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Information theory of money

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When bitcoin becomes a unit of account and is used in daily transactions, market participants can observe the real-time flow of funds from their suppliers and customers.

Text title: "information theory of money"
Source: ethereum fans

Price reflection information

"In a free market, price is knowledge, a signal for communicating information. Price is not only a tool for capitalists to make profits, but also an information system for material production, which will communicate knowledge and coordinate complex production processes all over the world."

——Saifedean Ammous

Price is the collaborative engine of a free-market system. Every decision-maker relies on information about the prices of available goods and services to help them make decisions, because prices reflect all known market information in their own measure. In other words, all relevant information will eventually show up in the price after compression (if you prefer the technical term, then the price system, like a hash function, is one-way).

Every purchase and sell decision, in turn, affects the price, and the new price carries that new information back into the market. Some of you may have heard this in the "efficient markets hypothesis", although it mainly talks about how information in the market emerges in the prices of assets, such as stocks.

In short, buying and selling affect prices, so price movements become an indicator of supply and demand movements in the market, an indicator by which entrepreneurs can gauge their production plans. Of course, because the results of the entrepreneur's production are reflected in the price, the price then becomes a system, a system to which all people send information, and to which it carries information continuously. A price system that cannot be adjusted dynamically makes no sense.

Money is a metric

"Money performs a central information function throughout the economy. As a medium of exchange, a store of value and a unit of account, money is a key tool for understanding market conditions.

"Capitalism is not so much a system of equilibrium as it is a dynamic field of entrepreneurial experimentation.

—George Gilder

The essence of capitalism is the efficient use of capital under given resource and time constraint. Companies are the place to experiment with how best to allocate capital, and money is the measure of good. Making money means the efficient arrangement of capital, while losing money is the embodiment of ineffective use of capital. And competition is countless independent companies, individuals with discrete decisions to respond to market demand.

Capitalism is very much like chemistry:) -

Information is decentralized

"A centrally planned economy can never be as efficient as a free-flowing market, because what one person knows is always a tiny fraction of what all the members of society know."

-- Hayek (Hayek's "Local Knowledge Problem")

Discrete property rights constitute an economy thus complementary to the dispersion of knowledge in society. Every company is trying to use what it knows to create products and services that ultimately prove to be efficient USES of capital.

To highlight the dispersion of information, let me quote Milton Friedman: "no one in the world knows how to make a pencil:

· the wood should be taken from the tree
You need a saw to cut down a tree
You need steel to make a saw. Iron ore is needed to make steel
· graphite is also needed, to be extracted from some mines in South America
· erasers are made of rubber, probably from the rainforest
· may also have yellow paint (wrapping pencil)
· glue may be used to put the parts together
· so no central planning bureau can accomplish anything. It all works through the magic of the price system. "

The study of human behavior (Praxeology). -

Central Banks have unresolved data issues with them

Central Banks face data problems all the time - as with all electronic signal-processing systems, there are bottlenecks in data collection, data processing and decision-making. A centrally planned economy does not work because the planning centre never has access to all the knowledge necessary to make the best decisions.

"The difficulty with knowledge is that it is not concentrated in one person as a whole." - hayek

To operate efficiently, central Banks have to collect trillions of data points every day, and there is no perfect way to do that. Think about how many rides people have to make, how many sandwiches they have to buy, and how many payments they have to make within the app.

"We need to believe that we live in a predictable and controlled world, so we turn to people who promise to meet our needs and look authoritative." - Philip Tetlock,

In the past we created central banking because we wanted the world to be "more orderly" and we wanted to believe that someone was in charge. But even if we could collect the data perfectly, it would be hard to generalize a simple cause-and-effect relationship to a complex, chaotic system that involves the decisions of billions of individuals. While it might seem easy to establish a cause-and-effect relationship between weather and crop yields, how can you generalize about why pancakes need to change? Unlike the natural sciences, economics is subject to a permanent shortage of samples. We cannot repeat the dotcom bubble with another President and another central bank.

This raises another question: how do central Banks measure the impact of events and make decisions? As the old saying goes, "if you can't measure it, you can't manage it." It's not easy to measure a kilogram of mass with great precision, so how do you measure inflation accurately? (the CPI basket doesn't even include food and energy!) The consumer price index (CPI) is a measure of the consumer price index (CPI). Food and energy prices are normally included in the CPI calculation; Also, according to wikipedia, excluding food and energy prices is called the "core price change rate.")

"Big events come out of the blue, and in a world where unpredictable events (so-called 'black swan events') determine reality, making predictions may do more harm than good by creating the illusion of predictability for others." - Carl Richards

Carl adds, "a risk is something you're confident you've considered all the scenarios and left out." Daniel Kahneman also famously remarked on the dangers of learning from history:

"Hindsight, the ability to interpret history, has given us the illusion that there is no such thing as an inexhaustible source of our understanding; that the whole world works in order, even when the status quo is out of order.

Here's a useful analogy: the fed is like driving a car, but with a foggy rearview mirror and a blurred windshield. That car is the economy, and that glass is our insight. How can the fed drive a good car? Is it better to let the car adjust itself according to the road conditions?

The interpretation of history depends on imagination and intuition. The amount of "evidence" is so great that you have to pick and choose.

So what other options do we have?

Sound money

"Sound Money is equivalent to scientific honesty: once the experiment is over, you are not allowed to alter the data."

——Adam Taché

Sound money is the scale of a fixed ruler that does not allow the planning authorities to manipulate the results of the measurement.

Bitcoin is a perfect iteration of sound money. There is a reason for a hard cap on the number of bitcoins: to be a precise metric, to reduce the risk of political attack and to encourage speculative fervor and viral marketing.

So why 21 million? Why not 100 million?

The reason is that...... That number doesn't matter! The important thing is to have a fixed number. Because economic activity grows at a small scale, it is difficult for individuals to make decisions without a fixed unit of account to compare values.

As for the risk of political attack, Mr Nakamoto believes it is impossible to set a "proper" inflation rate, so he has decided to eliminate the room for human intervention. Both of nakamoto's statements in favor of fixed supplies support this conclusion:

"As the user scale growth, our system will not someone like central Banks or the fed to adjust the money supply. (to reasonably adjust money supply) need to have a trusted subject to determine the value of money, because, as far as I know, software can have no way to know the value of something in the real world."

He also said:

"If there were a good way for the money supply to anchor something, or if we could trust someone with the authority to actively manage the money supply, the rules would have been programmed already."

Finally, Mr Nakamoto postulated that a fixed cap on the money supply would create a speculative boom.

"As the number of users increases, so does the price of the currency, potentially creating a positive feedback loop: more users, higher prices, and then more users trying to profit from the appreciation."

Sound money

Bitcoin is the ultimate safe-haven asset. As more people buy bitcoin and its derivatives, it becomes a DE facto safe-haven asset.

When the bitcoin era arrives, bitcoin will become a store of value, a medium of exchange and a unit of account, reflecting "risk-free" rates of return with unprecedented precision, enabling market participants to allocate resources more efficiently. The risk taking/risk exit of every market participant, whether individual investor or company, is reflected in the price of bitcoin.

Finally, when bitcoin becomes a unit of account and is used in daily transactions, market participants can observe the real-time money flows of their suppliers and customers (through their public bitcoin addresses). This transparency makes markets super-efficient because the way information is processed is so efficient.

Bitcoin has reshaped the way capital is distributed in the economy, ultimately creating a more prosperous world for all.

Source:https://ethfans.org/posts/information-theory-of-money