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Crypto and fiat currencies are completely different, that’s why

June 1, 2020

One of the core narratives of Bitcoin (BTC) from the start is the often-declared goal of separating money and the state. While this was certainly a strong creed in the early adoption of the currency by crypto-anarchist and techno-liberal communities, what does it really mean? It’s just a call for a neutral form of money.

When you put out the most political messages, Bitcoin is basically the introduction of a credibly neutral global value transfer system that is open and without permission, but is cryptographically secure and verifiable. This burgeoning crypto-economy is still relatively early in its development, but in the more than ten years since its inception, it has fundamentally changed the discourse about what money could or should be in the future.

The third halving of Bitcoin on May 11, a 50% reduction in BTC block subsidy that rewards miners for validating transactions and securing the network, is a clear distinction between fiat money systems and mood systems systems are controlled cryptocurrencies that are executed via software. A global crisis like the one we are now facing is a melting pot for every monetary system, which often shows the priorities of the existing powers.

Crypto and fiat currencies are completely different, that’s whyCrypto and fiat currencies are completely different, that’s why

The unrestricted ability to print money in the fiat world is in stark contrast to Bitcoin in that emissions are regularly reduced through unchangeable monetary policy. Halving Bitcoin in the context of the pandemic provided an interesting starting point to discuss the key difference between Fiat and cryptocurrency paradigms and the distribution of power in both.

Trust currency systems

The prevailing monetary systems in the world are fiduciary systems that are supported by the sovereign state entity through an arbitrary decree. These coins have value because the state prescribes their use as a medium of exchange, store of value and unit of account: the three qualities of money. The most obvious evidence of this request is that the state requires taxes to be paid in local currency.

This relationship between government agencies and money dates back hundreds of years when governments and empires sealed the face of the current ruler of the territory in hard metal currency. Today, Fiat money consists of scraps of printed paper that are issued by a central mint under the supervision of a State Department. This money is supported by the state rather than goods.

The United States used to trade in a gold standard whose banknotes were covered and redeemable by precious metal reserves, but the massive flight of capital to a secure gold supply during the Great Depression led the government to free the dollar from the underlying commodity. The systemic challenges of a gold-based monetary system would inevitably have prompted the state to abstract the connection to the underlying resource to such an extent that the scaffolding would have become a building, so to speak. In summary, Fiat currency can be seen as a technical answer to simplify large-scale money management.

A large number of fiat currencies circulate in the global economy, but only one has reached the hegemonic state – the US dollar. After the end of World War II, the dollar was made the world’s reserve currency by an agreement. Despite the fact that the agreement implied that the dollar would be backed by gold and end if the gold standard were completely abandoned during the Nixon government, organizations like the International Monetary Fund and the World Bank were established to maintain a neutral monetary system. and internationally, with the dollar in the center.

Because the government can print pieces of paper that are only supported by self-empowerment, people place a lot of trust and responsibility in the government to properly monitor the currency and avoid economic instability. If a government prints too much money, there will be inflation that will severely depreciate the value of money in the economy. Some governments have poorly managed the money supply, which has led to hyperinflation, in which the volatility of the price of a country’s currency against other world currencies decreases rapidly and becomes more valuable as firewood or paper mache than as a reliable medium of exchange.

Does this make the state a unit that links the population to arbitrary financial systems from which they cannot be excluded? Of course, there are many Bitcoin advocates who would support this claim, but let’s look at the broader pattern. The reason why government currencies have grown in importance is because people have agreed to the unwritten social contract behind money and have asked the government to manage the complexity of such a system. This trust problem is paramount to understanding what Bitcoin offers as a solution.

The Bitcoin paradigm

While fiduciary monetary systems represent a monetary policy that is largely subject to what the legislature considers necessary, Bitcoin and other cryptocurrencies have been autonomous, decentralized currency systems with codified rules since their introduction. Cryptocurrencies are programmable, predictable and confidence-reduced from day one. They are radical experiments in the creation and distribution of value, which are applied through an unmatched representation of digital security.

Bitcoin’s monetary policy is unique in that it is executable through open source software and not through a central currency monitored by treasurers and politicians. Key features include a limited supply of 21 million BTC, block times of around 10 minutes, an incentive mechanism for BTC coinage, and an adaptive difficulty in mining to keep this watch cheap.

A critical part of Bitcoin’s monetary policy, which halves, is a regular change in the BTC delivery schedule that occurs every 210,000 blocks or approximately every four years. This automatic and preprogrammed deflationary measure is unprecedented in the history of money and stands in stark contrast to the world’s dominant trust systems.

These protocol design options, combined with new financial incentives and cryptographic security, allow Bitcoin to maintain four core attributes: Resistance to seizure, censorship, counterfeiting and inflation. Or to put it simply: resistance to the failures that have plagued past and present monetary systems.

So where is bitcoin in relation to fiat currencies? Although many narratives have increased and decreased over the years – electronic money, “the end of the Federal Reserve”, digital gold, “bank without a bank account” etc. – the most relevant at the time of writing of this article, and perhaps it will become the term in the future the neutrality of money.

