In the early days, when the very first signs of transition to civilization were taking place, humans felt that they need a “Trustful and Provable” way to exchange their assets with each other like exchanging knife with bread!
So they’ve decided to exchange “Product to Product” but after a while, they’ve found out some products, regarding how much hard it was to produce them, worth more than the others! You need to wait a whole year to harvest wheat or rice in addition to the continuous care and hard work for that, compared to a knife which could be built in a day!
This was potentially the very first “Economical Challenge” in Mankind history:
“How are these two worth equally?!”
There was a tremendous need for something which had a specific value for everyone and had the power to declare the level of “hard work to produce” for every asset, so people decided to use “Ring Rocks”, a little piece of rock with a hole on that! But even at that time, Rocks haven’t had a tangible value; they were backed by the hard work of building them! After discovery of the copper and silver, the Economy had faced a remarkable change! With these new elements, which were very practical in real life, people realized that these elements might be the most optimum choice for being a “Currency”, but the value still came from the hard work of mining these elements! Similarly, we had golden age too.
Then comes the paper money, which was backed by the same elements humans had used back then! How this paper money creation differs from the past? If you follow the clues, you’ll discover that the source of value wasn’t changed in structure, it was still based on the hard work of mining.
The main difference at that time was that you could exchange your paper money with silver or gold.
In this particular time, politicians decided to add another value to Money called “Supply Ratio” which was totally in the hands of government!
US government had actually gone beyond that! On 1964, US government stopped exchanging silver for dollars, they’ve done the same thing to gold on 1971 too! It means that the US dollar as a currency is no longer backed by anything at all!
According to Investopedia report ( https://www.investopedia.com/terms/f/fiatmoney.asp ) “the US dollar is fiat money, which means that it’s not backed by a physical commodity and the value of that money is derived from the relationship between Supply & Demand”
In other words, the US dollar is backed by people’s faith & credit of the Economy!
How is that possible? The US has one of the most authoritative economies in the world! It doesn’t sound logical at all! But actually, it is!
There is a relation between the Number of printed paper money and the growth of the industries! (Rate of production or the same old hard work), these kinds of approaches are very perilous and unstable to use in the economy, but the US as an early-user and maybe inventor of this approach, have implemented it very well by the help of the most sophisticated experts in the economy.
How does the US always keep its production industry alive?
Actually, there are a lot of reasons, one of the main reasons of that is the US banking system structure, as an investor who intends to raise money and avoid huge taxes, having your money in the banks, sounds like a very bad idea! You can earn much more with investing in stock etc. Besides that, you can avoid huge taxes on your money. So investing (working with your money) is absolutely the most optimum choice in the US. This is how the US government always keeps its production ratio safe & sound.
As you can see, the main approach of hard work backed money, haven’t changed since the beginning of the procedure of Money creation!
In addition to the hard work of maintaining this kind of system, there is always a massive potential for bubble creation in the economy, which even the US government could not resist that! We can see the proof of this bubble creation potential in the history of Crashes in the US economy.
On the other hand, for centuries, we haven’t observed any development in the monetary system until 2008, when the very first successful Technology-Based Money called “Bitcoin” was introduced by “Satoshi Nakamoto”
This was the very first time in monetary history that a kind of currency was backed by Math which was also totally limitless, and it’s dependant on CPU power or we can say Electricity.
You might wonder how this is different from the past?! Well, it’s not! The value still comes from the hard work, before cryptocurrency we had hard work of humans on something which was limited, such as gold, silver etc. But now we have the hard work of computers and electricity.
What is the difference here? “Limited” and “unlimited” sources!
Another question is “What would happen if we ran out of tangible elements like gold, silver etc.?”
This question reminds us of a story called “Moby Dick”, an American novel by “Herman Melville” which was published on 1851, the story shows us the starving of human beings for energy/money and how they nearly broke the sea ecosystem to achieve their goals! This is not a fiction story, Same thing is happening right now to Oil and Gas!
Now, for the first time, we can see there is a nature-friendly way to gain what humans need, electricity is always available, especially with new nature-friendly and renewable practices to produce it, such as Sun, Earth, Wind etc., these are all unending resources for producing energy.
The old hard work is now in the hands of computers, which means it’s immune from political issues of working with humans like sit-in of workers etc.
This is what we call an “infinity circle”, human beigns can produce electricity from renewable sources and use this electricity to mine through computers and the circle will never stop!
You can call it “unlimited money”
We can say as a result, the Money that we knew is long gone; technology is taking the world to a whole new level, where we have experts and scientists ruling the world instead of politicians!
One of the other main drawbacks of the current banking and monetary system, which is almost resolved in crypocurrencies, is the amount of money that they have at a specific time compared to the amount of money they intend to or can spend! The ratio of this amount is about %10! (This could be higher or lower, depends on the banking laws of the country). It means that if a bank has $10, it could spend $90 based on people’s credit and not what they have! Unlike what we assume about the system, banks are actually giving loans from people to themselves, which results in heavy debts for the government.
According to the Guardian article ( https://www.theguardian.com/commentisfree/2014/mar/18/truth-money-iou-bank-of-england-austerity ) “people put their money in banks, banks then lend that money out at interest either to consumers or to entrepreneurs willing to invest in some profitable enterprise. True, the fractional reverse system does allow banks to lend out considerably more than they hold in reverse & true if savings don’t suffice, private banks can seek to borrow more from the central banks”
We have central banks which can print money and lend it to banks, they can print in a limited Number. If they print too much, it could cause heavy inflation which leads to chaos in the economy. (Actually, we still have some countries with this kind of specific problem in the world!)
But the good news is, we have independent central banks in almost all of the countries around the world!
If these central banks weren’t independent, governments could print money as much as they want and this absolutely brings about chaos in the economy.
How is this new form of currency different?
In cryptocurrency, there is a simple solution for that, called “UTXO” also known as piggy bank, every time you spend some money, you’re breaking a piggy bank & use the available funds on that!
Let’s review the UTXO definition with a simple example; (for the purpose of the article, we use Piggy Bank as UTXO)
Imagine John aims to give 3 Bitcoins to Sarah, John has 2 piggy banks, every piggy bank contains 2 Bitcoins, here is what he should do, he breaks both of his piggy banks and transfers 3 Bitcoins to Sarah, he has one Bitcoin now, which will transfer into his new piggy bank!
This is why there is no place for loans in cryptocurrency, you can’t spend more than you have!
We’ve tried to take you to a brief journey of how money was created at first place and what were the most important aspects & challenges of the current monetary system, but we are not even close to the end of this story. Indeed, we are at the edge of the most brilliant Tech implementations of all time! The development is still running and it gets faster every day. The only thing that we know for sure is that the current monetary system does contain a lot of fundamental problems in the structure, so let’s face these problems & solve them before it gets too late!
The future is brighter than what you think! Especially for the poor people around the world.
Let’s change the world…