The True Nature of Money

Money Is the State of Active Exchange Itself

We usually think of money as currencies like the yen or the dollar. But that's only a surface-level understanding.

Think about it. Wherever people are exchanging goods and services, there is always some form of liquidity—a dynamic where you can get what you want and pass on what you have. This collective liquidity is what money actually is. Currency is just one of the tools used within it.

Let me explain this with a water analogy.

Our wants and needs are like water vapor drifting through the air—invisible and scattered. "I'm hungry." "I need a tool." "I need a safe place to stay." These desires, on their own, don't become transactions.

But when an exchangeable good appears—food, tools, precious metals—those scattered desires crystallize into concrete transactions, the same way water vapor turns into droplets when it touches a condensation nucleus. Once one transaction takes place, others around it begin to join in. Droplets attract more droplets, and eventually a large "pool" of liquidity forms.

And the very fact that a pool exists draws even more people in, further expanding it.

This pool—the state of transactions actively circulating—is money.

Why Only Humans Can Create Pools: The Fiction of "Equivalence"

So why are humans the only ones who can build these pools? Animals compete for food and gather nesting materials, but they don't trade.

The reason lies in the ability to recognize that "A and B are of equal value."

The idea that one fish equals three arrowheads is a fictional rule written nowhere in nature. To borrow from the philosopher Wittgenstein, this is a kind of "language game"—a set of rules implicitly shared among participants. The exchange only becomes possible when both sides agree to play by the rule that, in this context, one fish equals three arrowheads.

The historian Yuval Noah Harari argued that Homo sapiens' greatest weapon is the ability to believe in things that don't physically exist. Myths, nations, laws, and money—none of them exist in any tangible form, yet they function because everyone believes in them. "Equivalence" is precisely one such fiction.

What I want to emphasize here is that completing a transaction does not require trusting the other party. The credit theory of money holds that currency works because of trust, but in practice, transactions go through even when you're dealing with a con artist. What's needed isn't trust in your counterpart—it's a shared cognitive foundation: the mutual understanding of the rules of equivalent exchange.

Humans have most likely been using this fictional rule to conduct transactions and generate pools ever since the moment they acquired language, moving beyond instinctive signals like cries and threats.

What Makes a Good "Nucleus": The Criterion of Entropy Resistance

Not just any good can serve as a condensation nucleus for transactions.

Pools are constantly under pressure to break apart—what we can call increasing entropy. Participants leave, information becomes asymmetric, goods physically deteriorate, and political forces ban transactions. All of these work to fragment the pool.

What matters, then, is how long a good serving as a nucleus can withstand this pressure and remain in the pool. I call this durability, or entropy resistance.

Take fish, for example. It can serve as a nucleus for exchange, but it spoils quickly. When the nucleus collapses, the transactions that had gathered around it disappear too. Fish is a good with low entropy resistance.

Now consider gold. It doesn't rot, it can be divided, recombined, and is hard to counterfeit. Gold remains the same gold after hundreds of years. That's why it has sat at the center of pools for so long. It's a good with exceptionally high entropy resistance.

Arbitrage: The Autonomic Nervous System That Keeps the Pool Healthy

Humanity depends deeply on pools. Food, shelter, and healthcare—none of these are obtainable without exchange through a pool today.

And pools come with a built-in property that makes them resilient from the very start: arbitrage. Whenever something is cheap in one place and expensive in another, rational participants will naturally exploit that gap.

No one designed this. No one is directing it. The profit-seeking actions of individuals end up smoothing out imbalances across the entire pool and redistributing goods. Like the autonomic nervous system that regulates body temperature and blood pressure without conscious effort, the pool's health is automatically maintained by the self-interested rationality of its participants.

There Is More Than One Pool: Global and Local

Here's an important clarification. The pool is not one giant, interconnected body of water spanning the entire globe.

More precisely, what we have is a state where the conditions for pools to form are linked in a chain—they tend to emerge in succession. Some regions see transactions happening routinely on a global scale, while others see them only sporadically within a local scope.

In global pools, the number of goods that can serve as nuclei is vast, and those with the highest entropy resistance naturally rise to a dominant position. Currently competing for that position are the US dollar, gold, and—still in its early stages—Bitcoin.

In local pools, the range of goods that can serve as nuclei is inherently limited. The laws of entropy resistance still apply, but with fewer candidates, the dominant good—the local currency—can end up being quite different from what dominates globally. Regional agricultural products, direct exchange of labor, and credit records within a community—things that could never serve as currency on a global scale can function perfectly well at the local level.

The Coming Upheaval, and the Principle That Endures

When political pressure—sanctions, capital controls, war, excessive regulation—overwhelms a pool's ability to withstand entropy, it temporarily loses its capacity to function and is effectively destroyed. Transactions cease, and many people are pushed to the brink of survival.

To my eyes, this political pressure is escalating rapidly in the modern world. The fragmentation of the global pool is accelerating, and the possibility of a catastrophic outcome cannot be dismissed.

Yet the ability to understand the fiction of equivalence and complete transactions exists within human cognition, independent of any political pressure. Even if the global pool is shattered, local pools will keep emerging.

That is why relying solely on the global pool may not be enough. Participating in local pools as well could be the preparation we need for the upheaval ahead.