Cryptocurrency Is Not New Money And That Is Why It Will Succeed

almost 2 years ago

Bitcoin was revolutionary but not for the reason most believe. The idea of currency outside the reach of governments or central banks is not novel. Yet, this is what many are led to believe.

That does not mean, however, that Bitcoin did not bring something new to the table. It certainly did. Uncovering what was so unique is going a long way to revealing the likelihood of success when it comes to cryptocurrency.

We all heard the banks say "we love Bitcoin but hate cryptocurrency". There is a reason for this as we will see. Understanding the implications of the technology is very important.

So what innovation did Bitcoin develop that is so revolutionary?

That is the point of this article. We will delve into that along with how it pertains to money.

Source

Private Money

Private money is nothing new. In fact, this is the actual state for much of our history. Even today, the major currencies of the world are controlled by the banking system, not the governments. When we look at the US dollar, the expansion of the money supply comes from the commercial banks making loans. Roughly 80% of the world operates under this system, called fractional reserve banking.

Governments like to make like they are in control of the money supply. So do central banks. They behave as is reverses are legal tender, which it is not. Since few question the difference between a Fed reserve and the USD, they get away with it.

Cryptocurrency is touted as something new. It is not. This is just another example of private money. While this is outside the influence of the central bank, it is still not a new innovation.

One of the most recent examples was the Ithaca Hours. This was a private currency developed by citizens in the Town of Ithaca (New York). It is notable because it was the longest running local currency in recent history.

It was started in 1991 with local businesses starting to accept it as payment. Over the years, millions of dollars in business was conducted in the HOUR. It was a physical currency which saw its decline start with the adoption of electronic transfers.

Nevertheless, it does provide a lesson in what is possible.

Cryptocurrency is akin to the HOUR. It is private, reserveless money. Since it is reserveless, that means there is no central bank involved. We are also creating money without the commercial banks.

Hence, we can call cryptocurrency private, reserveless money without the banks.

Distributed Ledger Technology

We often talk about distributed ledger technology (DLT). This is the foundation of blockchain. The present monetary system is controlled by a combination of banks and financial institutions, all of whom run their own ledgers. They are the trusted parties responsible for making sure all transactions are recorded and settled. The currency is in the hands of the commercial banks although the Fed and other central banks run their own ledgers also.

DLT does away with this. There is no central party who is responsible for the ledger. Each node runs it own ledger. Depending upon the consensus mechanism, the system has designs of how to reach agreement. Anyone who has a ledger that is out of consensus is ignored.

The idea is to have unrelated block producers validating the transactions. This means the ledgers are spread throughout the world, each unrelated to the other. Bitcoin certainly fits into this category. The miners produce blocks based upon the solving of the mathematical equation. This means each is running a ledger unrelated to the other miners. In the end, consensus is reached and a new block is added.

Once again, this is not novel. Many historians have point to the Island of Yap in Micronesia as the forerunner to distributed ledger technology. This community used decentralized ledgers hundreds of years ago for the stone money of Yap.

The story goes this island imported huge stones that were quarried hundreds of miles away. These were brought to the island and set in place. Some of then were 13 feet in size and weighed as much as a car. Hence, you were not moving them around to transact.

So how did the local economy utilize this form of currency? Simply, they maintained ledgers of ownership. Yet, what was novel is there was no centralized, trusted party like the local government keeping track. The ledger was recorded orally, with each person keeping their own. Of course, at times, disputes arose but the basis of distributed ledgers is there.

Delivery System

When it comes to cryptocurrency it is really blockchain that is the innovation. Here is where the bankers have it right.

To fully reveal what is taking place, we need to delve into the different exchange mechanisms.

They are:

physical transfer - cash uses this
electronic transfer with trusted 3rd party - this is our system today with companies like Visa supplementing the banks
electronic transfer with no trusted 3rd party

It is obvious the last one is where blockchain and, hence, cryptocurrency falls into.

As shown, private money and distributed ledgers are nothing new. What was so innovative about Satoshi Nakamoto's innovation is that we were introduced to decentralized electronic transfers. That is the radical shift of Bitcoin and other cryptocurrency networks.

It also took care of disputes since consensus is reached with each block.

Most focus upon the currency aspect of cryptocurrency for logical reason. Many promote the idea of success (or failure) based upon this. However, that is not the innovation that cropped up 14 years ago.

The question is not whether private money can succeed. There is a long track record of that being the case. What is at question is whether electronic transfer systems will be the norm going forward? It is safe to say this will be the case.

Therefore, if that is true, then we know the ability to do this in a decentralized manner will persist. After all, decentralized file sharing has not disappeared in spite of efforts to stop it. Peer-to-peer technology is something that operates organically. The very structure of a system built around this idea will continue.

It is also the reason why cryptocurrency will succeed. Ironically, it has little to do with the monetary component and more to do with the fact it is a novel exchange mechanism.

Unless the digital world is going to implode, it is safe to say these networks will keep expanding. Thus, anything tied to them, including the different coins, will see the same result.

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