Cryptocurrencies Are the Next Generation of Money

Currency is a foundational technology of civilization. The form it takes and who has access to it have the power to shape society.

Money has taken many forms over the millennia: from shiny objects traded between villages, to coins issued by kings, to fractional reserve banking. And each iteration of money has had a profound impact on successive civilizations.
The modern era is one of national currencies issued by central banks. This era is marked by a boom and bust cycle and dramatic fluctuations in the relative value of the currencies. Money printed by central banks is assigned a value that is influenced by everything from a nation’s trade balance to its perceived global power and influence.

Depreciation
While there are big differences between national currencies, one thing that every national currency on the planet has in common is that it suffers from depreciation. The devaluation of a nation’s money is the result of a multitude of factors, but the printing of money is a major contributor. When the supply of money grows faster than productivity, each unit of currency ends up representing less exchange value in the market. This is known as inflation and it’s a good reason not to store your hard earned income in the form of any national currency.

At the turn of the 20th century, the money supply in the US for example was just $7 billion. Today there are 1,900 times more dollars in existence. So while you could buy a nice pair of leather boots for a dollar a hundred years ago, now that same dollar pays for a few minutes of parking. Throughout the 20th century therefore, anyone with money to spare would have been wise to exchange that money for almost anything else of value. Exchanging USD for gold in 1934, for example, would have resulted in a 3500 percent appreciation as opposed to a 99 percent depreciation had it been left in cash.

The USD is of course, considered a stable and successful currency by global standards.

In some cases, the devaluation of a nation’s currency is much more dramatic. When inflation runs rampant, citizens must spend their money as soon as they get it. This is the case in Venezuela right now where the International Monetary Fund predicts inflation will spiral to 13,000 percent by the end of this year.

The creation of the first cryptocurrency, and the initial wave of its adoption came about in direct response to the 2008 financial crisis. The genesis block (first block) of the Bitcoin chain, which occurred on January 3, 2009, was embedded with The London Times cover story title “Chancellor on Brink of Second Bailout for Banks.”

The 2008 financial crisis was largely a result of the excessive printing of money. In this case money was printed on the basis of housing loans that should never have been issued. Banks were eager to capitalize on low interest rates and so eagerly made riskier and riskier loans. When the house of cards finally fell, even more money was printed in an attempt to prop it back up and the banks that caused the crisis in the first place were given the vast majority of the money. The financial sector bailout in the US, widely reported at $700 billion, is actually likely to end up costing US taxpayers according to Forbes more like $15 trillion. Every dollar printed to prop up banks that are too big to fail represents further devaluation of the money already in existence. This phenomenon is now reaching unprecedented levels, with many analysts predicting dire consequences in the very near future. The next bust is likely to be much worse than the last.

The promise of a truly decentralized cryptocurrency was then and remains today the creation and use money that is not controlled by a central authority. A key tenet of this usurpation of centralized power is that the currency cannot be endlessly printed at the whim of a nation. Bitcoin and most other cryptocurrencies therefore have a set supply and a carefully scheduled release of coins; in Bitcoin’s case 21 million coins will be minted at an ever decreasing rate over the next two decades (99% of bitcoins will be mined by 2036). Anyone using a cryptocurrency like Bitcoin knows that it can never be devalued by nations looking to build their armies, enrich their cronies, or otherwise print money to maintain control or line their pockets.

Custody
Most people use banks to store their money. This is considered a safer way than hoarding piles of cash in your basement. And in many ways it is. By offloading the responsibility of safekeeping your money onto a secure bank, you are protecting yourself from events like theft and fire. Most banks are heavily insured for such events, meaning that even if something terrible happens, you’ll have access to your money. Until, that is, you don’t.

History is rife with examples of banks that have either gone insolvent, or had restrictions placed upon them by a national government. And when things start to go bad monetarily in a nation, it tends to happen rather quickly, with only the insiders retaining the ability to move their assets in time. In the case of Greece’s 2015 financial crisis, banks first froze everyone’s asses, then restricted individuals to withdrawals of just 60 euros a day. Then, as the state took over full access to all bank clients’ accounts, confiscations of bank assets became widespread. The same scenario has played out time and time again in nations with corruption and irresponsible fiscal policy.

Cryptocurrencies solve this issue by eliminating the bank altogether. Instead of being stored in a central location that can be controlled by a government, your currency — or rather the database that keeps track of your currency — is stored on a distributed global network that combines game theory and cryptography to make it immutable and virtually impossible to hack or otherwise shut down. An additional key feature of most cryptocurrencies is that access to them is entirely permissionless: anyone, from anywhere, can at any time move funds in the network (as long as they have the correct private-public key combination). The only way for a government to take control of the network would be to systematically remove a majority of the nodes that are securing it. This would involve a truly global effort and even then could easily be averted by a vigilant community of node operators.
The importance of these innovations cannot be overstated. Never in history, has it been possible for people to have instant control of and access to large amounts of monetary value from any location and with no possibility of that value being taken over by a government. There are several implications for this new level of autonomy:

Security
The unprecedented security offered by cryptocurrencies has, in the extreme, the ability to save lives by enabling people to flee oppressive regimes. In World War II, for example, one of the first steps in the genocide was the freezing of Jews’ and other “undesirables’” bank assets. With little or no money at their disposal, many people lost the ability to escape the coming catastrophe. If cryptocurrencies had existed in the lead up to the genocide of World War II, or any of the other dozens of genocides around the world since then for that matter, it would have been a lot easier for people to escape. Not only would access to their money make it possible to fund their escape, but they’d also have the means and confidence to rebuild in another location.

