Cryptocurrency: The Phoenix of Economics

crypto

If one reverses history ten-thousand years or so, it’s clear that life was the definition of primitive: rough, brutish, and infinitesimally short for all creatures. With the culmination of the iron and bronze revolutions, life spectacularly improved for the majority of mankind as a consequence of sturdier weapons and agricultural tools. However, these pale in comparison to the dawn of trade; a system that catapulted humanity as far forward as the invention of fire.

Trade brought culture, capital, and information in a remarkable way because it catered to the whims of all nation-states. Historians consider the expansive trades between Mesopotamia and the Indus Valley as the first of these long-distance exchanges, fulfilling the dreams of any merchant who as Peter Bernstein says went: “Against the Gods.” But as Darwinism changed all creatures, in a similar fashion, it changed trade and markets; currency was then harnessed as an agreed-upon method of exchange – moving from animal pelts, to metal coins, and finally to paper money.

Today our money has no distinct value, called fiat for this reason, and if somebody burned their collection of dollar bills, it would not harm the financial system. More worrying rather is how money is viewed and how monetary policy in conjunction with grandiose corporations are the sole benefactors of the dysfunct system. Why is this the case? The collapse of Bretton Woods in 1973 led to free-floating exchange rates, allowing central banks to often have the final word over interest rates and other monetary phenomena.

Nevertheless, monetary policy has its roots more deeply in religion rather than in the natural sciences – negative interest rates were thought to be impratical in our theoretical models, but in reality, they are expanding in countries like Japan. In religion, one ascribes to a certain set of rules and never questions the content regardless of factual evidence; monetary policy is such an example where we’re forced to believe that it is a positive sum choice. Taking a glance from 2009 to 2011, we can observe that at the highest levels of American society, – the top 7%– net worths skyrocketed by 28%, from 2.5 to 3.2 million on average after the recession. The substantial increases at the top have not flowed to the coffers of the bottom 93 percentile, who saw their net worths evaporate by over 4%. In our naivety, we might say that the solution is to raise taxes, but that would be more akin to dumping water out of a sinking ship – the problem still remains and it grows and festers within monetary policy.

As we pointed to the start of trade as a turning point for our ancestors, historians will point to the failure of monetary policy that grew cryptocurrencies, and largely Bitcoin, out of its ashes. Methods such as open market operations and quantitative easing have failed to serve the needs of citizens over the past decade, thus begging the question if a contemporary system is necessary. The value of a blockchain-based system would largely exist within characteristics like the fixed supply of tokens, network incentivization, or removing barriers to entry.     If the supply of currency was set in stone – or in this case, mathematics – then there would be no instance where governments could eagerly print more currency, leading to hyperinflationary situations seen in the 1980s with Argentina. Furthermore, in a system like proof-of-work or proof-of-stake, individuals are incentivized to act in their and the network’s greatest interest, so they can reap the profits as well. Systems can only prosper with the proper incentives. In our current system, people are not rewarded for acting in the interest of others – they’re much better served developing their wealth and hoarding it: indeed what has occurred. The reason for the strife over Bitcoin is the potential to eradicate businesses that solely operate as middlemen or more accurately, as robber-barons. Corporations like Facebook, Uber, and Airbnb operate as sole intermediaries – their value lies within their ability to inconvenience the consumer: extracting enormous amounts of data from their personal lives or implementing substantial booking fees. On systems built on the blockchain, users can conduct business or chat with friends without a corporation watching every move and selling their data to the nearest government or advertisement agency.

These improvements, a few among many required, seem incredibly far-fetched – why should any government allow or even adopt blockchain technology? The pandora’s box has been unleashed: blockchain is here to stay, so governments must scramble to adopt it within their current framework. Russia, essentially Putin, is ramping up efforts to launch their blockchain-based currency, the CryptoRuble, according to various publications. And as the Chinese government has done in the past with other forms of technology, the internet and retail to name a few, their involvement in utilizing cryptocurrency seems inevitable.

With all this in mind, a hybrid system, monetary policy and cryptocurrency, appears to be  the most intelligent solution. Consumers, removed from the invariant middleman, would be able to use blockchain technology for transactions or communications among many other situations. Indeed, there are certainly faults with current cryptocurrencies – Bitcoin and Ethereum for example – including lack of liquidity, barriers to purchasing, and insufficient technical knowledge on the part of investors. Yet, companies in the blockchain sector are making headway: the process will become easier and more efficient over time thanks to businesses such as Coinbase and ConsenSys. But as the internet was able to not just survive, but thrive in our world – enriching the lives of many – it can be said that blockchain technology will do the same on an even greater scale for the years to come.

The Author

I write about tech, philosophy, and macroeconomics.