Many believe cryptocurrency is something new. It is not.
We have been dealing with ledger based money dating back to the late 1400s. Over the centuries, this has grown to the point where we are now dealing with communication systems that reach all corners of the world in a few seconds.
This means that cryptocurrency presents an interesting question: are we looking at something that is just a fad or is this the next evolution of a monetary system which was in play for a very long time.
Personally, I think it is the latter.
Cryptocurrency: Next Generation Money
There was nothing novel about Bitcoin. Many think it was the first shot at "electronic money". This is nowhere near true. We have operated under a digital form of money for decades. Before that, we dealt with things electronically.
When talking about money, we are really dealing with the monetary system. The focus is always on the form of money, ignoring what is underneath. This is actually pretty static.
What is a monetary system?
In simple terms, it is the combination of accounting with communications while providing a means to settle. This is true whether the money is paper, commodities, slaves, leather, or numbers on a screen. The system is still the same.
Today, communications means digital networks. Blockchains certainly meet this criteria. Then we have the accounting. Another word for this is ledger.
The breakthrough of bitcoin was the shifting of control of the ledger. The data in the Bitcoin database is no different is not different than a commercial bank. It is simply transactions entering and exiting a wallet.
With our currency, the ledgers are controlled by the commercial banks. These are the ones who reign over the money supply, tracking where it goes and keeping things updated.
Bitcoin came along and decentralized that. Through the mining process, no single party was in control of the ledger. Instead of having a centralized validator, something that was required up to that point, Satoshi brought us a new realm of potential.
Essentially, we are simply dealing with a different set of numbers on a screen.
Introduction of the Liability
Ever since Luca Pacioli gave us double entry accounting, money changed. Before that, we could only count what was there. Tracking who owed what did not occur until this accounting innovation was presented to the world.
Over the centuries, there were many forms of ledger money.
The most common form was the check. This is a transition mechanism that it settled using nothing but accounting. Banks operate on a two-tier settlement system. When a check is processed, the money is removed from the issuers account while being added to the recipient.
This is only one phase of the process. The banks have to settle among themselves, usually through bank reserves× when they net out the end of day.
While this is the most common, it is not the only one.
Have you ever heard of the Rai (or Yap) Stones?
These were giant stones that were quarried hundreds of miles away and brought to the Island of Yap. These were used as currency for major purchases.
Naturally, people would not roll the stone to different locations. One placed, they didn't move. What did they do? Basically, it was a ledger process. Everyone agreed on the stones as money. They also were all aware of who the owners were.
Hence, if a change was made, the "ledger" was updated, changing the ownership.
Sound absurd? Not really. This is the epitome of ledger based money. Estimates are this dates back roughly 500 years ago.
The stones were the basis for a financial system the inhabitants of the island agreed upon and utilized.
This is no different than cryptocurrency.
Speed And Scale
Obviously, with a few hundred residents, and a handful of stones, keeping track of things is easy. This concept, however, does not scale well.
Fortunately, technology gives us the ability to reach more than 5 billion people via the Internet. We now have global telecommunication networks that span the globe. These operate at high speeds while scaling to levels not seen even 100 years ago.
Here is where cryptocurrency can excel.
While some might cite the speed, or lack thereof, with some blockchains, it is important to look at the totality. With all the different networks in place, how many transactions per second could be done. We are looking at tens of thousands.
Also, if we take a historical view, even the Bitcoin network, at roughly 8 transactions is light years ahead of the traditional banking system. Consider how long it takes for an out-of-state check to clear, even today. Cryptocurrency is near instant in comparison.
The people of the Yap Islands saw a monetary need and fixed it. Cryptocurrency follows a similar pattern. People are free to design, develop, and evolve money however they see fit. This is something that is not under the full control of the banks.
Our ability to scale stems from the ability to networks to grow. Here is where technological innovation is a great aid. We are going to see the monetary and economic potential expand due to the progress of technology at the infrastructure level.
We are at the point where technological innovation equates to monetary innovation.
This means our monetary system improves as the monetary unit, data, is moved around at a faster pace.