Re-imagining money: are the 700 years of centralization over now?

By Olga Grinina

“(money)… drives the world, for better or worse. Economic incentives drives entire swathes of human populations to behave”

Chamath Palihapitiya

Most of us are used to looking at money through the conventional prism of exchange medium in the form of coins and banknotes issued and backed up by the government. However, it looks like neither this definition is complete, nor it reflects the ongoing economic shift powered by advances in decentralized ledger technology. Over the last couple of years, the latter has triggered rapid expansion of crypto economic engineering, which is basically reinventing all the core conventional economic concepts, money being at the core of this ongoing transformation.

Cryptoeconomics that sits at the intersection of cryptography, economics, game theories and psychology, is all about designing and engineering new economic ecosystems powered by a certain set of incentives that push the participants to behave in certain ways. Economic incentive design is an essential component of the blockchain technology. Hence, the very notion of money is now shifting to the realm of a complex engineering problem. As the concept of money value is changing, so is the financial infrastructure: a set of crypto-economic and crypto-financial primitives are to be built to leverage decentralized financial governance by virtue of protocol-based self-sustaining incentive systems. One hypothesis assumes that the future of financial services could be composed of a few commonly adopted crypto financial protocols responsible for transactional low-value tasks and hundreds of entities focusing on building dApps for ultimate user experience.

More so, as the governments gradually weaken, both in terms of social and financial powers, they are ultimately losing the grip of managing money flows. The era of centralized public governance is giving way to decentralized financial protocols, with the governments and public agencies failing to exercise their core function of regulating universal social realms as effectively as they once did . We are seeing ample indications of this in many traditionally strong governmental functions, like pensions, for instance. This phenomenon is a given economic reality now, mostly due to the decrease in governmental revenues: tax collection becomes less viable, as more and more entities choose to operate in the grey area of offshore jurisdictions, or crypto realm. The government backed money systems are losing credibility with experts questioning the very viability of this public financial institute. We should probably question the very fact of money backed by gold or some other asset, which in fact has long ceased to be the case: with the the golden standard cancelled back in the 70s, the inflation rate has been escalating ever since. Take for instance the recent collapse of Argentinian Peso.

Yet, with all those pitfalls becoming more apparent, the majority of people is still rather sceptical about cryptocurrencies and DLT. The main reason is probably that they are stuck with the idea that the legit money must be tangible and stored in the public treasury or the central bank. In fact, the history might prove them wrong. Back in the 19th century the non-governmental money spanning across a number of countries — North America, Sweden, Scotland, Hong Kong — as an alternative to the centrally governed counterpart has already proved to be viable. All of them were issued by local banks with minimized level of trust, since they were not backed by central government. All those currencies in a way formed a peer-to-peer interaction system between banks where they could redeem competitors’ notes — just like the the Bitcoin network unites miners and other users. By operating this way, the entire money circulation system grew more reliable form of reserve compared to its centralized counterpart. Privately issued banknotes and privately minted coins can be traced back to ancient times with monetary metal as the layer that powered the ‘paper money’ being the closest analogue to Bitcoin settlement layer. More so, the analogy is perfectly stretched to higher levels of traditional monetary system: checking accounts and bank notes, for instance, would most closely correspond crypto exchanges. These higher levels are normally less efficient in terms of computation than their underlying layers (circulating banknotes are harder to control than the gold in treasuries) and less secure for the attacks, therefore bearing more trust.

Was the non-governmental money the closest counterpart of cryptocurrencies of today? Despite apparent similarities, there is yet a number of substantial differences. While the former is local currency backed by gold, cryptocurrencies are essentially the medium of exchange acknowledged by the global community. It is the community that decides what money is attaching some value to a newly created coin. Integration into the community and awareness of this very payment medium is another essential feature of ‘new money’. Hence, being an important player in global crypto community, crypto exchanges are introducing tokens for trade to allow the community to buy and sell the newly attached value. Probably, the closest analogy we could trace between the conventional fiat and Bitcoin is the US dollar: its value is accepted by everyone in the world irrespective of the fact that it’s no longer backed by any asset and its country of origin.

Decentralization is no stranger to the money matters that has already proved to be viable over the course of history. Unlike the modern fiat money that has turned into void backed by nothing but governmental promise. While Bitcoin basically becoming the first crypto-financial primitive with the value attached and acknowledged by the community, new decentralized digital money call for corresponding mechanisms to operate on. Ultimately, this is a trigger for the build-up of the next layer of more complex protocols: powered by Ethereum blockchain these smart contracts are set to enable parties to exercise financial services in a decentralized trustless manner. It is the primary goal now that is now being addressed by emerging trustless asset management ecosystems. Giving pension beneficiaries full control of possession and disposal of their savings and providing a number of choices between entities that provide asset management services, at the same time being able to monitor the process in transparent and efficient manner and have access to their funds tracking them at any time, is an essential set of features to eliminate cases of misuse or corruption of funds.

When implemented, these protocols have the potential of bringing a significant shift to the industry by introducing the concept of real financial independence where individual ownership and possession rights are granted to every user. In Dharma and Akropilis-like systems, a user is entitled to possession and control over his assets and savings operating in open borderless competitive marketplace for asset management service made of the set of crypto financial primitives that opens up access to effective asset managing strategies to virtually everyone. Naturally, to build those basic blocks, a number of crypto-financial and crypto-economic primitives should be introduced and tested to prove their reliability and efficiency. We will dwell on specifics and implications of those in our next post, hang on.

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