Interview with James Howard on Cryptocurrencies and the Interplanetary Economy

James Howard is a statistician and consultant on economics, policy and high level data for Federal agencies and similarly sophisticated clients. He has served the Board of Governors of the Federal Reserve System as an internal consultant on statistical computing. Past work includes undergrad work on space systems design and telecommunication. He can be found online at

HH: We’re here with James Howard, PhD today. How is it going?

James Howard: Everything is going great. How are you doing today?

HH: Good. So first question here is Mars One proposed giving its future colonists lessons in civics and governance systems as part of their training. Do you think this is a good idea or a bad one? And why?

Howard: Well I think it’s absolutely a good idea. And one of the things that I’ve talked about before is importance of building good governance structures when colonizing Mars or creating a new community or anything else, whether it’s even ranging from something as simple as a space station here circling Earth to a ship, a generation ship traveling away, never to be to be seen again. Because those sorts of governance structures are going to be the fabric that holds a society together there. And I think that we see when you have a stable governance structure compact, people are willing to abide by, it allows people to resolve their conflicts amicably. It’s going to become a critical tool for them in a way that should reduce violence, should reduce risk and to produce the possibility of something that’s viable from a social standpoint.

Now, what exactly that government is going to look like, whether it’s Mars or the moon or whatever, or even if just built another city from the ground up in, say, the desert, those sorts of decisions are decisions that need to be made at the time and based on the actual circumstances people are engaged in. If people are facing one set of circumstances, for instance, it’s a very high risk environment. I would say going to Mars is very, very different than say just building a new city in the desert where we kind of understand what we’re doing here, even though it’s maybe not necessarily as pleasant as we think. So those sorts of government structures that are developed need to be responsive to the challenges that are going to faced which should not be pre-planned. It’s a very long answer in some way.

HH: So what sort of governance systems do you see becoming the norm for future space colonies or confederations of colonies that might form for specific purposes like trade?

Howard: Well, and trade becomes very important for deciding governance structures. I think we would all like to believe that people will eventually move towards democratic societies. But one of the things we see here on Earth is the more resource driven an economy is the less democratic it is. We don’t have a lot of high natural resource, democratic societies, for instance we don’t have a lot of large petroleum exporting countries that are very democratic, basically the United States and Canada being the exceptions to that. But we don’t have societies that have a lot of mineral wealth that are very democratic. The most democratic societies we have are those that are service oriented and goes with the strong knowledge economies where people get on and they do a job where they have to think versus something where they do a lot of physical labor. So it depends on if that continues to hold like that and you see a lot of resource driven economics at Mars or on an asteroid or the moon or whatever, it’s going to be a more autocratic government with less democracy, the best way to approach it. Exceptions are going to be if we see some very small communities develop where everyone really knows each other, and I mean really knows each other, you are going to see it form more like a social democracy. That doesn’t work very well at scale. So if we are looking forward to how we’re going to be building those governments and what they’re most likely going to look like, it’s going to be driven based on what the trade is.

HH: So what elements of colonization of space do you think would be most conducive to developing governance structures that are friendly towards trade that includes decentralize cryptocurrencies?

Howard: That’s a more complicated question, and that’s because the speed of light becomes an issue. With round trip time, and this all again happens at different scales, but if we have a government or if we have a society we’re trading with that is more or less independent but located at the moon, it’s no big deal because the communications round trip time between the Earth and the moon is like half a second. With Earth to Mars life gets more interesting because there your minimum round trip time is 6 minutes and your maximum round trip time is 42 minutes. Now we can look at the existing cryptocurrencies, the big one of course is Bitcoin, Bitcoin expects a 10 minute lag in the network for verifying transactions, and 10 minutes is just fine because it knows to expect it, that’s no big deal. But 42 minutes, it doesn’t necessarily mean the transaction is going to be verified. Now, those are technical limitations based on Bitcoin. If the built-in lifetime were an hour, hey, it works out just fine.

The other problems that start to arise are with any good system you’re using and whenever you’re selling anything, whether it’s bottled water or a barrel of oil or load of the CDs where most people will still actually buy CDs. But one of the big cost that gets embedded in that is the cost of transportation. The cost of transportation in a lot of ways will dominate trade, you can work anywhere else, it still costs $10,000 a pound if it’s something in the orbit, and a lot more to go further than that.

So when we’re looking at these costs, we are going to see these things embedded in that, and that becomes a much more driving factor, and whether or not we’re doing that sort of interplanetary trade and really the good governance structure we use to manage that trade and finance that trade. Now that said, there has been a proposal and there in fact is an existing network for a cryptocurrency called Marscoin. It’s designed to provide currency for use at Mars, the method is right, it is absolutely fantastic, and because it’s on a planet, they’re going to have local networks that are moving very fast just like we have here on Earth. That will work just fine. But making those transitions between the local coin distribution or the local currency and an Earth currency or where things are going to start, you are going to get delays.

And there’s been some study done on this showing that interest rates are going to be eventually collapse down to whatever the price of energy, their cost of moving something. And that becomes very important for understanding how this all works in the grand scheme of things. When those interest rates start to fall towards the cost of energy, you’ll see that then you will have kind of a perfect market, things will flow very well, but you actually have to get that.

And the funny thing about that study, and that was actually done by Paul Krugman in the 70s almost as a joke but it turns out the analysis is correct, that the cost of money between interplanetary trade is also the cost of energy for moving things. On the other side when you have a cryptocurrency in a perfectly smooth and functioning economy around the cryptocurrency, the cost of the next coin is the cost of the energy in emolument and the positive energy becomes this whole underlying currency, and whether we’re dealing with it in dollars or euro, pounds or Bitcoin or Marscoins or whatever, we’re just denominating the cost of energy. I know that’s a really complicated answer to what should be a really simple question, it’s a very uncomplicated question.

