Aspects of Currency: Is Digital Currency the Future?
The outbreak of the novel coronavirus has brought normal life to a standstill. Now is the time to reflect, develop and plan for when the crisis is finally over.
With this in mind, let's take a closer look at the fundamentals of Bitcoin and digital currencies. No matter from the sense of technology, practicality or application, it focuses on the history and evolution background of the currency itself.
Currency is born from multiple creations by people in different places. Its emergence does not rely on technological breakthroughs, but on ideological revolutions. Currency is not numbers on a screen, bills in your wallet or coins in your pocket. It is a subjective reality that exists only in our collective imagination.
From ancient times to modern times, money can be anything that we all agree to represent value in exchange for goods and services. The form of money and the way its value is generated has changed a lot over the centuries. In this sense, digital currencies are just the latest step in the ongoing evolution of money.
Before the birth of currency, popular barter
According to early records from Egypt dating to 9000 BC, farmers and merchants would meet in markets and exchange goods with each other. For example, trade cattle for bread, grain for oil, and clothes for sheep. Although it sounds simple at first, when you think about it, it is actually very complicated to obtain goods through this trading system, because merchants need food every day, but farmers don't need so many new clothes,
This imbalance creates demand for money. That is, a controlled exchange system that can be used to measure the value of goods, and a medium of exchange that can facilitate transactions. Seashells were the earliest currency and one of the most widely used. Other regions used different "currencies" such as grain, cloth or even buckskins, which is why in the US people often refer to "dollars" as "bucks".
Although these currencies look different, they share 3 main characteristics:
Community Agreement: There must be a consensus that this is indeed currency. Farmers will only accept shells for their own cattle if they can confirm they can use the same shells to buy grain.
Resilience: Objects used as currency need to be able to withstand the test of time on a physical level. There's no point in using mushrooms as they will rot within a few months and lead to bankruptcy.
Consistency: One grain is not better or different than another. Items must be interchangeable and interchangeable.
While this currency has worked well for a while, there are still some issues when it comes to acquiring the currency. If you use grain as your currency, you can also grow more currency when you run out of currency. If shells were used as currency, bankrupt merchants would just have to go to the beach again. In many cases, this violates the first point mentioned above: the community cannot agree on what items can be used as currency.
Here comes the coin.
Precious Metals and Coins
The first people to use coins were the Lydians in ancient Greece in 600 BC. These coins are made from a natural alloy of gold and silver and are struck by their weight, so they are usually weighed rather than counted. Unlike shells or buckskin, no more natural silver or gold could be found to mint coins and stamp the royal seal. Even today, mining gold is not within the reach of ordinary people.
Coins satisfy the three main characteristics of money described above, and rulers make them currency and are accepted by society. Gold coins do not evaporate or rust over time, and the metal is uniform in texture and can be smelted into larger or smaller nuggets, most importantly the total weight of the nugget.
As Greek civilization rose and fell, so did its currency. But precious metals have been used to mint coins for centuries. The only things that have changed are the royal faces on the coins and their circulation.
From coins to banknotes
Although coins solve many problems as money, they also create many problems. Coins are heavy, take up a lot of space, and circulation is limited by the amount of precious metal available. These inconveniences have sparked the need for a new type of currency originating in China.
In 100 BC, China invented paper money. People no longer need to carry heavy purses of coins and can leave their funds in the bank. In return, they get signed notes from the bank that verify the value and ownership of the funds. These bank notes build a trust system. People exchange paper money because they all believe that they can exchange paper money for tangible funds (gold coins) at any time.
The idea that paper money represented money quickly spread around the world, and it wasn't long before banks in Europe began using paper money. Since everyone started using paper money instead of gold itself, banks started issuing paper money in larger quantities than the gold they could draw on. The idea of the bank is that not everyone who holds paper money will go to the bank and ask for gold at the same time.
This marked the first practice of expanding the money supply, which we still do with money and notes today.
abolition of the gold standard
Until the 1830s, each $1 bill could be exchanged for $0.40 worth of gold. This loose exchange rate of gold to paper currency is adopted because the United States also believes that not everyone will go to the bank to exchange gold bills on the same day. But all that changed with the advent of the Great Depression.
The economy needs help, but the U.S. government cannot print more paper money due to a limited supply of gold. So, in order to prevent the economy from collapsing, in 1933 the President of the United States made it illegal to own gold, forcing everyone to turn over their gold to the Federal Reserve Bank, which would issue paper money in return. In 1971, President Nixon officially de-pegged the dollar from gold. Private ownership of gold was not allowed again until 1977.
Today, paper money has been completely decoupled from gold or any other precious metal. In fact, if you take a banknote out of your wallet right now, for example a 20 Hong Kong dollar, you will see "HKD 20 payable by bank check" printed on the banknote. . The banknotes don't mention gold, and don't expect to exchange the banknotes for HK$20 worth of gold from the bank. All you can do at a bank is turn paper money into electronic money. More than 90 percent of all the money in our accounts, or more than $50 trillion, is stored on computer servers alone, says Noah Harari of Sapiens.
Electronic money has evolved from numbers in bank accounts, using plastic credit cards, to electronic money exchanged using mobile devices. Then, just like the Great Depression of the 1930s, the global financial crisis of 2008 took monetary development a big step further.
Bitcoin debut
With the advent of Bitcoin in 2009, we had a new form of money that built on all the foundations of the entire history of money, with some important improvements. Bitcoins are not minted or controlled by a central authority, but distributed and controlled by holders.
Bitcoin sparked the digital currency revolution, but BTC itself is arguably not a medium of exchange. The price skyrocketed, plummeted, recovered sharply, and then fell back again. Prices will continue to do so for the foreseeable future. The community certainly agrees that it has value, but that value can change dramatically in a short period of time. As a digital asset, its volatility makes it more of a scarce commodity than a currency.
But digital currencies have changed a lot since 2009. There are now hundreds of currencies used for various purposes. For example, stablecoins are designed for consumption and transactions, they exist in the digital world, and at the same time this form of money is programmable. As technology develops and the world we live in becomes more digital, stablecoins will find more utility.
Other tokens in the Ethereum ecosystem, such as native exchange tokens or Gas, are used to power operations in digital applications, and smart contracts are one of the most complex technical functions in use today.
Digital currencies are the future of money
What lies ahead of us is completely unknown. The tokenization of commodities, such as gold-backed post-digital currencies, is an interesting development that may bring more traders into the digital currency space. Tokens tied to fractional ownership of real estate are another innovation in the digital currency space.
Perhaps in the future, we will no longer express the price of digital currencies in dollars, just like we will no longer peg the dollar to gold reserves.
The only thing we can be sure of is that digital currencies are developing and changing rapidly, and there is no shortage of ideas and technological advancements. Digital currency satisfies all the characteristics that we think currency should have, and makes the digital world we live in meaningful through continuous enhancement of functions.
Like the birth of money centuries ago, this is a revolution of ideas that we all actively participate in and actively shape.
