According to the article, the new Venezuelan sovereign bolívar is pegged to a cryptocurrency petro, which itself is linked to movements in oil prices. I know the basics of crytocurrency, but I don't understand how this works. Could somebody explain?
Contrary to popular belief, even trotted out here on HN in about half our discussions on BitCoin, currencies are not just something that some government said somewhere is worth whatever. They need to back to something. US currency backs to the fact that the US law enforcement and potentially military (if you're big enough) will come after you if you fail to pay taxes, which, while perhaps a bit brutalist and in violation of some of our more delicate follow-citizen's tastes, turns out to be enough to keep an economy humming along.
If the Venezuelan government is incompetent enough to have that same delusional view of how currency valuation works... well... behold its results.
Like, say, backed by international oil market?
I'm sure this is just a story, but it's relevant to your comment: https://thedailywtf.com/articles/Special-Delivery
Also note: I don't disagree with you, there's no way I'd be touching a pretrodollar.
But I'd also add that there's more to backing that just saying "And this currency is backed by that." Go ahead; try it. Scribble some badlogninagain bucks down on some paper and try to get people to accept them for goods and services instead of dollars. When they complain, tell them that your badloginagain-bucks are backed by US dollars and see if that satisfies them. It shouldn't. For badloginagain-bucks to be backed by dollars, you need to be able to produce dollars in exchange for them. That's what a backing is; something you can always exchange the currency for.
Exchanging dollars for people not busting down your door and taking your stuff is certainly more abstract that exchanging it for silver, but it seems to be functional. Exchanging Venezuelan currency for Venezuelan cryptocurrency doesn't seem to be making progress. At this point my faith and credence in that government is quite rationally zero that they won't screw with something under their control, which is, you may note, concretely backed by the rest of the world by the fact that the only assets in the world worth anything are also all the assets not under their control. I'll believe it's pegged to international oil markets when it's actually stabilized the currency and people have demonstrated the ability to convert the newest bolivars into oil concretely at will.
The US currency is backed by the US economy, due to it being legal tender (i.e., form of payment) for all debts governed by US laws.
For point of comparison: the Fijian dollar is roughly half the value of the US Dollar, but Fiji has one of the smallest militaries in the world. It's value holds up because you have to spend FJD in Fiji for commercial transactions. And the EU's Euro is worth more than the dollar, despite a smaller military and more permissive legal system, because the EU has a very large economy (and the potential to be larger than the US' economy, if the Mediterranean states got their shit in order).
This is true. The demand for US currency is driven by demand to access good and services (or even to exchange to other currencies) denominated in USD.
> the Fijian dollar is roughly half the value of the US Dollar, but Fiji has one of the smallest militaries in the world. It's value holds up because you have to spend FJD in Fiji for commercial transactions.
These comparisons aren't useful. A comparison of USD to another currency would need to fully account for quantity of currency in circulation, and the liquidity (transaction volume) in exchange markets. Generally speaking, comparing currency values in USD is not useful - it can be more useful to look at purchase parity (how much it costs to purchase the same basket of goods in another country), or size of economy (e.g. measured in USD).
Edit: Another way to look at things is that it doesn't matter how much a currency is worth in USD. What matters more is the rate of change of that exchange with USD. The faster the currency devalues against USD, the less quickly market participants can adjust and effectively "price" good and services, leading to the currency's further collapse and potential abandonment for a more "stable" currency.
Trick is, people have to believe that you can and will make the exchange. If you have a whole fortress full of gold, for example, people will probably believe your pieces of paper that say "redeemable for 100 gold coins", and the value of the paper is about that of the coins. If I issue paper that says "redeemable for 1 acre of prime Manhattan real estate" you wouldn't (and shouldn't) believe it, because I don't have any Manhattan real estate.
So: how much should one believe that 1 "petro" is actually redeemable for 1 barrel of oil? Clearly they have some oil, but there's no clear mechanism yet for making that exchange. And long term, there's obviously trust issues.
Basically, the Venezuelan bolívar isn't worth very much, due to a number of reasons, including rampant printing. They tried passing laws to say it was worth more, but nobody listened, because nobody outside Venezuela cares what the Venezuelan government says (and even inside the country, you can ignore the laws of reality, but it doesn't mean they'll ignore you...). So they made a cryptocurrency of sorts, backed by nothing other than people's faith in the Venezuelan government, which is basically nil, so it was also basically worthless. So they said it was backed by oil, but the only way you can "back" a cryptocurrency with a commodity like that is to just sort of promise you'll totally back it, and (see above) nobody trusts the Vezezuelan government to honour their promises, so it was still basically worthless. They they announced petro gold which was ...I don't even know, maybe a second type of petro coin backed by gold instead, but I don't think that went anywhere because (see above) nobody cares. So now they're passing a law to back the bolívar with the cryptocurrency. So...
...in other words, they're realised that a currency backed by their promises is worthless, so they're trying one backed by a promise to back it with something which is backed by their promises. Because obviously if you don't trust the government to manage the existing bolívar correctly, you'll totally trust them to manage the new one, which is pegged by fiat to a different currency, which you're also trusting them to manage, and which is pegged by fiat to an actual commodity, which you're trusting them to actually have.
Fundamentally, the whole thing is fiat all the way down. An fiat currencies can work very well when well managed by an entity which is trusted by market participants, it doesn't work here, because it's not well managed and nobody trusts anyone. Waving a hash algorithm over your fiat currency doesn't magically make it non-fiat.
(Also! A 95% devaluation is an enormous "fuck you" to anyone who actually still trusted the current Venezuelan government, and will have ensured that any trust that did somehow still remain is now gone. All existing currency, savings, pensions, many contracts, etc., have just been ripped up. And now they're saying "right, now that we've totally screwed anyone who trusted us before, now just trust us when we say that this time, this paper is actually backed by some magic crypto which is actually backed by some oil, totes legit." This couldn't have worked before today, but it double extra can't work now.)
wasn't that already done by the hyperinflation?
https://www.aljazeera.com/news/2018/02/venezuela-petro-crypt...
Which leads to more questions: (0) The purpose of Bitcoin, and by extension blockchain-based currencies, is "an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party" (Nakamoto, 1998). Third parties such as payment processors and governments. How does the Venezuela petro relate to this purpose?
(1) Bitcoin, Etherium mining is continuous to process transactions. Each time a transaction clears, there is some mining required, as the blockchain is changed. In contrast, this indicated that the "petro" was "pre-mined" by the Venezuelan government. How is petro BOTH a cryptocurrency based on blockchain AND "pre-mined"?
(2) What is the process for redeeming petro in barrels of oil? How is the currency "backed" by oil?