Julien Smith has a very insightful blog post about “social currency”. The one thing I’d add is that whuffie isn’t really currency, not in the sense of what money is. One thing that’s funny is that people really don’t understand what money is (and that’s no dig against Julien or anyone else). Not really, not at its core. People know what money is by how it functions, by what it can do for you, but not by what it is.

Money is generally accepted as 3 things:

- a medium of exchange
- a unit of account
- a store of value

Money as a store of value means that it’s very hard to change the value of money. Counterfeiting is therefore one of money’s greatest enemies.

Money as a unit of account provides a uniform measure. For example, you couldn’t use seashells as money effectively because they’re very non-standard, and you could argue that one shell is sufficiently different from another to be a different value.

Money as a medium of exchange allows you to trade for dissimilar things without direct supply and demand issues. For example, in barter, if I have a cow and you have chickens, the only time the trade will make sense is if you need a cow and I need chickens. Otherwise, barter breaks down. Money acts as an intermediary.

This is money’s greatest power. For your average worker, they see money’s output only. Money can buy me a stereo. Money can buy me a burger. What they don’t see is money’s objective value. Money is exchanged between you and a vendor for a product, yes, but money is exchanged between you and employer in exchange for time, energy, resources, and knowledge.

Time is one of the greatest values you can exchange for money, and it’s the foundation of things like interest, which is one of money’s greatest and most misunderstood powers. It’s why, for example, lottery winners who start out poor often end up poor, because they don’t understand that money is an exchange of value for something else. They spend it all on material goods that decline in value rather than invest it so that you’re trading money in exchange for time.

Ordinarily, they trade their time for money as an employee. Once you have a lot of money, if it’s correctly functioning money, as a unit its value does not degrade, and you can then trade it for time - lending it to someone. When someone takes out a student loan, they’re really purchasing time, just like when someone rents an apartment, they’re purchasing space.

Whuffie fails to be a unit of account of uniform measure, largely because it’s not tangible and you wouldn’t want it to be tangible. How awkward would it be to trade certificates of goodwill? Whuffie is immune to counterfeiting only insomuch as the person who grants it is capable of detecting excremento de toro. Whuffie isn’t even a very good medium of exchange because its value declines with time. You may do someone a favor out of goodwill, but as time passes, the impact of that act does degrade.

So what is whuffie? It’s barter. It’s the imaginary transactional unit of non-tangible barter. I provide a link to In Over Your Head, the Underground Hip Hop Podcast and I’ve traded a tiny bit of whuffie to Julien Smith. I can ask at some point, should I choose to do so, to redeem that with a link in return, or something else.

What makes Julien’s post so important is that he essentially reverse engineers whuffie. Whuffie isn’t a currency, or you could store it, trade it, etc. like you can with any currency, even a fictional currency like the Linden from Second Life. Whuffie is barter, and Julien correctly emphasizes that the relationships are what matter.

Relationships matter in a barter system. They’re the core of barter. If you have no relationships, barter is very difficult. In some cases, for premium items, without relationships, barter is impossible no matter how much stuff you have to trade. In commodities, the larger your network, the more likely it is you’ll find someone to barter with - cows and chickens. For premium items, the larger your network is, the more likely it is someone else will have something you can trade in exchange for the premium item. Remember the red paperclip? So, if you don’t focus on building relationships in a barter system, you’re going to do very poorly. Likewise, if you focus on building strong relationships while building things of value that you can trade, then you will do very well in a barter system.

How do you earn money in a barter system? How do you convert those relationships into real money that can put food on your table? Simple. As Julien says, build relationships so that you can barter successfully. Once you are essentially a clearinghouse of barter, a hub in your social network, you can then exchange whuffie and other non-tangible barter items very quickly and freely with your network. At some point, someone external to your barter system will ask for something - a link, an ad, a sponsorship, a job, whatever. It’s at that point that you can exchange whuffie for real dollars. But until you have become a hub of your social network by creating value for everyone in it, you have nothing to trade, and the real world will not be asking you to exchange currency for whuffie.

Updated: I think we just solved why new media has so much trouble assigning value to itself, from discussions about value based billing on Mitch Joel’s Six Pixels of Separation to Julien’s blog post. Here it is in a nutshell:

You cannot use tools like return on investment, profits, or other monetary metrics in the absence of a functional currency. Tools like cost per action and return on investment are financial instruments specifically designed for use with a currency. New media, if it remains a barter economy, will need tools and metrics that are designed to function in a barter environment.