reddit

As discussed previously, paper currency was redeemable for money in the form of precious metals gold or silver. Without the restrictions placed on redeemable paper currency creation, politicians have been free to expand the currency supply without restraint. The above political cartoons or “memes” in today’s parlance, illustrate politicians lacking the restraints necessary to prevent hyper monetary inflation. Astonishingly, these memes are separated by 160 years, yet illustrate in detail almost down to the name of the same government officials, the identical causes of monetary inflation.

Non-redeemable currency(fiat) or as it is known sometimes as legal tender is by law must be accepted in satisfaction of previous debts denominated in that fiat. Should a legal dispute arise over a past commercial or public transaction, the legal tender laws say a monetary debt is satisfied if these notes have been “tendered” or formally offered in the correct amount. Under these laws, it is still possible to make a contract in something other than the legally designated currency. A vendor, for example, may specify the payment type needed will not be accepted in legal tender. But if payment for an debt not otherwise specified is tendered in the legally designated medium of exchange, it must be accepted at face value. If some medium of exchange is made legal tender, payment of that medium for a debt cannot be refused on the grounds that the designated currency is not money. Issuing money is something else. It is possible to issue currency without making it legal tender. The government has previously issued various forms of notes that have circulated as currency, but have not been declared legal tender. Gold or silver coins may be issued without making them legal tender. At the same time, tender status can be conferred on the coins or notes of another country. Consequently, the monetary standard and legal tender can be different things.

Legal tender notes are only good for private and public debts inside the country's borders. These fiat notes are not good for paying out interest on govt. debt or paying excise taxes on imported goods.

Source: US Treasury

Today’s currency is no longer useful for John Bull or Joe Sixpack

What this means is government can change at will the value of contracts and salaries negotiated in non-redeemable currency. As an example, $10 dollars in redeemable currency (i.e., gold, property) is generally immune to politicians' decisions. $10 dollars in non-redeemable currency can have its value changed to anything at any time by politicians.

What is old is new

Decentralised creation and distributed money/finance systems (DeFi) are designed to be trustless as their core design. This means the asset in the transaction along with payment and settlement occur almost simultaneously in a DeFi transaction under a smart contract infrastructure.

Currencies such as GBP or USD can be tokenised and used in these trustless transactions. Likewise, new tokenised currencies are created to represent complex financial transactions. These new forms of currencies are created quickly to implement interest being given which are used as currencies in other transactions. This process is repeated over and over again in the DeFi world. Furthermore, the custodial holding of these digital assets are kept by the owner not any other third party.

The great move backwards

These new decentralised finance mechanisms are providing the ability to directly swap assets for assets. The costs of using these systems are negligible coupled with operational low friction. This has resulted in a meteoric rise in their adoption across the industry.  In short, the old “mediums of exchange” USD/GBP/EUR are being discarded for the more stable and trustworthy “Direct Exchange” which removes uncertainty of value and replaces it with more intuitive assets persons are willing to accept.


All of these features result in very low transaction costs with regards to investment in personnel and computing resources leading to ultra low friction in the exchange and provision of liquidity mechanisms. These systems can be located anywhere on the Internet and use assets from anyone. In short, these systems are providing more stable and better transparency to the underlying value of the direct exchange of assets.

Whats next

As we have been discussing, instant liquidity mechanisms are core to providing blockchain automated liquidity. We will discuss in the next series what they are and how they function with digital assets.

[1] American English term for typical isolated countryside community.

[2] United States dollars in 1879 when redemption to gold was restarted after restrictions were implemented during the start of the American civil war.