HH: That’s alright. So how do you think trade should be managed among the colonies who are used to self-governance and may have reason to distrust in centralized power structures?

Howard: So ultimately they’ll be trading whatever it is they have to trade with each other. All economics are barter systems, we just use dollars here on Earth, well in the United States we use dollars and in Europe they use euros as a way to simplify the process. The medium of exchange, the currency is a way to smooth and facilitate.

One of the things I talked about when I spoke at the Mars Society convention last year is we will see small colonies across Mars, you’re not going to see one big local government, you’re going to see a colony founded by the United States and one founded by China, one by Europe and one by Amazon and so forth. Each one is going to be there for a different reason – one might be mining iron or ore for instance. Another one is there actually to provide backbone services, like this hypothetical Amazon colony might be there just to provide goods and services to other colonies. How are they end up interacting with each other, it’s going to be just a reflection of whatever it is they have to give each other.

So they could choose to pool their resources together into a common currency, exactly what the euro is, and in a lot of ways that’s what the United States is, where we have each different state pooling its resources together to this national government to provide most financial services. To do the same thing at Mars would be like something variable. On the other hand you’re probably going to see local currencies developing and exchange rates for traveling between the two because it turns out people don’t necessarily want to trust each other. They didn’t trust each other to build their colonies together. They may not necessarily trust them to build their economies together, which reflects again what we see here on Earth and the current struggles.

Why did Britain leave the European Union? And in a lot of ways they weren’t full fledged members anyway because they never trusted the currency. A lot of these problems we’re discussing are problems we’ve seen here again and again and again on Earth, and sometimes they get solved one way and sometimes they get solved another and it just depends on the exact nature of the problem, the exact people involved, and sometimes the personalities involved. It’s really nothing that’s going to say this is the way it’ll happen, there are just a lot of options.

HH: Okay. So do you foresee any governance or technical problems that will have to be solved before cryptocurrencies and blockchain naps like smart contracts can be adopted as part of interplanetary trade?

Howard: Yes, we’re going to go over the speed of light somehow. The speed of light it turns out is a huge problem, not just in science fiction but also in reality. When you have a long-running… and like I said even the one hour, let’s say you drag the Bitcoin window to one hour instead of 10 minutes, that’s great for Mars, it doesn’t work when you get as far as Jupiter, so that’s going to be a problem.

Someone is going to have to solve this. How do we deal with wide transactions? Or maybe there’s a side chain, and, unfortunately, my knowledge of the technical specifications with Bitcoin are not as good as it maybe should be. But there is this concept of a side chain where there are transactions happening in a separate ledger that can later be folded into the primary ledger, maybe that’s how it works.

So you have this whole side chain going on and say once a day it gets folded into the primary ledger. And that’s in fact how smart contracts are already implemented. It’s a side ledger that gets pulled in periodically. If that’s happening off-site and it gets folded in let’s say at the end of the day, except that day is kind of a meaningless term here, there’s got to be some way that we can resolve this issue. Since we’re not going to fix the speed of light issue, the question is how can we get around it. And a lot of this really just depends on what kind of communications infrastructure will be put into place to facilitate whatever transactions are happening. I have a proposal, and I’ve not got it approved yet to talk at the Mars Society convention this year specifically, about some of these issues with regards to how do we do these financing of infrastructure and whether that’s an indication we want to hear, how those decisions happen will in a lot of ways affect this so…

HH: So given Bitcoin’s nature as a proof of work cryptocurrency and some alternative currencies proof of stake algorithms, what improvements do you think should be implemented so that the interested parties like colonies or planets don’t engage in an arms race for the purpose of seizing control of the network?

Howard: Well you see I don’t think that’s actually going to work. Right now the cost of Bitcoin is driven primarily by the energy costs of mining rigs. And we’ve already seen a few instances where even if it was just briefly like a few minutes, one particular mining network had the majority of the Bitcoin network long enough that it could have been disrupted, long enough that it could have controlled the network and because of that a lot of the mining pools have intentionally doubled their size is just to make sure they don’t do that again.

Now let’s say hypothetically I need to go to Mars today and I’ve got my laptop and a couple other computers with me because I think I need a few extra just in case. That’s all the computing power I have and I’m easily outdone by more powerful mining rigs, there’s no way to address that problem other than throwing a ton of processing power and then the energy to drive that processing to wherever we’re going. That’s not necessarily a good way to do this and I think ultimately, at least initially, we’ll see local crypto coins develop because I think it’s actually a very good approach, it saves you from having to kill trees and are very different money, to manage the local economy and then trade between Earth and Mars let’s say is actually going to be really focusing on goods and not so much on services. With an exchange of goods Earth is sending raw materials for building habitats and such, and not so much paying for something in any currency. Now things are going to end up getting denominated in some value and if that happens today it’s going to be in dollars, if we’re looking at a hundred years down the line who knows what the dominant economies would be that will be denominated in that. Only as time really progresses and we see kind of parity between the two we can see that 50%, plus one problem start to disappear when people trust that sort of interconnected meaning.

HH: So that’s all the questions I have, anything you’d like to add?

Howard: No. I appreciate the opportunity to answer these questions, I hope I’ve answered them in a useful way.

HH: Yes, you did. Thanks.

James Howard at the 19th Annual Mars Society Conference

Publications by James Howard

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