Cryptocurrency Three Hundred Years Ago: Seeing the Second Empowerment of Currency from John Law
If the value of a token keeps depreciating, and people lose trust in it, how can it appreciate rapidly or even exceed its value? Three hundred years ago someone came up with a solution.
In the era when there was no modern bank currency system, when gold and silver coins were used as currency, John Law issued paper money for the first time, and used national debt as the threshold for purchasing company stocks, which made the depreciating national debt very popular and eased the French government. The debt crisis, but due to the constraints of the political environment at that time, some of the envisaged functions have not been realized.
Today, 300 years later, the international monetary system has completely got rid of the gold standard system, and has formed a credit-based system similar to the one envisioned by John Law. ideas become possible.
In this article, we will demystify John Law’s method of creating “credit notes” and try to design a model for token empowerment.
Let’s see what happened
The background is that when the French government was in financial difficulties and desperate, it granted John Law privileges to help France get through the debt crisis, and the “credit-based paper currency system to replace the coinage-based banking system” got the opportunity to implement.
1. Universal Bank
John Law first established the Universal Bank, which issued banknotes that could be exchanged for gold coins at any time and that people could use for transactions. Due to the portability of paper money and the excellent creditworthiness of the precious metal backing, coupled with the government’s promise to John Law that it would not intervene in devaluation [LS1], and even at the beginning John Law stipulated that paper money had a 1% premium over gold coins, people began to exchange John Law’s paper money.
2. Mississippi Company
After obtaining the monopoly privilege to develop North America and trade independently from the French government, John Law established the Mississippi Company, and then used “mining gold” as the promotional highlight of the Mississippi Company. John Law put the deposits absorbed by the General Bank into the Mississippi Company, making The company’s stock was soaring at the time. In conjunction with the public opinion of getting rich and the sharp rise in stock prices, people have started FOMO, looking for ways to buy stocks.
Mississippi Company Stock Chart
3. Set the threshold
John Law stipulated that people who buy stocks must first buy treasuries, and then use treasuries to buy stocks.
Let’s do the math, let’s say you want to buy 1 million shares:
We saw real investment yields as high as 200%, people started to buy bonds and stocks in large quantities, and in the free market, the stock price even reached 10 times the subscription price of the issue, John Law and the government took advantage of people’s FOMO sentiment, and issued another 1.5 billion livres of shares, 12 times the size of the previous two issuances.
Through the method of buying new shares with treasury bonds, the price of these government bonds, which are like waste paper, was once returned to par value.
The government obtains currency by selling the national debt, and the Mississippi Company obtains the national debt, and the company destroys all these national debt, exempting the government from its repayment responsibility, and the government will pay the Mississippi Company 4% interest every year for the next 25 years.
4. Bank restructuring, debt transfer
The French government reorganized the private bank into the Royal Bank and began to issue a large number of banknotes. By the end of 1720, the issuance of French banknotes reached 3 billion livres, while the Royal Bank’s reserves were only 700 million livres. The government also paid interest. Debt is transferred and huge debts are forgiven.
According to the capital adequacy ratio calculation, even at the most underestimated figure, the capital adequacy ratio of Royal Bank reached 16%, which is a full double the value of modern banks stipulated by the Basel Accord. In addition, the first person to run on the Royal Bank turned out to be the Royal Bank itself. No bank could refuse to accept it, nor was the Bank of England at that time, or no bank could resist it since ancient times. Because the gold reserves could not be used to pay the run on the banknotes. All gold exchanges in France eventually came to a standstill.
In order to avoid a complete collapse of the economy, John Law issued a deflationary decree, planning to reduce the official price of Mississippi company stock from 9,000 livres to 5,000 livres each month, and he also halved the number of notes in circulation. However, the public has lost confidence in paper money and stocks, company stock prices continue to plummet, and the “Mississippi bubble” burst.
Although the end result was a flop, we can still look back at John Law’s operation, make some findings, and compare it to cryptocurrencies.
The second step of the whole plan is the focus. John Law created a vision – “Mississippi companies will dig gold in North America”. When people want to buy, John Law set the precondition for buying stocks, that is, they must buy government bonds. to buy shares.
John Law used two methods. One was to use people’s gold coins in the bank to invest in Mississippi companies, so that the stock price continued to rise, and the other was to use the endorsement of the French government to hype the Mississippi company’s privileges in North America. Using big topics to cover up small topics, John Law let the people buy a lot of government bonds while buying stocks, thus alleviating the debt crisis of the French government.
Why do people buy John Law’s paper money in terms of currency?
1. You can exchange gold coins at any time
2. Depreciation without centralized government intervention
3. Precious metals are guaranteed credit
4. Convenience compared to gold coins
5. The government accepts the payment of taxes in this banknote
Nowadays, the attributes of cryptocurrencies, stable coins can be exchanged one-to-one into US dollars at any time, and the transaction behavior on the chain is decentralized, guaranteed by US dollar reserves (USDT as an example), and the way to absorb market funds is also used as an intermediary . The reasons for the two are different at the beginning, but they are similar in terms of quickly building consensus and enhancing the value of the currency.
Where are the reserves?
According to the data, people did not use banknotes in real life at that time, and the most users were some institutions and companies. Due to the convenience of banknotes, they were often used for large-value transfers and settlements. Relationships act as constraints on companies, preventing large-scale sell-offs and runs. This makes people more believe in the value of paper money, and it can be seen that the use of large corporate institutions has brought value endorsement to paper money.
The people at the bottom don’t actually worry about whether the reserves are enough. As long as institutions and the government and other organizations with a large amount of funds continue to hold and use them, they will not have any doubts. A run on the money will cause panic among the people, which will lead to the rupture of the capital chain. In fact, John Law’s plan finally failed.
Can the problem be solved now?
