The article is an entry from a series of loose thoughts of the author about the impact that technology can have blockchain all over the world. This article deals with broadly understood banking. In subsequent entries the author will try to navigate further topics and solutions offered by the technology in practice.
Does the blockchain and the technology behind it have a chance to lead to a real world revolution?
This question is asked by every novice amateur cryptocut as soon as he convinces himself what is a decentralized transaction register and how blockchain works. The following article summarizes the short history of money and explains what aspects of modern monetary policy can move technology Blockchain.
Exchange of goods in the past ...
Since the dawn of mankind, the system of exchange of values first in the form of barter and then in monetary form is based on one of the most important rules for all trade, i.e. trust in the means of payment. In old tribes, which numbered at most several hundred or several thousand individuals, trust it it could be easily verified, no coins or money were needed. It can be assumed that barter exchanges did not always take place "here and now" in such communities (as is the case with the modern exchange of money for good). This exchange was carried out using the medium of trust. This trust allowed, for example, in the harsh winter to buy a farmer a firewood from a woodcutter. The next harvest took place only in six months - the lumberjack trusted and waited, and in the case of lies and deceptions, the community of the dishonest criminal was quickly brought to trial. Contrary to popular belief, the butcher did not have to go to the market and exchange pieces of meat for wood, etc. Everything was done within one community on the basis of trust. People "confirmed" the transaction with their trust and thus could enforce it later in time. Interestingly, we have a double trust function in the form of a payment carrier and a credit of trust. Only for the purposes of this article, I allowed myself to divide barter transactions into direct and indirect. Of course, as the size of a given society increased, more sophisticated mechanisms of exchange had to be developed, but more on that in a moment ...
Barter exchange and trust
Barter exchange in the form of a direct exchange of some goods for another it was just a small part of the whole exchange based on trust. An interesting fact is that such a basic form of exchange in trade is doing well until today. From our home backyard, we can remember that a similar system until recently has functioned in Poland. During communism our domestic currency or Zloty it was a widely available means of payment for which you could buy (theoretically) all articles and services. The problem is that in fact there were times when it was difficult to buy goods for the current currency due to shortages and chronic shortages in state stores. At that time, our Polish word "settle" was established. "Under communism" you could "get" many articles, services or even jobs. The handling was based on the fact that someone had the priority in the purchase of articles, services, sometimes for a fee and sometimes free of charge in exchange for another "favor". Of course, this is not a form of classic barter, but rather its highly modified form. Interestingly, in today's "free-market" Poland you still hear about places (especially in state administration) where "Dealing" works and is doing well to this day. The means of exchanging goods in the form of doing business also worked in a specific context and for a specific community - this is how the word "arrange" can be summarized in Polish, i.e. a carrier of trust. Contrary to appearances, such exchange is very efficient and cheap - you could say that it is even free, because there are no fees for transfers or for issuing a card - you only need to know someone important from a given group or a remembered face. This system, however, has one major drawback: it works well only in small communities where everyone has a strong opinion about everyone and trust in themselves. The growth of the community makes it hard to remember all participants of the market game. Such exchange, therefore, does not make sense in large cities of several hundred thousand or several million inhabitants. In a moment you will say that in the People's Republic of Poland it worked well in cities that had several hundred thousand people each? That was how it functioned, but it was always about a specific group in a given context, so these groups acted somewhat independently of each other and additionally secretly because officially "dealing" was associated with speculation and was forbidden. There were, among other things: dollars from a money changer / horse because not everyone could just buy it - currency speculation was prosecuted and punished, so the horse had to know who he was selling to. Jobs were arranged from the director, and here the director preferred to know that he was dealing with a friend of a friend who, in return, "arranged" a longer period of membership while waiting for a flat, etc.
In search of trust
In search of the perfect means of exchanging values that could replace the barter used man tried to spread a medium of exchange of goods. First, there were items for indirect barter such as salt, animal skins, etc., then various types of shells, ornaments, precious stones and finally gold. The shells had a negligible value, they had to be of a specific type, shape or specially prepared (wound on strings, etc.). This meant that 'counterfeiting' shells took as much time as their production, and the negligible value did not compensate for the effort and time for forgery. The negligible value meant that "larger exchanges" had to involve more and more shells - so there was no larger denomination (it was possible to twist 10 ropes of 100 shells into one shackle, but they still occupied the same volume). In larger communities, carrying a large amount of goods first and then the same amount of seashells did not make sense. Ornaments and gemstones were good for larger transactions but their indivisibility still made it difficult to trade for smaller transactions. This is due to the so-called exchange rate - if someone had a precious stone, he did not always find a buyer with enough goods to replace the entire stone. The ideal solution was gold, divisible and universally accepted by any merchant - the perfect carrier of trust and value.
Gold as a universal carrier of values
Gold has accompanied man since the beginning of history and from the beginning it also played the role of money, it was easy to divide. People quickly came up with the idea of measuring a certain amount of gold, and on this basis first the state and then the separated banks began to beat different denominations of coins corresponding to the amount of gold contained in them. Gold in the form of coins seemed to be perfect money and in this form it accompanied man for many centuries.
