In search of Money — episode 3: Cryptocurrency to replace fiat?
Hello people of Earth! We live in an exciting time.. as if there was a generation who could say the opposite.. Anyways, as we’re dashingly moving into new decentralised model of economy we decided to cover the topic of money as we think that its form is transforming extremely fast creating gaps in understanding its nature which is essential for making smart moves in the coming future world. You all use cryptocurrency term a lot, most of you are very well aware of the stablecoin notion, maybe not so well of the decentralised reserve currency ideas while many probably struggle to understand the mechanics behind token minting process performed by various DAOs offering crazy APYs. As this is quite a topic, the material will be released in four episodes:
Issues with the modern fiat money
Cryptocurrency to replace fiat?
Stablecoins and future of money
We hope that you got a bit excited at the end of the previous episode and now are eager to devour the next chapter. This time we will plunge into what comes to replace fiat money (oh, it will be replaced because of the number of issues we just talked about) and…. surprise! — that will be cryptocurrencies no matter how hard some governments try to resist them. How come? Well, cryptocurrency is far more efficient version of money than fiat one and if something is much more convenient, efficient and resilient to previous flaws, it stays. This is how evolution and natural selection works. No one can make people stop using something that works better for them. You can confront the evolution and die or you can embrace it and live.
Right, so why cryptocurrency is here to stay and replace fiat money? Because it solves the problems of fiat money which we covered in the second episode. It’d be fair to say that the cause of the main problem — constant depreciation of money that leads to an array of subsequent economic and social issues — is the centralisation, i.e. when a bunch of high profile people decide what do to do with the supply of money while being susceptible to fears, anxiety, own short-term interests and power of other high ranking people. The other problems of fiat money are more technical — i.e. cost of the traditional financial system, access to resources, speed and they are also elegantly cracked by cryptocurrencies — immediate access by anyone, direct ownership of your assets, thousand times less resources needed to maintain the cryptocurrencies and all transactions between all agents, way faster than traditional bank transfers and we can go on.
But first, let’s introduce a definition of cryptocurrency so we speak the same language here. Essentially cryptocurrency is a digital unit (called token or coin) that exist in a software blockchain code (Layer 1) or in a software code that is plugged into blockchain (Layer 2, 3…) where all transactions are verified by the blockchain it is plugged into. This is not all, though. In order for that digital unit to be considered a cryptocurrency, that software should be able to maintain the global ledger — i.e. the history book of all transactions with those digital units. Digital wallets are created, they accumulate the digital units coming from:
- airdrops
- initial sales, Liquidity Bootstrapping Pools (LBP) or usual liquidity pools that projects create with their new token
- reward for transaction validation services (i.e.mining)
Then people start to send and receive those digital units in exchange for other things. So the software should be able to maintain correct balances in all those existing and new wallets which are being constantly created. All transactions are packed in blocks, which get validated and then plugged into blockchain ledger which no one then can adjust or delete. Thus at any point of time all wallets have the correct balances of digital units after all incoming and outgoing amounts.
What is important here? Transparent & preset token supply schedule, no intermediates (permissionless), no human factor, no room for manipulation and direct ownership of your asset. Let’s clarify those points. What we are trying to say is that thanks to blockchain, suddenly humanity gets this beautiful tool that can play the role of money which:
- cannot be adjusted to the interests of few people in power, i.e. they cannot increase or decrease supply discretionally when it is beneficial for them and front-run the rest of the population
- does not require banks (i.e. we do not need those expensive buildings, staff and infrastructure to validate who owns how much)
- is not susceptive to human greed (no one can take the money of people in their accounts to invest into seemingly good deal or bonds just to lose much of it and say to people ‘sorry, your bank has gone bankrupt’)
Therefore cryptocurrency is a fairer, much more efficient and resilient version of money that helps to build a better society.