Currency in crisis

The issue of currency neutrality is embedded in a much broader discourse on the distribution of power in society. The currency’s circulation shows the general health of the economy and its residents. When resources such as currency are not generalized or accessible in different layers of society, pathologies develop, as does an interruption in blood flow in a human body.

The real melting pot for complex systems like money or business is how they adapt to crises. The sudden emergence of crises – unprecedented or largely ignored – tends to show the inherent weaknesses of our infrastructure and where the powers’ priorities really focus.

Quantitative easing and the money hierarchy

In a few months, the current coronavirus pandemic has disabled entire economies, supply chains and various systems that support people’s health and well-being. Much of the company’s central infrastructure has been and is being disrupted by the effects of the first and second order viruses.

In times of crisis such as an impending recession or a potential risk of inflation, governments will implement a monetary policy called quantitative easingor QE, where the central bank prints a large amount of money and feeds this money into the economy by buying financial instruments such as stocks, bonds and others. While the goal is to keep the economy alive by maintaining the targeted level of inflation, ensuring the stability of the monetary system and ensuring citizens’ trust in the currency, this can increase inflation and distrust of the currency, including manufacturing of cryptocurrencies They seem to be an alternative for investors and the general public.

Much of the US government’s multi-million dollar stimulus package. USA They use QE to fight the steep decline in the market. In this way, the government favors large companies over small and medium-sized companies with limited credit programs, and the millions of people and families affected by the pandemic are receiving a single check for $ 1,200 at this time. ). Why does the government seem to be primarily concerned with keeping banks and businesses alive and printing billions of dollars for them, rather than primarily to ensure the well-being of their citizens?

The weaknesses and inventions of the old financial system are largely a problem in system design. A particularly useful framework for understanding the origin of the situation is the Cantillon Effect, an eighteenth-century theory developed by French banker and philosopher Richard Cantillon that states that printing and distributing money and wealth is common in society a hierarchy of institutions follows from top to bottom before reaching normal people.

Financial systems and intermediaries at the top of the pyramid, closer to the rulers, work better than the disjointed and inefficient systems down the chain. This way, the rich have access to new money from the start, and the value is passed on to everyone else over time – something that many do not. This is an easy-to-observe phenomenon of an old financial system that favors Wall Street over Main Street.

Persistence in chaos

While trust systems are completely controlled by their superiors, cryptocurrencies such as Bitcoin are only subject to the execution of software that is based on a high level of mathematical security. Although the trust systems implemented by the US government. USA Bitcoin’s economic clock shows significant tensions and preferences amidst a global crisis and is constantly ticking on a series of predetermined protocol updates to the delivery schedule that are not based on a whim, but on a programmable design since its inception.

Halving Bitcoin is the opposite of monetary policy to loosen the trust world quantitatively. Instead of quickly increasing the money supply, Bitcoin’s monetary policy reduces the issuance of the BTC currency at fixed time intervals in a process that some have termed “quantitative tightening” or “quantitative tightening”. The entire ecosystem of Bitcoin stakeholders – miners, traders and forks – has to adapt to the rules of this software, never the other way around.

However, When evaluating the energy distribution in the Bitcoin network and its neutrality, some considerations have to be made. When we analyze Bitcoin through the Cantillon effect lens, we can first see a hierarchical distribution of the value in motion. While the network, unlike the trust system, is distributed and decentralized with a literal central bank, the Bitcoin issue goes through certain intermediaries before it can circulate freely – the miners.

The block subsidy is not only the economic incentive for miners to provide significant resources to secure the network, but also the process of minting the currency itself. The first new bitcoin to be found is being serviced by miners to proof the solution -of-work algorithm compete. While the sales rate varies depending on the business model, operating costs, investment costs, etc., Bitcoin only circulates when miners sell it on the open market, which in turn is full of speculation.

In theory, miners are the only entities capable of compromising the network by colluding with more than 50% of the hash performance. Although there are strong economic incentives to prevent this, it is important to recognize that the distribution of power, even in the literal sense, strongly favors these special actors in the network.

It can also be pointed out that an absolutely unchanged monetary policy can lead to complications in the future. Security and determination are unique and powerful features of Bitcoin and other cryptocurrencies. However, this does not protect the system from unpredictable volatilities and future distortions.

In the field of chaos theory, for example, there is the idea that apparently deterministic systems can turn into disorder or chaos because they are very sensitive to their initial state. In the Bitcoin context, the proof-of-work model could potentially lead to further network consolidation and monopolization, thus minimizing decentralization and distribution to a cartel of industry players. In addition, the pyramidal distribution of wealth in the crypto ecosystem can also repeat the sins of fiat money.

An advantage of an open source financial system is that such a discourse on the resilience of Bitcoin can enrich and influence its further development. Although it may not adapt quickly, it will ultimately do so through global consensus.

Is Bitcoin a completely neutral currency system? Not yet. However, it is the culmination of a powerful technosocial movement that aims to build credible neutral systems that support life and well-being. In a time of uncertainty, a monetary system that belongs to and is shared by a global peer network and is subject to a common set of rules could become increasingly attractive if there were cracks in the inherited structures to which mankind is committed used.