At present, gold is recognized in international trade in every corner of the world, although it is not universally accepted as money, we can successfully exchange the gold coin for local currency in almost every corner of the world. Unfortunately, gold has a number of disadvantages and therefore it does not work as a full-fledged coin every day. Gold can be easily "spoiled" by adding a large amount of other metal alloys such as silver or copper. Countries that beat their own gold coins in times of crisis decided on such a spoiling of money by adding too much inferior metal to the alloy what today we would call inflation of money. Gold-backed money was therefore prone to "deterioration" and thus to rising inflation. Not only states had the monopoly on spoiling the gold money. Counterfeiters of all sorts also exploited this susceptibility of gold to associate with other metals and put counterfeit coins into circulation. Large transactions required large amounts of gold. Large amounts of gold were, in turn, a tasty morsel for bandits, thieves and pirates. History in almost every corner of the globe is full of stories about stolen and hidden gold treasures. The transport of gold over longer distances had to involve more equipment and people, and thus it was expensive and very risky. Further discoveries of new gold deposits and further so-called the gold rush caused that the ore at various periods of history had large fluctuations in supply and, consequently, also large price changes. Despite all the disadvantages of storing, transporting and processing, gold is an irrefutable and difficult to falsify trust carrier and is still recognized all over the world.
Gold has quickly become a universal means of payment throughout the world thanks to it developed gold currency system. The zloty currency system is a hybrid of paper money and zloty money. The Central Bank of a given state kept in its vault a certain amount of gold (expressed in a certain amount of gold, usually the purest sample) and on this basis it could issue an appropriate amount of paper money, this was called gold parity and meant that the given unit of paper money was covered in a certain amount of gold deposited with the central bank. On the example of the US dollar, we can follow below how the value of 1 $ appeared in terms of the amount of gold at the beginning it was over 1504mg and now it is about 25mg.
Until the year 1933 the value of the dollar was, with small exceptions, constant in relation to the amount of gold contained in it. In 1933, the US abolished the exchangeability of the dollar for gold for its own citizens. In addition, it reduced the parity from previous 1504mg gold for 1 $ to 888mg for 1 $. The parity was still in force for international exchange and between banks of other countries. Eventually, the US in the 1971 year withdrew from this parity and the value of the dollar quickly dropped to 40mg for 1 dollar in the 1980 year. In practice, the purchasing power of the dollar for less than 100 years has dropped significantly. 1 $ from 1932 it was 1504mg gold which would be worth 61 $ now. As you can see, the dollar has fallen 60x in less than 100 years.
Fiat money - a recipe for continuous growth?
The current phase of money evolution is fiat money - that is, in most countries paper or electronic money based on trust in the issuing institution (usually the Central Bank). There is no gold or other metal parity anymore. The value of money is determined on the basis of an agreement between the central bank and the state. This means that every zloty in the portfolio is worth as much as the promise of the central bank and in practice, in addition to the generally accepted social contract, it has no value. This system allows for non-cash transactions, there is no need to transport gold from the treasury of one central bank to the treasury of another bank. There is also no need to store and guard gold. It is based on trust. The problem is that trust in a centralized institution called a central bank can easily be damaged. A centralized form of money emission management leads to fraud, in theory the central bank can generate any amount of money at any time. In practice, there are mechanisms that are supposed to protect against it, but often these mechanisms fail, which leads to the escalation of undesirable features of the monetary economy.
Such undesirable feature is, for example, the amount of debt or the amount of money borrowed in the monetary circulation. In the gold parity, the bank that lent money had to have the appropriate security in the form of gold, he also had to consider who he lends money to because he was responsible for it with his own gold. Currently, there are no such collateral so banks often use the privilege of borrowing money that they do not actually have. This leads to an unhealthy situation and the build-up of a problem. Money printed from the air increases the supply on the money market by what all prices are rising (inflation). Inflation is really the next tax levied on the citizens of a given monetary system, in addition a tax on which you can not escape in any way and which applies to all consumers without exception. This situation causes the average consumer to spend money (because they lose their value anyway), it is often the case that the annual inflation rate is higher than the interest rate on the term deposit in the bank, which additionally discourages saving money. Issuing money as we know leads to an overall increase in consumption. Enterprises, seeing this as an interest, apply for further loans for financing future ventures, and here the circle closes. Such an economic monster can only function in conditions of constantly increasing consumption and economic growth. Normally, consumption was limited by limited supply of gold and thus by money, which made it more profitable to save and invest money collected (gold). In the modern model, it is better to spend money on anything than to keep and save.
Consumption is currently limited only in two ways: naturally, by increasing raw material prices and increasing production and manufacturing prices to an exorbitant size or centrally by the same institution that has recently cheerfully added empty money to the market as to the furnace, i.e. by the Central Bank. The natural increase in raw material prices takes place in every business cycle. Central limitation is another manipulation, while the increase in raw material prices (ie their structural shortage) is a serious global problem. The current monetary system is really the central bank's authority over everything. Central banks can decide on what purpose will be spent money printed on, which can often be seen in mainstream media as a fight against the crisis by co-financing a large business (eg co-financing of car makers by the US government) using preferential loans in 2010-2013 years), implementation of social programs (500 + programs, flat + and derivatives). Unfortunately, the winners in this system are always banks at the expense of the whole society. The virtually unlimited possibility of manipulating the money supply always leads to a crisis in the end.