At that time, John Law once thought of two points to solve the problem of margin reserves. One was to directly collect money through French taxation, and the other was to use paper money to achieve the purpose of indirect taxation. These were hindered by the taxpayer system at the time.
In order to save money, the French royal family implements the “tax-inclusive system”, and the taxpayer has the right to collect tax, and the taxpayer only needs to hand in the specified amount on time every year, and the rest is collected by the taxpayer. And tax efficiency could not be guaranteed, John Law ultimately did not address the “tax as a margin” issue.
A major advancement in the field of encryption today is the emergence of smart contracts. Through smart contracts, the function of automatic tax distribution for each transaction can be realized. Functionally, the purpose of removing third parties is achieved, and it is more transparent, so that people can trust this system more. , it is easier to construct John Law’s credit currency system in structure.
Regarding the reserve problem, the algorithmic stablecoin in the current stablecoin is a breakthrough. It solves the problem of John Law. It does not use fiat assets or cryptocurrencies as reserve support, but completely manages the issuance of tokens through algorithms and smart contracts. Functionally, their monetary policy is similar to the central bank’s monetary management method, which is also more convenient for platform management.
Later, the reason for the decline in the value of John Law’s banknotes was the flight of capital. Large households exchanged banknotes for coins and smuggled out of France in advance. Secondly, the decline in circulation led to the unilateral devaluation of banknotes. Now DeFi is used to provide liquidity and provide a variety of solutions, which can stimulate With the improvement of liquidity, you can even think about it. The project party can introduce the Olympus mechanism in the later stage to reach a consensus that the pledge does not move, so as to reduce the outflow of funds.
Time back to 2022
We saw that after many ICO projects skyrocketed, the market automatically created a vision for people, that is, “projects participating in ICO will appreciate greatly”. At this time, the exchange and the project party cooperated to launch an IEO, and the exchange screened high-quality products for users. The project is audited and put on the shelf.
There are two elements that are similar to people buying John Law paper money, one is the appreciation of the stock (token), and the other is the endorsement of the authority (exchange).
Specifically, let’s take an IEO participation in Binance as an example: To participate in the Binance IEO, you must have more than 50 $BNB in your account. Every 50 $BNB can be exchanged for one ticket, and an account can have a maximum of 10 tickets. This in disguise makes “owning $BNB” a threshold for participating in IEOs.
People are buying $BNB to increase its value, and $BNB has a practical use as an IEO ticket. The premise of participating in the purchase of Mississippi company stocks is that a certain amount of national debt must be purchased as an entry ticket, both of which are used as “entry tickets” to obtain secondary empowerment.
The difference is that John Law’s main purpose at the time was to increase the value of national debt, so he could only choose the path of “paper money – national debt – stock”, not only to obtain the right to print money, but also to complete the secondary empowerment of national debt, which is more than the current one. The platform currency is one step further, but it also brings us some inspiration for token design.
A new type of token system
Looking back, John Law’s merged company is equivalent to a collection of the Federal Reserve and the U.S. Treasury. It is responsible for issuing money, collecting taxes and dealing with all the problems of national debt. It sells stocks to absorb past usury national debt, thereby reducing the government’s financing costs.
Then the current project party can also refer to this model to design their own token system.
Taking this as an example, we design a set of organizational token system:
The first token consists of:
Purpose: To enable the organization to obtain the “right to print money”, positioning: a stable and reliable settlement medium,
At the beginning, you can use a premium to gain user traffic like John Law’s paper currency. Compared with platform currency, the price of stable currency is not related to the team’s work.
2. Platform currency
Equivalent to the platform’s share currency. The platform ecological chain is connected in function to pay for the handling fee and service fee in the ecosystem. The value of the platform currency is more dependent on the empowerment of the team, which requires the team to continue to do things to make profits. Binance has given us a successful case of platform currency empowerment, and it has also given us more room for imagination to turn “securitization tokens” into “utility tokens”.
3. Project currency
Tokens issued by the ecological project party, the function and value of the token are mainly affected by the project party. On the premise of meeting ecological standards, the project has the right to self-governance.
The three coins are interconnected for empowerment
Such as: project currency and platform currency are bound (IEO), project currency and stable currency are bound (transaction settlement), through different model design, mutual empowerment is used to maintain the governance and profitability of an organization.
Three currency relationship diagram
This model has also been verified by John Law and Binance in terms of the efficiency of rapid financing, but most organizations do not have the coordination resources like France or Binance for configuration, so they cannot support this model. Connect the three coins.
How to relate?
Whether it is a country or a company, it is impossible to operate without a model design without its own resources. It must have initial resources as the initial fuel. The initial resource of France is the monopoly of the colony, and the initial resource of Binance is the competitiveness of the exchange. , Through the replacement of initial resources, France gave the Mississippi company authority, and Binance empowered the partners of the open platform, all of which have brought practical value to them, so that the tokens are no longer empty shells. Through continuous resource replacement, the realization of The connection of the token system.
Therefore, for an organization, my personal suggestion is to integrate its own resources, find out which role among the three coins is more preferred, and then find a way to interact with the other two coins, use resource replacement to continuously feed back its own tokens, and expand at the same time. Its own token function, and gradually realize the operation of the model.
So let’s go back to the question at the beginning: if the value of a token keeps depreciating and people lose trust in it, how can it rapidly appreciate or even exceed its value? Perhaps referring to the practice of John Law three hundred years ago, it is an approach that can be tried to re-empower it through resource replacement.
History is always similar, but ideas should not be imprisoned by reality. Crypto provides the possibility in theory. What we need to do is not only to reflect on the problems left over by history, but also to create our own system.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/cryptocurrency-three-hundred-years-ago-seeing-the-second-empowerment-of-currency-from-john-law/
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