# What is money?

I'm using QR codes to pay lately. It's interesting how quickly you can send money without touching it. As mobile phone to people ratio is becoming closer to 1, it's natural for cash to disappear in the future.

It might not disappear completely, you may need to print papers for old institutions, but coins and notes will suffer a process like Kodak reels. Apart from ID photos, when was the last time that you printed a pic?

Cash has no real utility. Imagine that suddenly, a virus spreads on our society, and only a civilization of 5 nomads in the Sahara survives. They could rob all the cash they want from banks, but how would coins and notes help them to survive? In the Sahara, 5000 bottles of water are far more valuable than 5000 papers.

Imagine that these nomads can collect the last 5000 bottles of water on Earth. They also manage to build a fridge in the Sahara to store those 5000 bottles. As they are a small community, resources are distributed equally on the first day so that everyone gets a bottle of water. However, as there is only one fridge, they build a system to get a token in exchange for a bottle. The refrigerator works in two ways: if you withdraw one bottle of water, you lose one token. If you add a bottle of water, you get one token.

Money has been born at this point, and it represents a piece of a valuable resource: first comes the valuable resource, then comes the money.

After the first month in the Sahara, one of these nomads creates a system to store rainwater, and he manages to add 5000 bottles to the fridge. He automatically has 5000 additional tokens to spend.

Another nomad decides to engineer an organic farm—assuming that it's possible—, and he begins to exchange food for tokens with the water producer.

Little by little, every nomad specializes in one area. They begin to exchange tokens, at the same time, the water producer perfects the system. The water in the fridge grows at a faster pace than it can be consumed.

At the end of the first year, the fridge stores 1 million bottles of water, and the token distribution is:

1. Nomad 1: 500000 tokens (water producer)
2. Nomad 2: 250000 tokens (agricultural engineer)
3. Nomad 3: 125000 tokens (house developer)
4. Nomad 4: 75000 tokens (electrical engineer)
5. Nomad 5: 75000 tokens (telecom engineer)

They are richer than they were at the beginning.

Imagine that the agricultural engineer detects that 50% of the bottles are contaminated with a virus. 500000 bottles need to be removed from the fridge. As nobody is guilty of the misfortune, the damage is distributed equally, and every nomad needs to extract 100000 bottles of water from the fridge.

Here is the token distribution at this point:

1. Nomad 1: 400000 tokens (water producer)
2. Nomad 2: 150000 tokens (agricultural engineer)
3. Nomad 3: 25000 tokens (house developer)
4. Nomad 4: -75000 tokens (electrical engineer)
5. Nomad 5: -75000 tokens (telecom engineer)

The first three nomads are richer than they were at the beginning, but the two last nomads are in serious trouble because they can't extract water from the fridge anymore.

Tokens are useless if resources aren't sufficient for everyone. If nomad 4 and nomad 5 can't pay for water, they will eventually rebel against nomad 1, 2, and 3 to have something to drink.

Hence, civilization is stable if resources are greater than the necessities. On a small scale, if nomads consume less than they produce, they'll become richer. Otherwise, they won't be able to extract water from the fridge.

However, if the population grows exponentially, will the Sahara fridge be able to provide water for everyone?

Precipitation at Sahara is scarce: it receives less than 100 millimeters of rain per year. If the population doesn't stop growing, at some point, demand will exceed the offer, and part of the population won't have tokens to exchange. Thus, some will die of thirst.

Tokens are a representation of the available resources. Nomads 2, 3, 4, and 5 can't get more tokens if the water producer doesn't put more water into the fridge.

Imagine that per some software bug, tokens in the wallets of the nomads increase by 1 million for each wallet. Nomads wake up one day, and they see the surprise.

This is the new distribution:

1. Nomad 1: 14000000 tokens (water producer)
2. Nomad 2: 1150000 tokens (agricultural engineer)
3. Nomad 3: 1025000 tokens (house developer)
4. Nomad 4: 925000 tokens (electrical engineer)
5. Nomad 5: 925000 tokens (telecom engineer)

Everyone remains quiet about the unexpected increase in tokens. Suddenly, the community is happier because they feel richer. Now everyone can buy bottles of water!

As the telecom engineer suffered so much during the past two years, he decides to exchange all his tokens (he doesn't want to depend on anyone's water anymore).

He gets instantly 500000 bottles of water, leaving an empty fridge. The water producer, agricultural engineer, house developer, and electrical engineer have a lot of tokens, but they can't withdraw water anymore.

To address this problem, the community proposes to increase the price of the water to 36.05 tokens/bottle so that $N_{tokens} = \sum M_{bottles}$.

Here is the purchasing power of each member at this point:

1. Nomad 1: ~388349 bottles of water (water producer)
2. Nomad 2: ~31900 bottles of water (agricultural engineer)
3. Nomad 3: ~28432 bottles of water (house developer)
4. Nomad 4: ~25658 bottles of water (electrical engineer)
5. Nomad 5: ~25658 bottles of water (telecom engineer)

Now everyone can buy water again: resources have been redistributed.

However, the water producer has seen a decrease of 400000 - 388349 = ~11651 bottles. As he is the one who produces the water, he decides to stop filling the fridge. He will keep the bottles for himself until he gets back his previous purchasing power.

In months, the fridge empties. The other nomads ask the water producer to fill the fridge with his production. He decides then to sell water from his reserves for 72.1 tokens/bottle.

Nomads see their purchasing power reduce to half because of the tyranny of the water producer.

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Money is a quantifier of resources and who owns what. The more money you have, the bigger piece of the cake that you can get. If the cake grows bigger, society gets richer. However, the stack can only grow bigger if the base is stable enough.

For example, Apple has a valuation of $2.08 trillion at this point. But without the internet, could Apple be so valuable? AT&T has a valuation of $172.96 billion at this point. But without electricity, could AT&T be so valuable? Pacific Gas & Electric has a valuation of \$24.3 billion at this point.

You could do this exercise further until you arrive at the valuation of raw materials, food, and water. On paper, the higher you are in the pyramid, the richer you are. Apple executives may have lots of zeros in their bank accounts, but those who control the raw materials, food and water, are who call the shots.

Hi, I'm Erik, an engineer from Barcelona. If you like the post or have any comments, say hi.