Cross-Border Transactions
The status quo of international money exchange is laughably slow and expensive. Using a bank, it takes anywhere from 24 hours to 7 days, and costs in the range of $20-$75 in fees to send a modest amount of money. Using a money transfer service like Western Union, the time is reduced but the fees are comparable. There’s also the inconvenience of both parties having to actually go to an office, wait in line, and fill out a form to send and receive. Services like PayPal are more convenient but also charge significant fees and are only available in limited regions.

In an era where video calls to people on opposite sides of the world are routine, why should it be so difficult to transfer money across borders?

Cryptocurrencies don’t care about borders. Both the nodes that secure the network and verify transactions, and the people who make the transactions, are spread out around the planet. From the perspective of the network, sending cryptocurrency to the person in the same room as you is no different from sending it to someone on the other side of the world. The transaction fee and time to completion are exactly the same.

Censorship Resistance
In a consumer society, how you spend your money is one of the ways you express your opinion. So when centralized authorities have power over your money, they have the power to control your behavior. Under pressure from the US government, Mastercard for example, prevented people from sending donations to Wikileaks. Adult film industry workers in the US have long been subjected to censorship by having their bank accounts frozen. During the recent explosion in interest in cryptocurrencies, several credit card companies stopped allowing people to send money to cryptocurrency exchanges.

None of this control is possible when power is taken away from the central authority. Using a sufficiently decentralized cryptocurrency, it becomes impossible to stop the flow of transactions. If the cryptocurrency is enhanced with privacy features, it even becomes effectively impossible for authorities to retroactively find the people who engaged in the transactions. The result is a huge win for freedom of speech and liberty of choice in general.

Banking the Unbanked At least 2.5 billion people have no access to banking services. For people who earn below a certain threshold of money, it’s simply not in a bank’s interests to setup an account for them. Banks focus on people who are likely to store significant amounts of money because the deposits listed on a bank’s ledger are used as the basis for lending out more money, which is how a bank earns profit. People who are skipped over by the banks miss out on the opportunity to take advantage of banking services. They are forced to horde what little savings they may have in unsafe conditions, and simple spend it at what may not be the most opportune time.

Anyone who has visited a city, town, or even village in a developing country recently knows that the first thing people buy after they have taken care of the essentials (food, clothing, and shelter) is a smartphone. For as little as $20 a person gets a device that gives them access to the Internet, by far the greatest repository of information in human history. It’s the greatest tool for communication that has ever existed. And now, thanks to cryptocurrencies, that same $20 device not only gives them a way to safely store their money, but actually gives them access to the global economy.

Keeping in mind that we are still in the very early stages of the crypto-revolution, in the not-too-distant future, it should be possible for people to do things like tokenize their livestock, using the proceeds to build a pump or start a business.

We’re Not Quite There Yet

Many people will argue that cryptocurrencies aren’t the future of money because they suffer from volatility and lack of utility. These are fair criticisms but can be addressed:

Volatility

People need to rely on the stable value of a currency in order to be able to confidently trade with it. Particularly if you’re running a business that involves multiple transactions through a supply chain running on narrow margins, your business model would be drastically upset by a fluctuation in the value of the currency of even just a few percent in short period of time. You could easily find yourself not being able to afford a payment to a supplier, which could domino into a complete shutdown of your business.

There are several “stable coin” projects in the cryptocurrency space that are working on this very problem and it seems eminently solvable, though we are not there yet. Most cryptocurrencies will likely remain volatile for the time being because this is a very new space, people are unsure who to value, and so there is still a lot of speculation and uncertainty. That being said, holding major cryptocurrencies over the next few years is, for the reasons discussed above, very likely to offer more value than holding any of the hundreds of national currencies currently in circulation.

Utility

At this early stage of cryptocurrency adoption, it’s still rather difficult to use cryptocurrency for the majority of everyday transactions. In addition to questions about the taxation of cryptocurrency transactions, a big problem is the lack of a “closed loop” cryptocurrency economy in which transactions from payroll to everyday expenses are all done in cryptocurrency. To be sure, the number of merchants that accept cryptocurrencies is on the steady rise. According to calculations by Chainalysis, which tracks cryptocurrency data, consumers used bitcoin on merchant services for a monthly average of $190.2 million in 2017, compared with just $9.8 million per month in 2013. More and more use cases are popping up all the time, including the use of cryptocurrency to pay rent, buy tickets, get loans, and so on. I believe it’s just a matter of time before a closed loop ecosystem exists. Meanwhile we are doing are part to speed up the creation of a that ecosystem by building a marketplace within our smart wallet.

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Originally published at blog.diviproject.org on July 14, 2018.