What is a wealth creation mechanism?

There are many views on what constitutes a wealth creation mechanism. Wealth itself can mean many things to many people. Somewhere in North America, a billionaire is thinking of how to accrue more financial wealth. In contrast, a Bedouin somewhere in North Africa increased his wealth after a profitable camel trade. Ultimately as humans, we naturally want to improve our financial security and well-being. These are all simply stages of the value chain, where entities add value in exchange for extracting financial value from the process.

Traditional Wealth Creation Mechanisms

Resources

Mines, Oil Fields & diamond fields are all naturally occurring wealth-creation mechanisms. (We can describe this as any semi-finite natural resource in its natural state. Semi-finite because we may have an estimate of the resource but, as humans, we do not know everything and consequently are yet to make all the discoveries that are mathematically possible).

Monetary Control and Financial Services

The most recent and familiar “traditional” wealth creation mechanism known to us is the creation of Money in the literal sense of the word. That is right, countries around the world simply create wealth by printing FIAT money. There are two main forms of this.

Governments

Governments issue bonds to central banks, who in turn lend the “new” money, to commercial banks. The reason they do this is to inject more capital into the economy to stimulate growth. Furthermore, they control how this money can be utilized.

Banks

Banks practice “fractional reserve banking”. This means that they can lend more money than they have on deposit. This creates a healthy environment for them to “create” money. In other words, creates wealth.  This is done by lending money to consumers at a higher rate than what is being paid on deposits and only a fraction of the deposits need to be accounted for on balance sheets.

This is a short video that explains how a bank creates money

*It is worth noting that there is a similar phenomenon (along the veins of reserve banking/share dilution) in the cryptocurrency industry. This is when a coin is “forked”, holders of the private keys for Coin A, automatically own an equal amount of coin B, consequently, this has happened to Bitcoin many times.

Violence

Historically, violence has been the go-to option for almost all Countries, Nations, Tribes and Civilisations. Simply taking by force what belongs to another. Sad but true. One group will simply bring the other into submission and take their wealth. We still see this today, although we have no tolerance for this anymore as a society, some still try. As a result of this, We only destroy wealth.

How is Bitcoin a wealth creation mechanism?

The ledger

Many of us take quite a long time to fully grasp the concept of Bitcoin, hence most of us never really fully understand everything. Consequently, there are many doubts. Bitcoin is not a database, it is a distributed ledger. Everyone and anyone can use this set of records.

The value created by the ledger

Only by actively using this ledger can its value be realised. An accounting system. Uncontrollable by any entity. Using it more makes it even more secure. This forms a foundation for 1000’s layered “services”. A simple example is replacing letters of credit with a simple Bitcoin transaction moving value using multi-sig capabilities native to Bitcoin.

Representing the space in the ledger

Indeed, bitcoin does not really exist. Ledger space exists and the space can contain data or not. But the actual value that it represents is not real. This representation is real and it can be trusted which is a key magic ingredient. This “representation” takes the form of Bitcoin Tokens.

The key magic ingredient is that this representation is real.

Transferring ownership of the space in the ledger

Ownership of the ledger space is “proven” with a private & public key pair. As a result, there are a plethora of ways to store or transfer it. This function alone has spawned a whole wallet industry. This is the main advantage of Bitcoin as a currency, it is easily divisible and easily transferable. Anyone can trade Bitcoin anywhere in the world, regardless of your physical location.

Main benefits of Bitcoin as a wealth creation mechanism

Decentralised

The first real-world decentralised currency is Bitcoin. This makes the actual wealth creation process decentralised. Physical limitations and constraints can be imposed to “crackdown” or control this wealth creation mechanism, yet it remains uncontrollable. No workable solution to control or interfere with it currently exists. On the other hand, the one theoretical threat to the value of a specific transaction is the 51% network attack that we previously wrote about. This is not an economically viable option if the motivation is financial.

Open to everyone

Gold deposits for example, which are restricted to very specific geographic areas, are controlled by governments. This brings about global inequality and can be prohibitive to balanced economic advancement. Furthermore, a small group of people usually end up controlling these resources.

Bitcoin is different, but likewise, the same requirements apply to everyone. No one can manipulate the blockchain or force the users to make a decision they do not want to make. There is simply a set of rules which everyone who wishes to participate needs to follow. Mathematics governs these rules and consequently, they are open for inspection and verification. In addition, the rules can only change if everyone agrees. It does however add some complexity in terms of inheritance planning.

As a result, Bitcoin truly is the people’s coin.