Fiat money versus Cryptocurrencies
Money was invented by men to solve the “farmer and shoremaker” problem.
A farmer with a sack of potatoes needs a pair of shoes from the shoremaker. What quantity of potatoes is equivalent to a pair of shoes?
Fiat money, — paper money made legal tender by a government decree — .
solves this problem by serving as a standard for the exchange of goods and services.
The farmer pays a certain amount of money for an equivalent in potatoes hence the dilema no longer exists.
In todays digital world fiat money is no longer suficient for our needs. Over-regulation, cost of production/preservation,
inmobility and geographical restriction are just a few of its drawbacks. The biggest problem of all is the “middlemen problem”.
A man living in Alaska wants to buy a toy robot for his son’s birthday from a chinese toymaker in Guangdong Province for an arbitrary sum of “fiats” but he is faced with a problem.
How many middlemen stand between the two and how much will each middleman charge as commission?
The minimum number of intercepts is four :
1) The Alaskan father contacts the Chinese toymaker and the agree on a price (P)
2) The Bank of Alaska intercepts the Alaskan father and charges at a rate of (R1)%
2) The Bank of Alaska intercepts with the Bank of Guangdong Province and charges at a rate of (R2)%
3) The Bank of Guangdong Province intercepts chinese toymaker and charges at a rate of (R3)%
The above transaction incurs fees and commissions at each step.
If the Alaskan man must get the toy he must pay at least
(P ) + P(R1 + R2 + R3)/100
In a crytocurrency system the transaction follows these steps.
1) The Alaskan father contacts the Chinese toymaker and the agree on a price (P)
2) Both agree on an escrow to hold the payment until toy arrives at Alaska at a charges at a rate of (R)%
The Alaskan man must pays :
(P ) + P(R)/100
The cost savings (S) becomes :
S = P ( (R1 + R2 + R3)/100 — (R)/100 )
Assuming R1 ~= R
S = P(R1 + R2)/100
I am confident that digital currencies will eventually replace paper currency in the nearest future.