Now, there are thousands of cryptocurrencies in circulation at the moment. Can they all play the role of money? Technically yes. They all possess the above features to be used as decentralised money (we do not take into account scam tokens). If there are only two persons who send each other some totally unknown token as a mean of transferring value — this unknown token can be considered as money.
The major difference between them is social acceptance. Yes, it is public trust that makes one cryptocurrency world money and the other not. There are other factors such as convenience (wallets configuration, speed, availability at CEXes and DEXes etc) but they are secondary. By the way, the reason why does not matter, what matters is the fact that humans just practically started to use that currency. In the same way they started to use gold as a medium to accumulate and exchange value back in ancient times. No one came and decided that humans should now use gold. Some random folks used it because it was convenient, then others and it grew. Eventually it was a decentralised social acceptance. We might have agreed to use something different which was also scarce and relatively easy to transport, make marks on.
Therefore once humanity agrees that they will use this specific cryptocurrency as money, boom! It becomes money. As simple as that. All people will need to do then is to settle on what will be the worth of 1 unit of this currency in terms of real world goods and services.
Money, as you remember from the first episode is just a tool to express value of real goods and services. Have you ever thought of what 1 USD, YEN, GBP etc actually means? What is it 1 USD? We dare to say it is a common denominator of value of potatoes, pleasure, mobile phone, sneakers etc, i.e. all things and services that exist in the world. Humans somehow learnt to understand what you can get for 1 USD… it is weird if you stop for second… we just casually got used to our knowledge to be able to say approximately what 1 USD means in terms of real world goods and services. Obviously in different parts of the world it can buy a bit more or less of the same things but we understand that, we seem to know that due to the established financial infrastructure where things are traded for USD.
Now imagine, there is no USD or other known currencies. There is only bitcoin. What 1 bitcoin can buy you? Ah, you immediately converted it to USD to understand that, don’t you? That is because fiat currencies serve as a medium right now between the value of the real world and crypto money. We have not yet developed sufficient history of trades where real world assets are purchased directly for bitcoin, we have not yet built sufficient data of such trades across the world.
Ok, we have approached a very important point where we’ll need to connect the dots. What makes 1 unit of national fiat currency worth what it is worth? Simple. The total value of all goods, services, land, potential to generate value (e.g. patents, knowledge, expertise) in that specific country divided by the total number of existing units of that national currency.
So if there one and only one cryptocurrency exists that has been accepted by the society to be used as representation of real world values, i.e. to be used as money, what it should be worth? Ok, first of all, it is not linked to a specific country. I.e. it will need to represent the value of…. all things in the world… hm, that is… a lot… like the value of all things produced across the planet, all the land on the planet.. resources… potential… Secondly, what is the total number of units of this currency? If we think of Bitcoin… it is 21 million… oh, crap… Yes, that is the reason it constantly grows long term — it has potential to represent the value of the world, it is just matter of the social acceptance.
We are in the beginning of cryptocurrency adoption and there are still many hurdles. Among technical and legal things, the major obstacle is volatility. And it is understandable — humanity is not yet ready to accept crypto as the universal denominator of worth of everything, we have not built the sufficient foundation for that (mass adoption on commodity exchanges, in retail, in doing business, everyday life). So it pumps as it should in order to capture the value of the whole world and then it dumps because people get afraid of this crazy but stubborn idea. Then it pumps again because this is how laws of economics work and highly likely it will not stop.
When it comes to specific currencies, obviously, hardly people will limit everything to bitcoin. It has certain inconveniences to be used as money (endless decimals, slow, energy consumption vs PoS alternatives). There will be other cryptocurrencies that people will use as a vehicle to transfer value. Some blockchain generate and will generate more its own value (fees, governance etc — adding to the world capitalisation) and their coins will have its own innate value which does not require absolute social acceptance.
Ok, this has been a long read. We’ll close the money topic in the last episode where we’ll talk about stablecoins as a bridge to true decentralised money of the future. See you soon!
