The Future of Money- why Bitcoin ain’t it, and what might be…
Anyone with an interest in the economy or financial services will notice that there’s currently a shift happening. A shift where money collides with technology to solve some fundamental problems we have been facing with our currencies and banking systems for a long time. Several technologies and innovations combined at the right time have allowed for many new ideas to spring up about what the future of money could look like. This movement of using technology to solve problems with our financial systems started with Bitcoin, but does it end there? In this article, I’d like to take a look at several different ideas in place for ‘the future of money’. First a broad overview of the problems within the current system, then several proposed solutions, and finally my personal view on the best candidate for the future of money.
(For the lazy readers among us- I’ve included a short summary in bold and italic under each paragraph to make your life slightly easier)
What is wrong with our current systems (fiat currencies)?
From consumers to businesses to private banks, our current form of money and financial systems pose certain problems that we’ve had a hard time solving in the past. Money where the value is dependent on the supply issued by the government and central banks is called ‘Fiat currency’. Fiat currencies, like the euro, the united states dollar and the renminbi (yuan), are centralized currencies.
The value of fiat currencies is controlled by the government.
Centralized control
One entity, the government, can decide the value of the currency by controlling the money supply through government regulations. As mentioned in Encyclopedia Britannica, “According to the quantity theory of inflation, excessive issuance of fiat money can lead to its depreciation in value.”
At least transacting with physical cash allows you some control over who you give your money to. But there’s clear downsides to physical cash that makes it clear this is not the future. Besides the fact that physical cash is only directly spendable within your physical reach, it is getting accepted less and less and might even be eliminated entirely in some regions. People and businesses holding physical cash also makes them more susceptible to robbery or losing your money some other way, like a fire or a natural disaster.
As the world moves towards digitalization, it is clear that digital transactions are the future.
When we look at digital fiat transactions, this one entity has control over who can transact, the ability to block transactions and even freeze funds of anyone using the currency. These issues stemming from control over the monetary system by a single entity are often cited as issues for both consumers and businesses.
Governments and banks are centralized entities that can change the value of your money, censor who you transact with and can freeze your funds.
Exclusion
To use fiat currencies digitally, it is required to sign up to a middleman, a bank. Not everyone has the ability to create a bank account. This is an issue for both consumers and businesses. Government regulations especially have a large role in deciding which industries have proper access to the banking system, even when they’re legal. Take for instance the cannabis industry in the United States- getting a bank account as a dispensary can be a cumbersome process and eventually end up even worse. According to Flowhub, “Currently no major banking system will service the marijuana industry… …Compared to traditional banking, you can expect more strict compliance controls, longer timeframes, and significantly more paperwork…”
For consumers, getting a bank account can also be difficult. The requirements for opening a bank account are similar in most countries, but can have far larger consequences depending on the region. In western Europe, for example, most people will meet the requirements to open a bank account. However, in other regions of the world, a far larger percentage of the population does not meet these requirements. Let’s take a look for example at the requirements to open a bank account in Nigeria. From UBAgroup website:
In addition to filling a relatively short form by providing personal information like your full address and contact information, you will be required to provide the following:
Utility Bill: A recent proof of your residential address, such as water or electricity bill, is required to open a bank account.
Government-issued Identity Card: A government-issued identity card, such as national identity card, permanent voters card, driver’s license or international passport, is required to open a bank account.
Passport Photograph: The bank requires the passport photograph of the applicant for identification purposes.
Nigeria has approximately 108 million homeless people. Do those without a residential address, or without identification, not deserve to participate in the global digital economy? They arguably need it more.
Certain consumers, and businesses in specific industries, are being excluded from participating in the digital economy.
Local, not global
Fiat currencies, with centralized control, also prevent a currency from being adopted globally as a payment method. Country A does not want to adopt a currency as legal tender if country B can print it freely as much as they want. Governments don’t want to be dependent on the decisions of another government. It is therefore in best interest of a government to have a currency within its borders that no other government has control over. This has lead to countries all over the world having their own national currencies. But with different currencies come many problems. Trading currencies between countries is a hassle, it requires banks to continuously send money to each other and convert it to other currencies. For large international businesses, the fluctuation in purchasing power between different currencies in different countries is an issue as well. Even central banks trade between foreign currencies to control their economies. That’s why the FX industry has a daily volume of $6.6 trillion. But trading between national currencies can be costly. Not just the cost of trading itself, but time. Transactions between banks with different national currencies takes several days.
Centralized currencies can not be globally adopted, which leads to high friction in the forms of time and cost for banks, businesses and consumers.
A global currency, where no government, or other single entity, has control, would solve a lot of issues for consumers, businesses and banks. And that’s how we arrived at the point where we are now. With new technology and innovations, we’ve arrived at decentralized currencies.
Decentralized currencies
Now that we have established what the main problems of fiat currencies and our current banking systems are (mainly centralization), we can take a look at the most prominent solutions proposed that try to solve these problems through technology and innovation. Seeing as this whole movement started with Bitcoin, let’s start there.
