J Y

Jun 26, 2021

4 min read

Blockchain and the Decentralisation of Money

The human race has long been accustomed to the idea of using pieces of papers and coins as a medium of exchange for goods and services and a store of wealth — what is known today as money. Don’t get me wrong, the creation of paper money was one of the greatest innovation in the history of commerce and finance. But this century, cryptocurrencies and the blockchain technology are here to challenge the status quo. To make sure our minds are opened, I’d recommend watching this funny 3-minute lesson about the history of money before reading on.

For a very long time, our early ancestors knew money as gold, silver and copper. The Gold Standard remains as the only reality of money as governments issue notes and coins promising that they are redeemable for gold — until the historical Nixon Shock in 1971, which marked the day when the gold-backed, minted currency became fiat currency.

Fiat money has since become even more centralised and arbitrary in nature. It is no longer minted from a gold reserve, but can be printed out of thin air. Yet, its value remains unchanged. This is because money never derives its value not from its physical or extrinsic features, but from the society’s perception and trust towards the integrity of a central authority that controls the underlying monetary policy.

Money is a social construct.

This is why many have argued that for as long as the Dollar remains as the global reserve currency, the US Federal Reserve could arguably print money forever without having to suffer the fate of hyperinflation. For context, almost 1 out of every 4 US dollars that exist today was printed in 2020 alone. Other countries that have done the same thing so far did not end up so well in the history books.

Also, perhaps there was never any viable alternative anyway, not until now.

Decentralization is the central ethos of blockchain technology. Being a public distributed ledger:

  • Security — The role of a trusted central authority is replaced with a peer-to-peer network of computers (i.e. nodes). These node operators (i.e. miners / validators) work together in a trustless manner towards ensuring the integrity and security of the system by way of a certain consensus mechanism (I will dedicate a separate post on this subject). In order to attack or hack the system (e.g. to overwrite a block), instead of hacking just one central entity (in the case of a centralised system), one would need to launch the same attack simultaneously towards more than half of the entire network (i.e. a 51% attack). This means that there would be no single point of failure to a blockchain-based system.
  • Governance — The decision-making power, instead of being top-down in nature, is democratised and lies with the entire network. To make any change to the system, anyone in the network can submit an improvement proposal to be voted by the participants of the network. If an upgrade proposal is passed by a majority voice, the existing blockchain may then be upgraded by way of a hard fork or soft fork.
  • Efficiency — Applying decentralized processes also eliminates the role of intermediaries and trust institutions in many different ways, making transactions faster and cheaper.

Of course, decentralisation in blockchain also comes at a cost, as the more decentralised a blockchain is, the harder it is to make sure that the blockchain is scalable and secure at the same time. Blockchain networks often have to choose 2 out of these 3 aspects, a belief known as the Blockchain Trilemma.

The decentralised and democratised nature of blockchain technology has led to its enormous potential to be adopted in various industries that require a secure, immutable, transparent and verifiable log or ledger system. But before going into the other use cases, do we really need a decentralised form of money like Bitcoin?

Well, we don’t. Not until we lose our trust to the existing fiat monetary system that is essentially run by a handful of people holding office in the Fed. This is not to say that we should quit fiat and go all-in on Bitcoin which is said to be a 1000x more technologically advanced version of money. I think that fiat currency gives power to a government over the economy of a country, and I am not here to argue against the importance of having a functioning government.

However, there are instances where a peer-to-peer digital currency can serve as a useful and viable alternative. In cross-border payments, for example, the transacting parties often resort to the US dollars as they are unwilling to be exposed to the currency of the other party. Now, parties may choose to transact in cryptocurrencies that are truly global (not issued by any central banks) and have an open-source, pre-determined monetary policy, all within a trustless and permissionless system.

The above is just the tip of an iceberg. In the broader finance world, decentralized finance (DeFi) platforms are able to remove the role of banking institutions from financial instruments, and in turn distribute profits and governance directly to the users. Think about borrowing, investment and insurance in a peer-to-peer blockchain-based platform.

Afterall, if there is something that has every characteristic of money except that you can’t literally touch it and smell it, why not?