A History of Currency: The Road to On-Chain Value

Blockchain will be central to the future of money. Just like seashells, paper and the internet before it, money is always first in line for innovation at the advent of new technology. The first writing wasn’t a poem or a history note, it was an IOU. And no wonder: money is our human notion of value, and how we maintain peaceful societies that work together without descending into bloodshed. Money is defined as a unit of account, a medium of exchange and a store of value — the glue of our collective sense of individual and community worth. Humankind has always looked for the most elegant, most practical cipher to serve as representation of this value and, with the blockchain, they may just have found it.

Even the fiat currencies of national governments will eventually move on-chain, whether in the form of problematic CBDCs or in representative stablecoins. Despite the renegade shouting of the blockchain crowd and its treatment of fiat as anathema, the need for fiat representations of national currencies will be paramount as long as there are nation states.

So, how blockchain is utilized to bridge fiat denominations on-chain so national currencies can be exercised freely in the Web 3.0 economy is crucial. Onomy Protocol plans to offer a total solution — not just for retail, but for institutions and eventually governments too.

The Origins & Need for Money

People have always needed money. The history of currency dates back to over 40,000 years ago, but originated in the form of objects that could be directly exchanged. For example, the first Native American “money” was represented through different furs, teeth, and even blades. This method of exchange is commonly known as bartering, which is simply defined as the direct trading of goods and services.

Bartering relied upon a method of transacting items with different degrees of value in order for the parties involved to be satisfied with the end result. The issue with bartering was that it was slow and time-consuming, as you needed to find someone to take what you had to offer.

But as societies began to move along the continuum in terms of their development, they became more sophisticated in how they engaged in transactions as a whole. People would start to regularly trade utility-based commodities such as weapons, tools, animal skins, and salt as forms of currency that were widely accepted and therefore fungible.

While these forms of currency were useful in their own ways, they came with several limitations in terms of their qualities, such as durability and divisibility, to name a few. For instance, shells were easily broken and shattered, while also plentiful and less rare, making them increasingly unreliable to traders. There became an emerging need to shift to a more robust and feasible medium of exchange on national scales.

Money is often defined as needing to be portable, durable, transportable, and intrinsic value. In fact, not a single country in the world today uses a type of “money” possessing these qualities — instead, they all operate via currency-based systems where faith in these paper notes is derived from the promises of governments that issue them.

From Coins to Paper Notes: The Gradual Evolution of Money

Next came the transition to using precious metals as a medium of exchange. Dating back over 2500 years ago, the Greeks and Egyptians used gold and silver coins as mediums of exchange, deriving their value from their weight and size. These metals were given further authority by state power, where kings would stamp coins with emblems that guaranteed their weight and value.

The frequency of exchanges between people with coins increased dramatically, and rulers began to enforce taxes upon individuals, exercising their political control over societies and serving as a funding mechanism for the elite and armies to flourish.

However, over time, people began to manipulate precious metal money through adding cheaper metals or slimming down the coins. This disconnected the peg between the value of coins and the metal which underwrote them. Furthermore, while metal coins essentially represented the best form of money, they were divisible only to a certain point and became difficult to carry in large quantities, impinging upon economic growth.

The need for a more convenient type of currency, given increased global trade needs, led to the creation of paper money. Although paper money had no intrinsic value, the backing of government authorities or other units of power meant members of society trusted that it was worth what they were told and could be exchanged for precious metal coins backing their value. Paper bills were first issued by the Chinese, who carried folded money during the Tang Dynasty in the 7th century. The technology didn’t catch on in Europe until the 17th century, where newly-wealthy nation states in a frenzy of empire building and international politicking needed a more convenient way to represent their soft power on the world stage.

The Origins of the Forex Market and the Dollar Replacing Gold

The first Forex market originated in Amsterdam almost 500 years ago, finally allowing people to trade paper money currencies across the globe. This led to the creation of exchange rates. Soon after in 1875, the Gold Standard was ordained, restricting countries to creating currency notes that didn’t exceed their total gold reserves. This was to stop countries flooding the market with their currency and ensure that countries were staying within their means.

