The Evolution of Cryptocurrency

in #cryptocurrency7 years ago (edited)

An article discussing cryptocurrencies isn't complete without a probe into the nature of money. What is money and what makes it so valuable? Despite its ubiquitous presence in our lives, most people have a hard time defining money. Most would think of Gold, Silver, Dollars, Euros, and Pesos as forms of money, and they're correct. In order for an object to be considered as a form of money, it must have the three following characteristics: store of value, unit of account, and medium of exchange. In other words, if an object is to be used as money it must be stable, trusted, and convenient to use and carry around. In the past, objects that were rare and difficult to reproduce, such as gold, were used as money. Due to its scarcity, gold served well as a form of money. It wasn't perfect, but It was certainly an improvement on the previous financial system that was present and which was based on barter. Currency, on the other hand, is a very recent invention that was introduced to facilitate the creation of credit by financial institutions. The creation of credit revolutionized the world's financial system and had a multiplier effect on wealth. Despite its enormous benefits, it also created major problems. The most serious of which manifest themselves in the form of an economic meltdown every 20 years or so. With the introduction of the internet and e-commerce, merchants needed a way to accept money securely on the internet. This led to the introduction of cryptocurrencies. However, they had major obstacles that prevented them from being implemented. And it wasn't until 2009, with the invention of blockchain technology, that they resurfaced with what is known as Bitcoin.

Cryptocurrencies will have a long way to go if they are to be widely adopted by the general public. Like all forms of money, they have their advantages and disadvantages. Despite being a store of value, unit of account, and medium of exchange, cryptocurrencies in their current state will probably never fully replace fiat currency. Modern economies have been built around the central bank, which has as its main objectives keeping inflation low and maintaining an "acceptable" unemployment rate. Central banks achieve their mandate through policies that control the supply of credit within an economy. To make a complete transition to cryptocurrencies, whose intrinsic characteristic doesn't allow organizations or individuals to manipulate the supply of currency, would be unthinkable. I'm assuming cryptocurrencies will take the form of Bitcoin where the supply is controlled and limited. Cryptocurrencies are designed in a way that is tamper proof. The state cannot deflate or devalue a cryptocurrency. While this may sound great, it isn't exactly feasible to implement. Therefore, if cryptocurrencies were to survive and go mainstream, they will have to adopt one of two options. First, they should move in the direction of facilitating payments. The way our financial system functions places huge costs on the virtual exchange of value (wire transfers, credit card payments, etc.). Cryptocurrencies have the ability to facilitate exchange much more efficiently through low-cost, instant transfer of value that does not require a third party to verify. This will in theory greatly incentivize business to adopt this technology. The second option would be to use cryptocurrencies within the system of fiat money. This allows central banks to maintain control and business to benefit from the advantages that cryptocurrencies have to offer.

What makes cryptocurrencies special is the computer program which uses advanced cryptography relying on the inviolable laws of mathematics, which guarantee its authenticity. It has the ability to greatly simplify payment processing and save billions of dollars. Their appeal lies in the cost-savings they can produce compared to credit cards. Since their introduction, credit cards have been widely adopted. They seem convenient enough; with a swipe/tap of the card you can purchase virtually anything. However, the work happening behind the curtains is far from simple. Every time a credit card is swiped a series of events is triggered that go through no less than 7 different entities and would take days to approve the transaction. Each entity takes a cut from the payment, usually in the form of the 1%-3% credit card fees(11 trillion processed by Mastercard and Visa in 2013). Now, what if you were buying a café in Paris and your credit card was issued in Canada? You'll need to factor in exchange fees as well, which greatly complicates matters. This is where Bitcoin has the upper hand(lower fees and faster payment system). As a payment mechanism it eliminates almost all the fees and problems associated with credit card transactions.

The elimination of transaction fees does not only benefit the merchant who is paying a 1%-3% fee every time a customer swipes his/her hard. Cryptocurrencies as a payment protocol can save billions of dollars for remittances, internal payments and transfers. Global remittance payments are thought to be worth at least $500 billion annually. Fees for money sent across the globe can be as high as 20% in some cases. Factor in the exchange cost and the transaction cost, fees can run as high as 30%. Despite having a functional financial system, it is highly inefficient. We experience this inefficiency in the form of higher fees. Cryptocurrencies offer us an alternative that eliminates these inefficiencies.
Cryptocurrencies as a payment protocol can be of great benefit to the 2.5 billion people who are unbanked. Most of the world's unbanked population lives in emerging markets where banks do not want conduct business because they see it as a losing proposition. These people are essentially shut out of the world's financial markets. The system of credit developed by the Medici's and which allowed the creation of wealth and prosperity is none existent in those parts of the world, which greatly hinders economic development. Cryptocurrencies with their low transaction fees promise to bring the world's unbanked into the 21st century. Financially integrating a third of the world's population will be the greatest weapon against poverty. The need for an alternative banking system in emerging economies has given rise to a number of innovations most successful of which is M-pesa. However, even systems like M-pesa create a number of problems that are difficult to solve. For example, people living in remote locations still have a hard time accessing cash. This would be a non-existing problem with the peer-to-peer system offered by cryptocurrencies.

Blockchain technology manifested in Bitcoin fits all the requirements to be considered a currency: it's a unit of exchange, a store of value, and a medium of account. However, there are two crucial missing pieces that prevent it from going mainstream. First, despite being a store of value, its value has fluctuated wildly since it was introduced in 2009. Secondly, very few commercial enterprises accept it as payment. Thirdly, if you lose your Bitcoins or die, there is no mechanism by which you or your family can retrieve them. Fourthly, cryptocurrencies in their current form are not perfect. Not all technical problems have been resolved. The most prominent problems Bitcoin (the largest cryptocurrency by market cap) has include its ability to scale to higher transaction rates, and its ability to quickly process transactions.

Cryptocurrencies have come a long way since their introduction in the late 20th century. And since solving the major issues surrounding cryptocurrencies in 2009, they have made good progress. However, there still exist major obstacles to adoption including: price volatility, trust issues, regulatory uncertainties, and recovery mechanisms. Some progress has been made in the state of New York by the introduction of bitlicense. There are certainly great benefits to be gained by the adoption of cryptocurrencies as a payment protocol. They will save the world economy billions of dollars which can then be reinvested creating jobs and wealth for business owners. They could also facilitate the development of emerging economies and help bring people out of poverty. Some believers in cryptocurrencies potential believe that with time the value of various currencies would stabilize. Stabilization would help increase adoption by wary business owners. The other problems are being currently being addressed by the various vested parties including: government (regulatory) and developers(recovery mechanisms). As with all novel innovations, only time will tell whether cryptocurrencies will succeed or fail.

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You need to improve the formatting of your article.

Also, cryptos have not been around in the 20. century...

It's my first article, I'm still trying to figure out how all this works. And I was surprised as well to know that cryptos have been around since the 20th century. Blockchain itself is a new idea but cryptos are not. You might want to read about the work of David Chaum, who was the founder of Digicash. Digicash was a commercial company created in 1989 which proposed building a system of anonymous electronic payments for governments and private companies. You might also want to read about e-cash, which is also a digital currency that was being developed by Citibank in the late 90's. As you can imagine both projects ended up failing.

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