Alright, I've written for the schtackers on some of these themes before, e.g. in "The Economics of Peer-to-Peer" (#1405015)

Here were my remarks on peer-to-peer transactions:

By definition, peer-to-peer is economically inefficient. Bitcoin as a messaging/money system is also inefficient but we do that for a reason, willing to trade off the expense and tech and speed to achieve other, higher ends.

The big problem of peer-to-peer mechanism is that centralization is (economically) efficient.
With a middleman, a seller doesn't have to be online or processing the transaction at the same time as the buyer. We don't have to coordinate, but the middleman — against a cut and loss of sovereignty/independence, obviously — can spread out the transactions, literally match buyers and sellers by trading with them sequentially.

Not scalable, very roundabout.

On the Literal Peer-to-Peer: Travels with Friends

I have an international friend group, where we all live and work in separate fiat currencies -- and me, in certain not-so-fiaty moneys. Every time we go places, we are all paying for various things in some currencies and then, sometimes weeks or months later, we settle up: think booking an Airbnb in euros and then settling in GBP, at a different FX rate, two months later -- netting out drinks or dinners or whatever else. General financial hygiene between friends.

Except one of the friends, and myself, are both economistically damaged (saved?!). We understand that unexpected/sudden shifts in exchange rates are sort of undeserved; and we have mutual trust and care for one another (economically speaking, parts of his utility function is an argument in my utility function and vice versa). Thus, we usually split fx changes down the middle.
For illustration: if the price of a shared good is $100 when one of us pays, but $110 in local currencies when we settle up, we usually run the numbers as if it's $105, splitting the gain/loss down the middle. After all, his gain is my loss, and there's no point taking advantage of one another because fiat currencies are unstable.

All of this is a little bit artificial, and a figment of the world consisting of 160-odd currencies rather than the one global money that all incentives point to.

...and it leads immediately to bitcoin, its "volatile" exchange rate, and how to think about pricing goods and services in sats.

In my own dealings, I also tend to use Peach a lot: if I have to risk my name/privacy and give up sats to live, it just feels good (= little less bad) to do so with a fiat premium. Usually, no problem, and the going rate is somewhere 4-8% for services like this.

Today, there was a 9% swing between accepting a trade and settling it.

That annoyed me. A lot. I agreed to give up sats at 3.5%, but after the trading partner delayed for 12 hours, and bitcoin doing its thing yesterday, the effective price premium was -6%. By the construction of a Peach escrow trade, there's very little I can do: the sats have already left my hands, the only recourse I had was

a) reputation, where I can downvote him, and

b) delay the release by as long as possible and be overall annoying.

So I asked the guy to kick back some of the undeserved intra-trade gains, and after some deliberation he agreed to pay me about 4% of the total trade value. He agreed to buy at 3.5% above market and ended up arbitraging 2% (which is about the fee he has to pay Peach in the first place). I had agreed to sell at 3.5% above market, was faced with -6% and ended on -2% instead. Gains from trade; contract curve etc.

This was interesting for a couple of fundamental econ reasons. First, and most immediately, you can just appeal to people's reason and all interactions are negotiated. Practically speaking, there was nothing I could have done... the trade was done, sats were out of my hand, and my parting partner could have said "eff off, Den" and taken the full gain. #1547735

The doux commerce principle (the McCloskey-popularized idea that trading in the marketplace softens rather than hardens our morals #1550794, #1534753) "educating" us of how to exist and behave in commercial transactions with others. Even though we might never have repeat dealings, this is the sort of thing that tit-for-tat performs well over long time frames.

He didn't take full advantage (= going to the edge of the vagina graph... hashtag undergrad student terminology for gains of trade and the Edgeworth box). And at some level I think interactions like these teaches us to live with bitcoin.

The Puzzle of the Public's Dislike of Indexation

The opposition to indexation has long puzzled economists, i.e., those of us with odd minds that think about money, money illusion, and the (un)fairness of nominal contracts/payments when the real worth of money changes. To recap the deep, long, important economic intellectual convo:

• if I make a loan to you at $100 for one year and at 5% interest, but at the end of the year the price level is 10% higher, I lost out 5% while loaning you funds.
• If I make a loan to you at $100 for one year and at 5% interest, but at the end of the year the price level is 2% higher, the real rate of interest was only 3%.

There are a couple of ways that banks (and more sophisticated securities markets and futures contracts) could deal with this, where the most common one is for the bank to have in-house experts forecasting the future price level and price loans accordingly. That is, if they're willing to lend to you at 3% and they believe the Fed will hit 2%, the loan contract will say 5% -- hashtag all the way back to Irving Fisher, and in honest to every merchant and money-lender throughout history.

The other, more obvious, option would be to just adjust the principal (= the $100) by the inflation rate after the fact, leaving the (real) interest rate intact. So in the first scenario, the loan balance due (without repayments) would be $115 after one year -- $5 interest, $10 adjustment -- and in the second scenario, the loan balance would be $107.

People don't like that, supposedly because it feels like they lose out. Here's the opening to Robert Schiller's famous paper from the 1990s:

THE INDEXATION OF payments makes excellent sense for all sorts of long-term contracts. Future payments should not be expressed in currency units, but instead tied to an index of consumer prices or an index of wholesale prices, of wages, of incomes, or of components of income. History shows that the real value of currency units has been so unstable that it is better to use practically any one of these indexes to specify future payments in contracts than to specify payments in terms of fixed currency

He then walks through all the ways and observed instances where the public really won't go along with changes. It's like the dumb plebs are perennially stuck in being fooled by money illusion.

I live in a weird country where indexation, for odd banking-financial history reasons, is widespread. But only, I should point out, for mortgages... and the wider public absolutely detests it. There are always complaints, and people seeing the nominal value of their debt increase with adjustments, after they've made payments and "paid down my mortgage," drives the economically illiterate masses absolutely bonkers, especially in recent years when the post-'rona print shoved inflation (and thus indexed adjustments) to 10%-ish for a while. The economist in me just goes: this is fair... money printing, inflation, real value of debt, did you see your wage increase 8-12% for no good reason?? #1264166, #737272

There are also savings products like this, which I use frequently: bank accounts that yield 2% interest plus indexation of whatever the central bank says the inflation rate for the period was. They (usually) end up being very competitive with standard bank accounts where surprise inflation readings otherwise reduce my future purchasing power, whereas funds held in these indexed products protect me. Me likey.

I suspect bitcoin teaches us who live (and die?!) by it to understand fluctuations in the value of money better than anyone else.

Bitcoin's shifting real value teaches us the virtue of indexation, hammers away at whatever natural or ingrained tendency to see nominal fiat values as rigid and impossible or undesirable to fall.

It's not the first time in dealing with Bitcoiners (e.g., authors, long-term projects) where the BTC/USD rate completely shifts between
a) agreeing to project,
b) finishing project,
c) settling/sending payment for project.

My gain is their loss, and we just worked together (i.e., cooperated! #1429046) so we definitely care about e/o. #1457057.

Professional economists like to invoke this handwavy "people don't like" shit (nominal rigidity, contracts), so I shouldn't be too harsh on Mr. Greeley, who's The Almighty Dollar (#1478548) includes a lot of standard debt-deflation/indexation is bad shit:

• "...As things become less expensive, people should, in theory, just lower their prices and accept cuts in pay. But people don't like it when numbers go down, and sometimes they'll just refuse to adjust, which makes deflations a painful grind." (pp. 135-36)
• "In theory, markets in a deflation should clear; eventually people agree on a lower price and start trading. In practice, people are obstinate. In a deflation, merchants will simply refuse to keep negotiating. If they're owed money, they'll just wait for the full amount." (136)
• “sound money is a good idea in theory, and it works well for some people. But perfectly sound money forced a long deflation in America at the end of the nineteenth century, and during frequent panics it forced bankers to liquidate everything they could, then close their doors, leaving the fate of their remaining deposits uncertain.” (pp. 222-23)
• p. 215: "There has always been tension between the goals of sound money and those of functional money."

Anyway, I think Bitcoiners, by the nature of their money monetizing unpredictably, learn these unlearnable indexation lessons

Maybe that makes for a better world, the fixing of the money we never thought we needed.