Updated: Jan 20, 2022
The world monetary system has evolved greatly over the last few centuries. We have seen a shift from the earliest barter system of exchange that marked 6000 BC to commodities in 1200 BC, fiat currencies, and now to cryptocurrencies that have gained explosively in value and recognition within the last 11 years.
Understandably so, at each stage of the evolution, the preceding adopted system was found deficient in solving a key problem and hence the need for a new one. A look at the barter system reveals this much. While it addressed the underlying theme beneath all the other stages of the evolution of money, the exchange of value, it failed at facilitating such exchanges in the most efficient ways possible.
Its shortcomings were evident in three key areas: providing convenience, attaining efficiency, and providing the potential of facilitating fast transactions. All of these pointed to the necessity for a buffer to exchange. A refined medium of exchange.
Fast forward to 1200 BC, that refined medium of exchange came in the form of cowry shells!
Why cowry shells? Shells were light enough, scarce enough, and could provide a faster means of exchange if accepted with the public community than the barter system ever could. We know how that story goes. Cowries were accepted as one of the earliest forms of money and a means of exchange for transactions in countries like old providential China, some parts of Africa, and residents on the Pacific's shores where it was discovered.
Elon Musk expressed in a recent interview, "money is data that allows us to avoid the inconvenience of barter." As seen, this is true enough. But most economists would have described it as a store of value.
Yes, cowry shells stored value. However, it did not do so with a definite standard. The value of items was largely determined by how far the transaction was away from the source of the cowries; hence, you could purchase a fair-sized goat for the value of one cowry shell and buy the same item for five times the price when you were so far away from the ocean.
Over time, as the new medium was adopted and used, it became obvious that it was time for another evolution. We had the medium we needed. But we needed a standardized medium of exchange.
The Gold Standard
Two hundred years later, the Chinese began incorporating metal into their money. These metal cowries were designed with bronze and copper. It would take another 500 years before an actual coin was designed- the first known in Lydia.
However, soon enough, coins became so limited, and the world switched to paper notes. China became the first country to use fiat currency in 1000 AD, after which the fiat system spread to other countries.
The continued search for a standard system led to the right to use gold to balance other currencies. In the 1870s, the Gold Standard was adopted in key countries globally, including the United Kingdom, Germany, United States, and France.
The Gold Standard made inter-border trade very efficient. A citizen of the United States could convert his local fiat currency, the dollar, into gold, and travel into the United Kingdom. The Gold Standard meant that gold would be accepted as a legal tender in the foreign currency.
It was only reasonable why gold had been selected:
Unlike cowries which could be stumbled upon on an unexplored island, gold was more difficult to find. It had to be mined.
Did the public accept it? Absolutely! Gold had intrinsic value. It was a precious metal that could be used to create some other valuable items of ostentation.
Specific rates were set on how many ounces would need to be exchanged for a particular amount of the same currency. However, in 1914, another problem arose. It was the postWorld War I and the affected countries were not recovering at the same rate. The standard which had been so much trusted was growing unreliable. As such, the Gold Standard as we know it was abandoned too in search of a more convenient system. When gold was disconnected completely from the dollar, a very vital switch occurred. Money became less of an actual store of value as it wasn't connected to or with anything. The currency was to be regulated by the action of a particular entity called the Federal Bank.
The newly adopted fiat system required regulatory bodies to set up the guiding rules for the exchange. In the United States, the Federal Acts Law was signed into law In 1913 by President Woodrow Wilson. The Act meant that the Federal Bank Reserve could operate with autonomy, receiving no direct instruction or orders from anyone. Since the currencies were already detached from gold, their operations' ideas were determined by how much the central bank feels the economy is worth.
The case of a decentralized institution created centralized laws on a transaction and determined what works for the majority. The fiat currency, by many standards, had become subject to manipulations through their very existence. The financial institution's centralized nature had the right to determine the value of the currency through the measures they deemed appropriate; if they felt the need to, the Federal Reserve could reprice its currency higher. It is, after all, within its jurisdiction.
The Fiat Currency
Sure, there have been many advantages to the fiat system. Fiat currencies do great in times of economically stable times, but what about when crises arise? Since most currencies were no longer attached to any tangible representation of value, the Central Bank can be forced to print more money to keep up with demand. What happens as a result? Inflation! The fiat currency is flooded into the market, and as such, the value of the currency drops. This is only one of the likely events that could happen with fiat currency.
The point here is, currency notes can be printed as often as they are deemed needed, making the idea of fiat less reliable, owing largely to the fact that money had switched from being something so much of a tangible entity to becoming only a perception of value dictated by a tiny closed community.