A currency based on blockchain, a way to cope with the problems of the modern monetary system
As already explained in the previous paragraph, the power of central banks and the issue of money leads to many pathologies of the monetary system and practically boils down to the principle:
"Who has power over money issuance has total power"
The ideal solution would be to base money on trust as it did in the case of money based on gold and barter. The problem is that it's hard to operate with confidence alone when we have more than 7 billion people in the world, so the trust itself is gone. In turn, the return to the parity of gold is today considered by many economists as a remedy and a cure for inflation crises. We can agree with this but there is a problem of its securing and transport in large quantities (the more gold, the greater operational costs associated with transactions) and besides gold has already been and has been supplanted by the current system.
Blockchain and cryptocurrencies based on it can be technology that will consolidate the advantages of all monetary systems and at the same time get rid of the disadvantages of the current monetary system. A currency based on a blockchain such as Bitcoin, for example, has the advantages of several systems (gold, barter and monetary). The main advantages of cryptocurrencies (including BTC) are:
- Very large divisibility into smaller denominations (1 $ can be divided into 100 cents for comparison 1 BTC can be divided into 100 000 000 Satoshi).
- Decentralization and independence. The BTC network, unlike the banking system, is not subject to any centralized authority or organization
- Inflation under control. The amount of BTC in circulation is constantly monitored. The final amount is known and will be: 21mln BTC. After the extraction of the last BTC, inflation will cease.
- Interchangeability in every place in the world. To trade with BTC, it is enough to use a smartphone or other device and access to the internet. There is no need for a bank account, paper money, cards, terminals, etc.
- Trust in the money is based on mathematics and cryptography. The Central Bank and no institution can do anything.
- No forgery. Counterfeits are the scourge of modern monetary systems. Criminal groups are falsifying money from around the world. In the case of cryptocurrencies, this is impossible.
- No borders. BTC, unlike SWIFT transfers, does not concern itself with the borders of particular countries or monetary systems. Transfer to a technically seated person is performed in the same way as a transfer to a person on the other side of the globe.
- Low fees for each transfer or the lack of them - of course, everyone will mention that during the last bubble in 2017, transfers in BTC were expensive and slow - it's a fact! But nowadays, newer generation cryptocurrencies are being developed, where the theoretical number of transfers per second may soon exceed payment operators in this respect, and the transfer fee will be very small or even zero!
- Possibility to use smart-contractów i.e. special electronic automatic contracts - you can very easily create a decentralized system that will match lenders and borrowers without the participation of intermediaries. Banks are currently taking high commissions for lending in the future these commissions could disappear completely in a blockchain based monetary system.
- No fees for owning and issuing a cryptocurrency portfolio. Banks often have to pay for account maintenance, card issuance or introduce fees for using the functionality. In the case of cryptocurrency portfolios, you do not have to pay for anything. Having a wallet with any number of cryptocurrencies does not bear any costs (except for commissions on transactions that are becoming smaller and in the future they will probably be free).
- Security. Cryptocurrency cryptographic keys are currently unbreakable by any software. The only way a thief can steal cryptocurrencies is knowing the key-code. In the case of banks, things look different, there are attacks on ATMs, attacks using customer data, etc. Technologically cryptocurrencies provide better security than banks.
- Transparency of transactions - cryptocurrencies can be divided into two types in this regard: ordinary and anonymous. Common cryptocurrencies such as Bitcoin ensure total transaction transparency in the so-called Blockchain Explorer. We can view any historical or current transaction from any portfolio interested in us. This solution gives us complete insight into the flow of capital. In the future, it will be possible to create a mechanism that will track all transactions above a certain amount of transaction so as to detect embezzlement, avoiding paying taxes, etc. Anonymous cryptocurrencies try to hide the origin of the transaction and can be used to carry out the so-called anonymous transactions. This solution can be useful for small transactions. Currently, each user can choose any cryptocurrency and make transactions anonymously or transparently.
- No fees for currency conversion and increased fees for foreign transfers. As already mentioned, cryptocurrencies do not know the boundaries, so there is no concept of currency conversion or international transfer fee.
- Possibility to improve the fiscal system of a given country. Here, smart contracts will be able to be used in the future to calculate and automatically pay due taxes. Currently, the flow of money from the taxpayer to the state is colloquially speaking "pathological". A number of regulations, legal ambiguities and the very “operability” of the process of collecting due taxes mean that large companies and corporations often do not pay taxes or pay them much less than they should. In the future, a smart-contract will be able to collect the appropriate levy at any time in any enterprise for each transaction. The transparency and decentralization of the system make such a properly designed smart-contract infallible.
As you can see, cryptocurrencies have a number of advantages over the current monetary system. In the comments you can submit your comments, if an important aspect has been omitted, please comment.
The definition of indirect and direct barter was used only for this article in the context of the transaction trust factor and is not an official definition used in economics.
Below the infographic showing the development of the monetary system: