Turbulent market conditions force the price of digital assets down. Supply chain issues continue, geopolitical uncertainty reigns supreme with Putin constantly ratcheting up the threat level, and persistently high inflation sticks to the US consumer despite the FED’s (The Federal Reserve) interest rate hikes. The September CPI (Consumer Price Index) report read 8.2% and this forces the hand of the FED to continue rate hikes. Credit will dry up, borrowing becomes more expensive, asset prices crumble, and the economy contracts.
These prevailing market conditions put fear into investors, and therefore, remain the most appropriate time for investors to understand what digital assets are and what they represent.
Cryptocurrencies are a new form of digital money. This new monetary system separates the concept of money from institutions, sovereign issuers, and nations. These global currencies are borderless, decentralized, and inclusive.
This article outlines two critical features of this new instance of money and its applications: the blockchain and smart contracts.
The Blockchain
Throughout history, centralized entities have been charged with record keeping. Record keeping mandated the need for an entity possessing the power to issue and validate the information. However, this allows a single entity to change history. For example, under quantitative easing, the FED injected money that did not exist before into the system. The record of history was changed.
Cryptocurrencies remove the need for a centralized authority through the use of a distributed ledger; records are kept by everyone. A monetary system built on the concept of decentralization.
This open ledger shared by all has four key properties:
Peer-to-peer network- a network of nodes that are all equally privileged
Cryptography- allows verification of messages and proof of authenticity even with bad actors
Consensus Algorithm- an agreed set of rules for adding data to the record
Punishment and reward- it must be in people’s best interest to follow the rules
These public blockchains are open to everyone, censorship-resistant, and possess no single point of failure. Blockchain technology is a solution to the inherent issues of centralization in the legacy financial system.
Smart Contracts
Smart contracts are pieces of code that can be executed automatically and behave in a fully deterministic way. Decentralized Finance (DeFi) relies heavily on smart contracts and they are the basic building blocks for decentralized applications (DApps). DeFi offers permissionless financial services to participants globally and allows agents to utilize their money in a fully autonomous fashion.
Smart contracts are stored and executed on the blockchain making them trustless and secure. They can send, receive, and store funds. They even have the ability to interact with other smart contracts. They remove human error from decision making operating with if-then logic. These conditional statements are deterministic and permit no randomness. They will always produce the same output from a given starting condition or initial state.
Cryptocurrencies
These digital assets are the newest innovation in money- human’s oldest technology- and allow money to be utilized in a way not possible before. The underlying blockchain and smart contract technology will allow for the most rapid proliferation of economic services of any tool ever built by humans.
Digital assets at their core are an alternative financial system governed by code with hard rules set forcing agents to behave in a more responsible fashion. Fiat currencies have a constantly expanding supply. Unelected officials decide this rate of expansion and have consistently devalued currencies through these policies. By eroding people’s savings they are in essence stealing people’s time from them. An analogy can be drawn between the separation of church and state, cryptocurrencies facilitate the separation of money and state.
Conclusion
Digital assets are an alternative financial system. One where the individual remains in total control of their assets and can use them in whatever manner they see fit. The first opt-in currency where agents can decide whether they want to use them or not; fiat’s use is mandated through the threat of violence and coercion.
Digital assets blend the core notion of freedom with currency and are on the edge of reshaping the world.
Welcome the digital renaissance.
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