Bitcoin (XBT) and its Lightning Network
It is not even a debate if the Bitcoin network on its own can be a world currency- it simply is not built for it. Transactions take at least 10 minutes (but generally multiple hours, since Bitcoin uses probabilistic finality which means multiple blocks have to be added after your transaction has been included to decrease the chance of the transaction being reversed), have high fees depending on congestion, and is not built to scale. Even at a national scale, Bitcoin would not be able to do enough transactions per second. The system is built to only allow for ~7 transactions per second and is bound to this amount because of the block size and block times. The inefficiencies in transaction times, transaction fees (that go from a few dollars up to more than $60 per transaction) and the inability to scale make Bitcoin a bad candidate as a global digital currency.
Bitcoin’s network is not equipped to handle more than 7 transactions per second, and therefore less than ideal as a global currency (or even a national currency for that matter).
However, one proposed solution for Bitcoin’s scalability problem is the controversial ‘Lightning Network’. A second layer, on top of the main Bitcoin network, that would allow for more transactions per second, make payments close to instant, with a very low transaction time. Some Bitcoin maximalists might hail this as the solution to Bitcoin scaling and being used as cash, but even developers working on the Lightning Network, or that have worked on it, admit there’s a lot of issues when it comes to the security of the network.
Bitcoin’s Lightning Network also runs into exclusion of people from participating. A minimum account balance is required for the fees of opening and closing a LN channel in order to transact. This means that, even with lower fees per transaction, people that don’t have the money to open and close their LN channel can unfortunately not participate in the network. The Lightning Network also still has fees, which are set by node operators. They can decide to raise their fees if they like, and this is expected to happen as the network does not seem economically viable for the long term with its current fee structure. Besides that, there is a lot of criticism on the user experience of the Lightning Network. It is difficult to understand how it works and how to start sending and receiving transactions via non-custodial wallets, leaving people with less technical skills excluded from participating.
There are many concerns about the security issues with Bitcoin’s Lightning Network and fees to use it remain- excluding people from participation. Besides that, the technical difficulty of using it excludes those with less technical knowledge.
Besides the Lightning Network’s security issues and exclusion of certain people, there’s a bigger, underlying problem at play with Bitcoin in general- it is not made for long term operation. The energy and hardware consumption of the Proof of Work security model of the Bitcoin network, and the accompanying carbon footprint and electronic waste, gets a lot of backlash for being harmful to the environment. Even to the extent that governments are discussing the idea of banning Proof of Work currencies like Bitcoin. There is already a lot of critique on the environmental sustainability of Bitcoin. What I’d like to shine a light on here is also the economic unsustainability in Bitcoin’s security model. The operational costs for the bitcoin network is billions per year. Those billions of dollars are being paid by users and holders of Bitcoin, through inflation and fees. As block rewards go down, fees will eventually have to go up to insane highs to pay for mining costs. With more transactions on Lightning Network, and less on-chain, fees need to go up even more for on-chain transactions- to the point where no one will ever open or close channels anymore, leaving no revenue for miners. This might result in them shutting down their mining operations or mining other currencies, and eventually a collapse of the hashrate protecting the Bitcoin network. Leaving the network insecure and susceptible to 51% attacks.
From a Princeton University study:
Without a block reward, immediately after a block is found there is zero expected reward for mining but nonzero electricity cost, making it unprofitable for any miner to mine.
The study goes more in depth on how solely funding the Proof of Work security of the network through transaction fees can lead to very irregular hashrate over time and perhaps malicious forks being more profitable for miners than securing the network.
Bitcoin’s security model is not economically viable in the long term. As block rewards for miners go down, fees on transactions will have to rise exponentially to the point where less people will use the network. This leaves miners unable to continue their mining operations and lead to a significant reduction in the security of the Bitcoin network.
Let’s look further at other currencies that tried to innovate on Bitcoin’s example. How do they compare? Is there a decentralized currency that is more inclusive, allowing anyone to participate in the network (a barrier of entry that is as low as possible) while being long-term sustainable both economically and ecologically?
Bitcoin Cash & Litecoin (BCH & LTC)
After some issues with Bitcoin’s scalability appeared, mainly due to network congestion leading to higher fees and longer transaction times, different solutions were proposed to increase the throughput of the network and thereby decrease transaction fees. One was to have a larger block size with Bitcoin Cash. Another solution, implemented by Litecoin, was to lower the difficulty of mining blocks so that more blocks can be mined in a shorter time period. Even though these solutions do increase scalability somewhat, they lead to similar issues do to Proof of Work consensus mechanism (mining). Furthermore, increasing the block size can lead to less decentralization and a decrease in block time can be less secure and increase the chance of forks in the network. Because these solutions are very similar to Bitcoin, only with slight differences, the same long term problems remain.
Bitcoin Cash and Litecoin both offer slightly cheaper and faster transactions than Bitcoin, but with the drawback of less security/decentralization, and have the same long-term issues as Bitcoin.
