How well do cryptocurrencies fulfil the required functions of money, and how will we expect the 'Darwinian evolution' of monetary affairs advance? Here are a few thoughts to inspire debate and discussion - any constructive thoughts and feedback are welcome.
Cryptocurrencies: the potential is there, but still way to go to a perfect solution for money and paymentsNever before has any previous form of currency been as purely global as are the newly emerged cryptocurrencies: the market for cryptocurrencies lives incessantly its hectically pulsating and wildly gyrating rhythm 24 hours a day, seven days a week around the globe, across any and all national borders that do not exist for them. The cryptocurrency market never stops the way the operations of SWIFT, Automatic Clearinghouse (ACH) or various central banks that operate only during ‘banking days’ and ‘business hours’ i.e. for around 200 days a year instead of 365 – and why on earth should the transfer of money in the 21st century be dependent on business days and hours representing the past? The cryptocurrency market does not need to stop, as it is dependent on none of those archaic institutions and their business hours – nor on any other institution or government. This market is participated globally by anyone willing – there are no ‘barriers to entry’ that have been raised around banks, central banks and other government and financial institutions handling traditional forms of fiat money – nor should there be any barriers to entry either. The market for cryptocurrencies is more egalitarian on a global scale than any other form of money, and advances in technology are making all this possible. Eventually, the underlying technologies will enable an open, global financial system that is accessible to all.
The most well-known of cryptocurrencies, bitcoin, was introduced 9 years ago, on 3 January 2009, in the aftermath of the beginning of the worldwide financial crisis triggered by the collapse of the Lehman Brothers investment bank in mid-September 2008. While the first years of bitcoin passed as a technological curiosity, an experiment to prove the concept, the cryptocurrency industry started taking pace in 2013-2014 with the introduction and gradual growth of exchanges and consumer wallets to buy, sell and make payments in bitcoin, and the increasing value of bitcoin prompted the development of a number of other digital currencies often labelled ‘altcoins’, the number of which has already increased to more than 1,500 as of today and is growing by the day – while most of those altcoins are not intended to be cryptocurrencies per se but tokens for various purposes in the crypto economy, often based on the ethereum ERC-20 protocol developed for the ethereum cryptocurrency ecosystem, to function as tokens, or means of exchange for various goods and services mostly in digital form, and leveraging the blockchain technology for ‘smart contracts’ or otherwise, there is certainly a Darwinian evolution underway to shape the future winners in the global crypto economy, which will later on form a significant part of the general economy, when the cryptocurrencies and the underlying blockchain technology reach mainstream.
If we go back to the basics of money, its fundamental functions of
unit of account, store of value and means of payment or of exchange, very few, or any of the 1,500 potential cryptocurrencies or other digital asset tokens meet these requirements. In the end of the day, no cryptocurrency of today meets all those conditions, not even those that purely label themselves as cryptocurrencies instead of various tokens, i.e. none of them is ripe to function as everyday money, fulfilling its key requirements. If we reflect on them in contrast to
these 3 required functions for money:
- Unit of account: this is probably the easiest one of them to fulfil, as all cryptocurrencies represent units that can be divided into sub-units, like cents on a dollar or euro, but often with much greater decimals – e.g. one bitcoin corresponds to 100,000,000 – 100 million – satoshis
- Store of value: the wild fluctuations of the cryptocurrency market trying to establish the ‘correct’ levels of valuation (consensus view of the market) for each cryptocurrency, with the combination of news relating to individual cryptocurrencies, countries, their regulatory actions or plans, and the potential or real use cases of such cryptocurrencies bringing them closer to everyday use affecting the market and the pricing of individual cryptocurrencies every day, being too high to make cryptocurrencies reliable stores of value as of today, because the value can substantially go up or down in a very short period of time, without any guarantee of any particular level – it may be better, however, than the currencies of countries suffering from hyperinflation (many people in a number of South American countries suffering from excessively high inflation rates having been early adopters of cryptocurrencies), but not compared to any fiat money of industrialised countries of today, or any commodity such as gold traditionally viewed as a good store of value, even if, at the same time, many attribute bitcoins as ‘digital gold’
- Means of payment: Again, the massive volatility in the price of cryptocurrencies makes them poor means of payments, as the wild fluctuations in value can cause significant losses either to buyers or sellers of goods or services with bitcoin or other cryptocurrencies, and, because the markets have been generally bullish on cryptocurrencies over the past several years, despite of momentary corrections like January-February 2018, they have been seen more interesting to be acquired and held as investments due to the recent increases in their value rather than an everyday means of payment; becoming a means of payment would require much more stability in the market value of such cryptocurrencies (and relatively less interest to hold them as a speculative investment) as well as low latency, the technical capability of having a large enough number of transactions verified fast enough in the network (a problem that e.g. Bitcoin and ethereum structurally have but which can be solved in different ways such as the ‘lightning network’ project for bitcoin and sharding for ethereum, and some altcoins have been created to better deal with this problem of high network latency, long settlement times of bitcoin transactions)
So, while cryptocurrencies, which are independent of any government, central bank, bank or any other institution, can do away with banks and central banks by definition, and function as solid units of accounts, in general, they do not yet efficiently fulfil the monetary functions of a store of value and a means of payment. These remain major challenges to be solved, in order for a cryptocurrency to be adopted into mainstream use in everyday payments.