However, after World War 1, countries needed to print more money to cover their spending, marking the end of the Gold Standard and leading us into a historical frenzy of endless currency printing and manipulation. Still, precious metals have worth, and have long been considered a good store of value against the inflation caused by the printing of fiat. Indeed, in the age of computers, some — like silver and platinum — have developed highly useful ‘real world’ uses.

Now, however, the U.S. Dollar is currently the world reserve currency, serving as the most powerful and widely accepted medium of exchange across the globe — it’s been continuously printed since the creation of the Federal Reserve Bank in 1913. This, naturally, means its purchasing power diminishes year-over-year, but it can be paired with currencies around the globe. Close behind the U.S. Dollar is the Euro, the second most traded global currency within European countries, introduced in early 1999. Following the Euro, the other highest traded world currencies are the Japanese Yen, Great British Pound, Canadian Dollar, and Swiss Franc, in order of size and liquidity. As electronification of money has grown, so has the size and rapidity of international currency markets.

The Emergence of Banks & Online Money

With the internet and digitization, money was one of the first applications of this new innovation. Online banking initially emerged in 1981, where New York City provided online home-banking services through the following entities: Citibank, Chase Manhattan, Chemical Bank, and Manufacturers Hanover.

Over the next two decades, banks all across the world began offering online banking services and officially turning the concept of digitized money into a reality. By 2006, over 80% of banks were offering internet banking services, spurring massive and unprecedented growth in this sector. Online money was now mainstream, where users could trade, exchange, send, and do much more with their digital currencies than ever before.

However, as time went by, people experienced many frustrations with the e-banking sector. Delays, high fees, slow customer service, and other considerably over-extensive security measures made the process of transferring and using digital money through intermediary and centralized banks often inefficient and undesirable.

The market began to demand more, and this is where cryptocurrencies truly emerged into the light as a viable alternative, taking the traditional banking world by storm. This is where the fork in the road took place, forever transcending the financial world as we knew it.

Blockchain, Cryptocurrencies, and Stablecoins: The On-Chain Financial Revolution

In 2009, Bitcoin was created by an anonymous individual named Satoshi Nakamoto who, in his whitepaper, noted that it was designed to serve as an open-source and decentralized form of digital money — one of its most attractive attributes is that it was deemed by many to act as a hedge against inflation. In essence, it was the first cryptocurrency to be introduced to the world and restored many elements of control back to individuals seeking financial sovereignty, hence instituting a brand new free-market formerly lost through the traditional monetary system.

Bitcoin operates on a blockchain, a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems, providing an immutable record of information that’s impossible to delete or modify. Since its development, Bitcoin has led the charge as a source of inspiration for developing many other advanced cryptocurrencies leveraging blockchain technology to create new and powerful digital financial systems.

One example is Ethereum, a decentralized software platform where developers can create and utilize smart contracts to build decentralized applications (dapps). Since its inception in 2015, Ethereum has held its ground as the second-largest cryptocurrency and opened the door to innovative projects and dapps that are transcending the financial landscape by allowing users to earn high-interest yields, lend and borrow assets, and much more — this is all made possible through DeFi (decentralized finance).

At this point, cryptocurrencies can undoubtedly be deemed as revolutionary financial instruments with massive growth potential; however, they’ve proven to be highly volatile in nature, keeping many potential traders and investors at bay. This is where the idea of stablecoins presented an extremely viable and effective solution to truly help bring crypto to the masses — henceforth, the stablecoin journey to mass adoption began.

In totality, the two largest USD-pegged stablecoins have a combined market capitalization of over $100 billion and have become powerhouses in regards to their use case and liquidity.

However, both of these stablecoins are merely backed by financial reserves being held by the companies that issue them, effectively switching the onus of trust from the federal (or equivalent) reserve and into the hands of the few individuals with levers of control of these private entities. The same can be said for CBDCs — government issued stablecoins that have the potential to act as command and control technologies for nation states who issue them, as they would have the opportunity to program ‘what’ the money could be spent on — as well as trace wherever it went. Therefore, it’s key that there are decentralized solutions to stablecoin value that cleave closer to the central ideology of crypto, or we risk running the same mistakes as history.

