Blockchain Blog 02: A Story of Economic System

Aakash S
Coinmonks

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Every society in the world faces the same fundamental problem of how to distribute limited resources to people in a way that will be fair and effective. Throughout the history of society, different societies approach this problem in different ways based on the technology and tools they had. Every society had a similar or different economic system to deal with economic issues.

Before diving more deeper into understanding the modern-day currencies and cryptocurrencies let’s try to understand the economic system we are currently living in. If you haven’t read the previous blog about how we transitioned from a barter system to fiat currencies we have today please read it here: Blog 01: Cryptocurrencies, Is it needed?

Economic Systems

So What is an Economic System? In simple words, an economic system is a means by which societies or governments organize and distribute available resources, services, and goods across a geographic region or country.

Four Types of Economic Systems:

There are many types of economies around the world. Each economy functions based on a unique set of conditions and assumptions. Economic systems can be categorized into four main types: traditional economies, command economies, mixed economies, and market economies.

Traditional economic system:

The traditional economy is based on culture and rituals and is focused on the community as a whole. Everyone pitches in and benefits from everyone else’s efforts. Small societies focused on subsistence farming and hunting were considered traditional economies. We can say the barter system in the past would have been part of this economy.

Command economic system:

A command economy relies on the king or government to make all economic decisions including allocating and distributing resources and regulating prices and wages. Before, when there used to be kingdom and empires which was ruled by monarchies, we can say that they would have followed the command economic system, a modern example of a command economy would be North Korea, and also China to some extent.

Market economic system:

A market economy is driven by consumers whose decisions determine how the industries and financial markets will operate. Individuals choose how their resources are used, what goods to make what services to provide, and what jobs to take. In a pure market economy, there is no government involvement, because of this, there are no true pure market economies we have today. We can say that there are no fiat-based currencies existing today which are not in control of any government or centralized banking system.

Mixed economic system:

Most societies today have mixed economies that utilize limited government involvement, while also applying free-market concepts. One example would be the United States. However, nearly all other countries are some form of a mixed economy as well each is unique and faces the challenge of finding the proper balance between consumer choices and government control.

Economic systems are grouped into traditional, command, market, and mixed systems. Traditional systems focus on the basics of goods, services, and work, and they are influenced by traditions and beliefs. A centralized authority influences command systems, while a market system controls forces of demand and supply. Lastly, mixed economies are a combination of command and market systems. So in the mixed economy system, the market is driven by consumers, but the currencies we used are regulated by any centralized banking system. And that’s where the cryptocurrencies start appearing where the command of a centralized system is removed and power is given to the market, to the individuals.

Problem with existing currency?

It is important to understand the problem with existing currencies before understanding cryptocurrencies. The value of money is based upon the total available supply of it. It becomes even more important when we talk about cryptocurrency. We work so hard to create value out of ourselves, and with our offering, to society, we earn money to make our living and live a glorious life. The medium of exchanges we currently use is our fiat currencies.

Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it.

Now the government can print, 100s and 1000s times more of that paper currency for which you work so hard. And they keep on printing more of it, devaluing your life’s work. We have gone through a major boom like 2008, and still, nobody did anything with currencies. And this is exactly what happened in 2008. The great recession was declared by the historian. People lost faith in the currency.
Another Example: Reserve Bank of Zimbabwe
Below is the image of Zimbabwe’s $10 Trillion currency note.

In 2008 things were scary, government did not know what to do. So they started. So they started printing lots of money. Countries like Zimbabwe started printing more money, inflammation rate was 98–100%
Older people who saved their money had to go back to work bcoz their value of saving was worthless. Younger people did not get employment. The unemployment rate was 40%

Beginning of the Bitcoin

The chaotic time in 2008 led to the initial creation of this new digital currency we have today. During the recession, Gold looks safe heaven than having money in form of currencies in the bank. Today many people see bitcoin as gold. Like gold, Bitcoin has a limited supply, unlike paper currencies which can be printed many times. The current money we have can be devalued. And to make matters worst, money people do not have access to money today in many countries. Only 20% of people in Africa have bank accounts. But thank god, 2/3rd of people who live in Africa have access to cell phones. Cryptocurrency is different from today’s currency because they are regulated by mathematics.

Today 42 people control the same amount of wealth as the poorest 50% of people in the world. The world’s richest 1% owns 82% of the world’s wealth. Billionaires are keeping on maximizing their wealth while inequality between richer and poor is increasing. It’s not about being socialist or capitalist but this wealth inequality is too extreme. Especially when so many people are around the world still don't have access to banks.
Maybe this type of Capitalism can come to an end as everyone gets access to these cryptocurrencies in a long run. Imagine the economy, where these cryptocurrencies are generated based on the value that people create by being in the economic system.

So are cryptocurrencies solutions to the modern economic problems? Is Bitcoin really the solution? And will it be really appropriate to take away the power of the currency generation from the hands of the government, and set up a market economic system? To be honest, we really don’t know that yet. We are still exploring. Many of the cryptocurrencies founders today are younger, rebellious, and have this “power to the people” approach. They stand to make the global cryptocurrency process fairer to us. At the same time, there are a lot of influences affecting the flow of cryptocurrencies, there are also lots of scams taking place all around the world in the name of Initial Coin Offerings. Many genuine cryptocurrency-based solutions are created to solve the various types of challenges.

On this journey of 28Days of February: Blockchain and Cryptocurrency Research Blogs, I will daily post a blog about Blockchain and Cryptocurrency, where I will try to stay unbiased. In this series, we will further explore more about cryptocurrency’s technical and economic aspects.

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