For this reason, there is so far no cryptocurrency as a universally recognised means of payment or store of value – the recognition as such has been limited to individual cases. At the same time, this fact, with the key challenges remaining unresolved in these respects, provides vast opportunities to those who try to create best solutions to these problems and challenges. A number of potential routes to solve all the problems and meet all the challenges exist. Time will tell, which solutions will be the winners, but, at the same time, the space ahead is so vast that it allows a plethora of different solutions for different purposes in this new blue ocean of an open, global, decentralised network-based financial system that is gradually taking shape.
In this new era, the power will be of those who decentralise, and not to those who attempt to centralise power – it will be healthier to let one’s power to be ‘cannibalized’ by the technological advances than to lose it altogether when only resisting this tsunami of change. The Darwinian evolution underway will take care that the power to which the traditional incumbents of centralised, closed systems are trying to cling will slip away, and will be transferred to those who build, contribute to or participate the open, decentralised financial systems taking shape. This is inevitable and it is already underway, and trying to fight against it is as futile as is the fight against the windmills – such momentum can no longer be stopped, nor would it make any sense at all to try to stop it.
The only way to succeed and to generate value is to seek and find solutions to the new challenges with the new tools made available, as someone will find the answers anyway, and those answers will shape the evolution of the global financial system of the future, so it is no small feat. What is clear, regardless of the exact characteristics of the eventual winners is, however, that the most powerful solution will no longer be anything closed or centralised, and it will be impossible to maintain any power in such closed, centralised loops, as they will eventually run out of air like balloons – the Internet would have never been as successful as it has become as a global medium, if it had remained a system confined for military purposes as it was originally conceived.
As is the case of the Darwinian evolution, all actors must either be capable of adapting to the changing circumstances and accept the new realities and take new shape, or become extinct. This is what seems to be eventually happening to banks, central banks and the so-called fiat money as we know them – cryptocurrencies and the blockchain-based infrastructure will render many of their core functions ultimately obsolete. The evolutionary train cannot be stopped, but one must jump onboard instead. One cannot win the future through prohibition of products of innovation or imposing ever more regulation, as one can only regulate something that previously exists; this battle can only be won through ever smarter innovation, being better at it than anyone else, and applying it in better and simpler ways.
Like the blockchain itself, or the internet in general, the flow of information and transactions always finds its path to the right destination through replaceable nodes that become ever more numerous and interconnected so that any node can be immediately replaced by many other nodes without compromising the functioning of the network at all despite of any external effort to destabilise it, without any central server or institution behind it that could be attacked – the blockchain train cannot be attacked, as it will always find a way around any obstacles. This architecture of the open global financial system literally brings the power to the hands of its users and takes it from those of governments and institutions.
But rather than rejecting it, any government or institution can become stronger by adopting these technological advances to the benefit of their ‘clients’, be it the people of a sovereign country or clients of a business. While it is always very difficult to cannibalize one’s own power, often it is vital for survival and success, as history itself has proven so many times.
Here are also a few thoughts relating to money, central banking and the cryptocurrencies taking over sovereign currencies:
https://bitcointalk.org/index.php?topic=4524280We still can't see it for now since crypto currencies still needs to improve and needs to upgrade. We are still on the early stage and would wait for a proper time to decide that.