And indeed there are, crypto-collateralized and algorithmic stablecoins have successfully maintained their peg even in the face of macro-economic and crypto-economic shocks and, should they continue to do so, they offer the safe haven stable-value alternative that not just crypto investors, but everyday users of financial systems, crave. Without them, the system does not work. You don’t want your central everyday currency to be volatile, but with stablecoins — it doesn’t have to be.

In terms of additional advantages, stablecoins are extremely desirable because they’re permissionless and can be fast, allowing users to send any amount of money to anyone in the world with the click of a few buttons.

Currently, there’s still a lack of representation for stablecoins pegged to other national fiat currencies outside the U.S. Dollar, but this is changing — albeit slowly. Onomy plans to offer decentralized stablecoin tokens pegged to the world’s major currencies at any given time through one simple portal, as well as having easy fiat onramps and offramps for users and institutions alike. This will have obvious benefits for casual users, but where it will have the biggest impact will be on the Forex market.

How and Why the Forex Market Remains Opaque

When the gold standard went, and countries were at liberty to print as much currency as they like, the Forex market grew exponentially to accommodate the shifting sands of cross-border currency value, governed as it is by the myriad of economic policies of each nation state. Today, Forex is the biggest market with trillions of dollars in volume per day — an astronomical $6.6 trillion to be exact. Yet there is a problem, due to its complexity, and the importance of long standing credit relationships in order to be competitive, a select few have come to dominate this surprisingly opaque market.

The need for long standing relationships is due to the settlement risk inherent in trading currencies cross-border, and specialized but opaque liquidity pools drawn up between a tight concert of large actors. This drives out fair competition and reduces the equity of the market in a way that passes on costs to retail consumers exchanging currencies and businesses making international investments — all of which hinder global economic growth. Schrimpf and Shusko, in 2019, commented that the Forex market is increasingly less ‘visible’, and only an occasional snapshot can truly be seen. Whereas digitization has generally led to an opening of competition in most markets — e.g retail involvement in the stock market — with forex this electronification has merely led to more and more of the global market going through a few, dominant centralized hubs.

Although it’s tempting to then consider that these hubs are maintaining a stranglehold on the market for their own ends (and this is, in some senses, true), the fact is that maintaining suitable liability cross-border is an expensive business that is a closed shop. These large institutions, as much as any other, would welcome on-chain Forex trading, as it eliminates the need for them to account for settlement risk, gives them more freedom in their transactions, and let’s them integrate their assets in the Web 3.0 economy. This is what Onomy is setting out to achieve; to allow institutions already involved in the Forex market to deploy their vast assets for better return while also generating retail interest through the levelling of the competitive playing field.

Onomy Protocol: The Solution to Deploying Fiat Currencies On-Chain

Traditional finance is now at a crossroads, where even the most dominant players are beginning to accept the almost inevitable migration of worldwide fiat currencies to on-chain environments. Asset tokenization is fundamental in taking fiat currencies to the next level and creating blockchain-based digital economies that can scale.

Moreover, the blockchain happens to be the perfect mechanism to carry out this promising initiative. It contains features such as accessibility, immutability, and transparency that will help transcend the properties of digital fiat currencies. Ultimately, the blockchain is paving the way forward to an actual borderless and open financial market.

However, the market demands decentralization, and while we could technically have stable assets pegged to national currencies through real-world bank deposits, the crypto-sphere remains trustless in nature. For most future-thinking users, having their on-chain finances controlled by a centralized custodian who may or may not be able to prove they do indeed hold a 1:1 fiat resemblance is not the right way forward. Rather, decentralized and crypto-collateralized stablecoins may be the ones which truly help migrate foreign exchange on-chain. The market already has successful stablecoins that fit the criteria here, but most are pegged to the USD and are unable to move outside of the Ethereum ecosystem.

Forex is global, so it only makes sense to have global currencies that can be moved between blockchain economies. While Onomy’s Denoms are a brand new concept, they hold the economic and infrastructural characteristics deemed necessary to support the natural evolution of money.