27 Feb What is money
with the recent news of the House approving $1.9 Trillion stimulus package we thought it was a good time to publish here a d.center article called What is money, hope you find it insightful.
Can we be sure that our money keeps its value and is always accessible, while it is controlled by the banks?
Initially money has three main functions: a store of value, a unit of account and a medium of exchange. In order for a currency to last, its holders must trust its capacity to maintain its value and stay available as a means of exchange. History shows us that this trust can be lost quite fast though and the only currency that could ever stand the test of time was gold, mostly because of its inalterability and scarcity.
Money is a particularly poignant case of trusted third party flaws and dangers, and also the very reason the blockchain was created.
Paper money first appeared during Tang dynasty in China (circa 800). At first it was intended as a practical alternative to carrying around heavy coins, and was fully backed by gold. Over time, however, the authorities did not resist the temptation of printing more paper money than their gold collateral, which resulted in massive inflation, complete collapse of the currency and an eventual return to hard money.
Since then every country using paper money has repeated this experience. Over-printing can have numerous reasons, most often a war, and recently – economic crisis. What is sure is that every paper money eventually succumbs to over-printing, which leads to its collapse.
Speaking of modern times, since 1971’s Nixon shock (unilateral decision to stop dollar convertibility to gold, thus effectively ending Bretton Woods treaty) and the end of the Gold Standard most world currencies are completely detached from gold. In the absence of a physical backup, these currencies derive their value from the notoriety of institutions that issued them. That’s why such money is called fiat money (in Latin fiat is a binding decree issued by authorities, also translated as “let it be done”).
Most recently paper money has taken a digital form called “scriptural money”, and is massively issued by Central Banks, making short-term economic improvements and decreasing the value of money in a medium and long term. This massive overprinting, casually referred to as “Quantitative Easing” or “deblocking funds to support the economy”, effectively dilutes the existing holdings, making the prices of real and finite assets (stocks, real estate, art, and of course gold) skyrocket.
With scriptural money it became much easier to control their circulation, since all money movements are carried out by a trusted third party – a bank. Depending on the government policies, the bank can decide whether its clients can withdraw, send, or exchange their money. Hence the money on a bank account does not really belong to its owner, as they cannot fully dispose of it.
In the name of saving a bank from collapsing a deposit can be erased or cut (Cyprus 2013), in the name of saving the national currency all exchanges against foreign currencies can be banned (Argentina 2019), in the name of keeping the country from default cash withdrawals can be limited or stopped (Lebanon 2020), in the name of anti-money laundering a wire can be denied (everywhere in the world)… the list of possible dangers is long, and all of them steam from the fact that the money is being controlled by trusted third party – the banks (which themselves are being controlled by the government and the Central Bank).
Bitcoin as digital gold
The blockchain solves the problem of a trusted third party by replacing it with a decentralized system. Bitcoin is governed by its protocol and without any central authority. Its holders will always be able to send and receive bitcoins, the bitcoin emission will always be limited to 21 millions, and this won’t change unless the majority of Bitcoin users and ecosystem decides so.
Bitcoin is often referred to as digital gold, and for a reason: these values have much in common, notably their scarcity and a relative independence from the Central Banks. They have some differences though.
In case of gold, an increase in price motivates more companies to start its extraction (or allocating more resources to it), and the resulting increased supply progressively could lead to a decrease in price. An increase of Bitcoin price also leads to more miners wishing to extract new bitcoins, thus increasing the mining difficulty (mining becomes more expensive), however the supply of new bitcoins does not change (it is fixed by the protocole).The only thing that increases though is Bitcoin security, creating a virtuous circle, which does not exist for any other type of money: the bigger its price, the more secure it becomes.
The article was originally published here https://d.center/explore/what-is-money