Beyond fiat, what next?
With clear evidence that the fiat currency can be manipulated and controlled by a closed community, it was understood that the world is naturally evolving towards a system that eliminates these transactional constraints and give back power to the people- a system that allowed people to escape from the limiting claws of centralized institutions. It is very little wonder that Cryptocurrency has thrived over the last 11 years as a real substitute for fiat currency.
Side by side with the fiat, we can see a clear number of advantages that Cryptocurrency offers over it.
As opposed to the centralized fiat system that gave absolute power to a limited number of people, the cryptocurrency system is completely decentralized. Its magnificent blockchain technology provides platforms for the most secure exchanges with low transactional charges. There is no regulatory body that will increase the amount of crypto. Also, Cryptocurrency has a deflationary existence. Let's take bitcoin, for example; there are 21 million bitcoins in the world. None can be added. None more can be made. With Cryptocurrency, would we still have to deal with inflation as we do with fiat currencies? The answer, I believe, is obvious enough.
The Humble Beginnings and promising futures of cryptocurrencies
On the 21st of May, 2010, when the first bitcoin transaction was made in England, only a handful of the general public would have thought that the technology had the potential to revolutionize the world in the ways that it has. The world went on, largely oblivious to the blooming digital currency that if many people had been offered deals to get bitcoin 17 days earlier when it was still hovering at $0.003, many might have refused with fairly reasonable explanations:
Bitcoin was not a recognized store of value.
It was remarkably strange that a digital currency should exist in the ways that Bitcoin did.
The technology's full essence was not understood by the uninitiated, and it was only a natural reaction to resist a technology they could not understand.
However, 11 years later, with a single bitcoin now worth about $50,000, the internet is filled with all kinds of scenarios of how much an individual would have made had he bought and held on to some bitcoin all through the last decade.
Most bitcoin enthusiasts believe that bitcoin will change the world forever. However, this seems to be some years away from being true.
The Similarities and differences between Cryptocurrency and Gold
Certain qualities made gold the perfect medium over a century ago. These qualities are still very much valid today. Do cryptocurrencies have this same quality? Let's find out:
Scarcity: This is a stark similarity between Cryptocurrency and gold. Both are scarce. Let’s take bitcoin, for example; no unit of Cryptocurrency can be added to the 21 million that has already been created. Also, unlike cowry shells that can be picked up on the shores of the ocean, it is as hard to get your hands on a cryptocurrency lying idly in the streets or on the shores of a lake. You have to mine them.
Hedge against Inflation: Like the gold back in the day, Cryptocurrency is becoming the new bet against inflation. With all the uncertainties in the world last year following the Covid-19 pandemic, we witnessed Cryptocurrency's monstrous rise. Bitcoin hovers at over $50,000. It amasses right now over $1 trillion in market capitalization. In contrast, its closest twin, Ethereum, which has risen to more than $2000 per ether over the last week, amasses $226 billion in market cap, according to Coindesk data.
With the rise and efficiency of bitcoin, financial analysts and speculators wonder if we have gotten to another defining moment in the evolution of the world's monetary system.
Weight: It might have been something of an issue carrying large ounces of gold with you on your journey. However, with cryptocurrencies, all you need is a digital wallet. It is possible to store trillions in your cryptocurrency wallet and carry it around wherever you go.
Divisibility: It wouldn't be the easiest thing to break ounces of gold down into many tiny pieces. Cryptocurrencies, on the other hand, can be split into very small units called Satoshi.
Can the fiat truly be phased out?
Several experts have been quick to dismiss the possibility of cryptocurrencies replacing fiat entirely any time soon. The evolution appears to many years away. Many provide the strong argument that Cryptocurrency started for a different purpose: not to replace the fiat system but rather, to provide a decentralized atmosphere of exchange for a closed community of techies. This was done by eliminating third-party intermediaries. The main idea behind the currency was to restore power to the people through an autonomous peer-to-peer system.
True or not, we find ourselves in a transitional phase between crypto and paper money. Yes, many countries have embraced the technology and are doing all that they can to incorporate it into every layer of the financial system.
As of the time of writing this, VISA is working to create highly efficient software to allow banks to offer Bitcoin and other cryptocurrency trading services. MasterCard as well is getting ready to fall in sync with the digital coin economies and networks. On Wednesday, the 10th of February, 2021, MasterCard made public its decision to start receiving direct cryptocurrency payments starting this year. How much longer before the full transition to digital blockchain technology is complete? Will it ever be? Only time will tell.
For more on DeFi, Crypto and the decentralized web, follow dWeb Guide on facebook.