Money Backed by Nature

Thanks to Roman Croessmann and Sandra Kumhofer for their feedback and review.

Hello everyone. My name is Tobias and I work on engineering and economics at Mento Labs, a digital asset solution company.

This article is the beginning of a four-part series describing how I think about the future of money and regenerative finance. This first part is about what money is and how money could develop into something inherently friendly to our planet.

The key concept to learn in this blog post is that blockchain technology actually makes money backed by nature possible - A version of money that would be more friendly to humans and our planet.

Let us first go back in time. Before money was created, humans have been trading peer-to-peer, for example exchanging a hunted rabbit for help with building a shelter. These types of exchanges have been made easier with the invention of commodity money. Early on money included sea shells, gold, and silver coins, called commodity money. Then came representative paper money, which has usually been backed one to one by gold, until the growth in gold supply and so the growth in money supply could not keep up with the growing economy. This led to U.S. President Richard Nixon announcing the “temporary” suspension of the dollar’s convertibility into gold in 1971. This was the birth of fiat money. Since then, most money can not be converted into a valuable commodity. Instead, it has value only by government power and social agreement.

But how is this money created? Money is mostly created by banks with a mechanism called fractional reserve banking. When someone deposits money into a bank, the bank can lend a fraction of these deposits to borrowers.

Imagine an economy with Bob and Alice. Bob has one hundred dummy dollars, whereas Alice has zero. Bob deposits that money into a bank. The total money supply in the economy is one hundred dummy dollars. Now Alice has a business idea and gets a loan of fifty dummy dollars from the bank, which the bank takes from Bob’s deposit. The money supply now grew to one hundred and fifty dollars. Fifty dummy dollars of Bob’s deposit are now backed by Alice’s debt. Interest rates aside, in order for that mechanism to work and the money to remain valuable, Alice needs to repay that debt. And Alice’s ability to repay that loan is dependent on the financial success of her business idea. In the bigger picture, debt repayment depends on economic growth.

In this system, money from one person is the debt of another. Today’s fiat money can also be understood as backed by debt. Another perspective is that today’s fiat money is backed by economic growth because that is necessary to repay all the debt.

This is a simplification of the whole economic and monetary system. I recommend Ray Dalio’s thirty-minute explanation video How the Economic Machine Works for a deeper dive into these economic concepts and dynamics.

Charles Eisenstein noted in his book Sacred Economics, that whatever money is backed by, people tend to create more of it. The problem with money today is that this monetary system usually leads to unhealthy and unsustainable amounts of debt. Debt is usually not a problem as long as people believe it will be repaid in the future. But when people and governments take on more debt than they can repay, such fiat money systems can become fragile. Whether or not debts can be repaid in the bigger economy is dependent on economic growth. If the debt in an economy continuously increases, eternal economic growth becomes necessary for that system to work.

But there is a problem with the idea of eternal economic growth. In the Western economic systems, Sep Kamvar writes in the Celo Forum, economic health and success are defined in terms of production and consumption, dismissing the costs of pollution and natural resource consumption as externalities, depleting our finite natural resources as a consequence. Depleting natural resources comes with disastrous climate effects for us humans.

The backbone of any economic system is its money system. This leads to the question: How can the money system change into one that internalizes the costs of natural capital destruction and the benefits of natural capital preservation and restoration?

Since whatever money has been backed by - Gold, Silver, Debt - has been created, I imagine a money system where money is backed by something the world needs more of - the value of biodiverse forests, clean rivers, and protected oceans.

This concept might sound really good in theory but seems hard to actually execute in the real world. Luckily, here come market advancements and blockchain technology.

The recent development of carbon allowances and markets start to make the value of biodiverse forests, clean rivers, protected oceans, and the like measurable. And blockchain technology can enable a digital representation of that value. Thereby backing money by nature becomes possible.

In the next part, I am going to dive into regenerative finance, a movement towards economic and financial systems that encourage regeneration, not exploitation, of communities and our environment. The next part will also introduce how Mento Labs contributes to that movement by designing a new crypto asset: A stable asset backed by digital environmental assets.

If you want to keep up to date with these topics, you can follow Mento Labs on Twitter or join on Discord.