XRP
XRP has fast transactions (3–5 seconds) and relatively low fees. However, it requires the user to hold a minimum account balance to send transactions. It is also arguably centralized since Ripple Labs decides which protocols validators must follow and owns about 60% of the supply. Furthermore, Ripple, the original issuer of XRP and holder of the majority of the coins, has been sued by the SEC for unregistered securities offering.
XRP has lower fees but is centralized and sued by the SEC for unregistered securities offering.
Stellar Lumens (XLM)
Stellar Lumens, a project that was created as a separate version of XRP, has decently fast transactions (3–5 seconds) but excludes certain participants since it has a minimum account balance. Less than half of the total supply is in circulation meaning it is still highly inflationary. Even though the consensus mechanism seems to be a pretty good method for decentralization, the Stellar Development Foundation holds more than half of the total supply. Furthermore, Stellar Lumens still has fees, even though these are very small.
A large percentage of the XLM supply is in the hands of the Stellar Development Foundation, and both fees and minimum account balance exclude people from participating.
Enter nano (XNO)
Bitcoin was one example of what a decentralized currency could look like. However, as we have seen there are many issues preventing Bitcoin and other currencies that sprang off from this innovation from becoming global currencies that allow anyone, anywhere, to participate. Perhaps a radically different approach is the answer.
That’s why nano was created. With a blocklattice instead of a single blockchain, Open Representative Voting instead of Proof of Work or Proof of Stake, unique spam mitigation and no rewards for nodes or validators, nano solves several problems that other decentralized currencies face. Nano has an average transaction time of less than a second, does not suffer from centralization over time like other decentralized currencies and has confirmed more than 150 million transaction with 0 fees paid! It’s a decentralized, permissionless global network, running 24/7. Allowing anyone, anywhere to transact in less than a second at no cost. Unlike currencies such as XLM and XRP, nano was given away freely via captcha faucets, allowing anyone putting in the time and effort to obtain some.
Furthermore, unlike other decentralized networks, nano is able to scale as nodes get better hardware and bandwidth and therefore does not have a specified limit to the amount of transactions per second the network can handle. It also has no inflation at all, making it a solid store of value.
For these reasons, nano would be a good solution for decentralized, global digital money.
Nano uses unique innovations that allow for instant transactions to anyone in the world, globally, without fees, while being decentralized and decentralizing more over time. The network is extremely efficient, can scale with demand, and does not exclude anyone from participating, making it a viable candidate for the future of money.
To learn more about nano in general, the incentives for running a node, the history behind nano and what makes it better suited as a medium of exchange and store of value than other currencies, I recommend reading some of Senatus’ articles. They are full of valuable information!
A small note on stablecoins/CBDC’s
Perhaps Stablecoins and Central Bank Digital Currencies should be separated here but they are similar in a few ways. A criticism of many crypto projects, including nano, is that price volatility prevents widespread adoption. It’s definitely one of the reasons many businesses are not adopting decentralized currencies yet. However, what a lot of people don’t realize is that stablecoins fluctuate in ‘price’- or rather, purchasing power- as well. We see this currently with inflation rates rising and goods and services becoming more expensive. Stablecoins aren’t as stable as many people think. Where nano has a stable supply but varying demand, fiat currencies (and stablecoins that are tied to fiat currencies) have a more stable demand but the supply varies. Increasing money supply through money printing by central banks is the whole reason Bitcoin was created and the cryptocurrency movement started. What’s the point in stablecoins and Central Bank Digital Currencies? They do not solve the initial problem of removing control over value and transacting by central middlemen. In fact, when it comes to CBDC’s, they give central banks even more control. Centralized currencies lead to exclusion of certain people/groups, censoring/blocking transactions, and are very susceptible to hyper inflation- something that seems to eventually happen to every centralized currency we’ve seen so far. Because governments/central banks have the ability to print fiat currencies freely, the currency devalues over time. This also prevents global adoption of centralized currencies, since country A would rather not adopt a currency that country B can print freely at their will.
Stablecoins and CBDC’s are not decentralized and therefore suffer from the same issues as traditional fiat currency. Because of the centralized control over value of the currency (money printing) by a single government, it is unlikely to be globally adopted by other governments.
Conclusion
Centralized currencies have issues with control. Bitcoin made the case that money can be decentralized to solve this problem with centralized control, but isn’t itself made for long term existence. Other currencies improved on it more and more but continue with issues that exclude people from participating in the global economy through fees or minimum balances, have longer transaction times, probabilistic finality instead of deterministic finality, unsustainable economical and ecological security models and often centralize over time due to economies of scale.
Nano is the most logical solution for a decentralized currency that is able to scale while allowing any person or business to participate in the digital economy. It has no fees, runs anywhere 24/7 and is a likely candidate to become a globally adopted currency. The network is made for long term scalability and offers all the right incentive for nodes and validators without monetary reward and fees. No money lost on fees for using it, and no money lost from inflation by holding it. That’s what value should be.
I hope this gives a better insight into the problems with the current financial system, the attempts at solving some of these problems and how nano fits the ‘money of the future’ title best. Thanks for reading this article! Feel free to contact me on twitter @Forestnanoo
