How Blockchain Can Restore Normalcy in a World Gone Mad, Part 2

By Juan M. Villaverde on April 09, 2018

Before you do anything else, go here to read Martin Weiss’ just-published article in The Hill newspaper.

He names the strongest cryptocurrencies today with their ratings.

And he covers four major areas where crypto technology could have a major impact in the years ahead:

Secure social media (unlike Facebook) …

Elections that are both efficient and honest (unlike many countries today) …

True protection against hacking or cyberattacks (virtually nonexistent nowadays), and …

A more robust monetary system (my topic here).

A Broken Financial System

In Part I of this series, I explained how the financial system broke in 2008, how the world’s largest central banks embarked on the most extreme episode of money creation in history, and how they’ve inflated all kinds of assets — leaving investors vulnerable to sudden crashes.

Today, I will show you how cryptocurrency technology offers an opportunity to restructure the monetary system of the future by combining the best of two worlds:

•  It will help restore some of the inherent fairness and sustainability of monetary systems that were based on precious metals. But …

•  Instead of taking a step backward to old technology like the gold standard, it will take a giant leap forward to a new technology.

That technology is blockchain, or more broadly speaking, Distributed Ledger Technology (DLT).

For the First Time in History, We Are Actually ENGINEERING Money

If there’s a common thread through the evolution of monetary systems, it’s that nation-states stumbled from one system to the next, using whatever medium of exchange was expedient or readily available.

There was rarely much opportunity for long-term planning. And there was often intense pressure to implement quick fixes in response to the latest crisis.

This was certainly the case when Richard Nixon devalued the dollar and abandoned the U.S. gold standard on Aug. 15, 1971.

It’s also what happened in the wake of the Lehman Bros. failure on Sept. 15, 2008, prompting a series of knee-jerk reactions — giant bank bailouts and massive money printing.

With these and other kinds of helter-skelter, ad-hoc changes to the financial system over nearly a century, the monetary landscape ultimately morphed from

•  a gold-based system that was mostly trustless, permissionless and difficult to abuse, to …

•  the exact opposite — a fiat-based system in which governments have played an increasingly larger role in creating asset bubbles and busts.

Now, however, for the first time, DLT provides the opportunity to create a monetary system with the following strengths:

1. It can be carefully planned based on a broad consensus by decision-makers and participants.

2. It’s expandable. Like fiat money, it’s not boxed in by the scarcity of a particular natural resource. It can grow in tandem with real growth in the population and the economy.

3. It’s fast — far faster than any digital money solutions now in place

4. It’s global and borderless — not constrained by political borders or geographical barriers.

5. It’s trustless, meaning no one has to trust third parties to make or follow the rules.

6. It’s permissionless. To join, you don’t need to pass inspection by established institutions.

Anyone with an internet connection and a mobile app can verify the validity of a transaction and even trace back the history of each and every coin.

Counterfeiting, fraud and other abuses are virtually impossible.

Except for extraordinary situations, the system is self-enforcing. The code automatically punishes bad behavior, typically via ostracism: Bad actors are promptly kicked out and their transactions nullified.

Compare that to the financial system of many nations today, where fraud and abuse are common; regulation and enforcement are either bad or expensive; government measures are sometimes Draconian; or worse, central authorities are corrupted, creating a financial system that preys on the domestic economy.

Even in fair, efficient financial systems, consumers and investors are expected to trust a broad array of third parties that have a history of abusing that trust.

Consider banks, for example.

In today’s financial system, banks have to be trusted to move money from one entity to another through an account-settlement system.

They have to be trusted to hold money on our behalf in a digital format.

They have to be trusted to invest that money as they see fit.

They even have to be trusted to entrust those funds to third parties they alone select and inspect.

Moreover, each layer of trust is contingent on all the other layers of trust. Break one major link in the chain and you can see how easily it can unravel, as it did in 2008.

Now Compare That Potentially Shaky Structure with a System Based on DLT:

In a DLT-based financial system, anyone, anywhere can directly verify the integrity and validity of any transaction since the beginning of time. It is all 100% transparent all the time.

Think about that for a moment and recognize the enormity of its consequences.

It means that we no longer need institutions to validate transactions, to certify that they’re legitimate. Instead, that function is performed by the network itself.

It means that, for the most part, third parties are redundant. All transactions are peer-to-peer.

It means that there’s no counterparty risk. By definition, a cryptocurrency transaction doesn’t require a witness to validate and verify that the transaction has taken place. The very act of sending that transaction through the network provides all the validation that’s ever needed.

Who needs third-party validation when the entire network can bear witness to the event? With full transparency. In real time.

Restricted Money Supply

The ultimate danger of fiat money is oversupply. That’s what created the hyperinflation of Weimar Germany, the serial hyperinflation of Brazil and Argentina, and many more.

In contrast, the “killer app” of cryptocurrencies is restricted money supply. For the first time since the old days of precious-metals-backed money, we finally have a system that can keep governments honest.

Indeed, in a DLT-based monetary system, the money supply, like the gold supply of old, would be largely outside the control of sovereign nations. They will have input into the decision. But they will not be able to create money out of thin air.

Thus, DLT-based money (cryptocurrencies) is the natural evolution of money. It’s money that’s engineered to the specs of modern society.

Like systems that prevailed before the advent of fiat money, it provides:

1. A global standard of value everyone can agree on.

2. Permissionless access to trading with no counterparty risk, with each transaction final, and each person in direct control of their own money.

3. And a trustless system where anyone with the technical expertise can verify the validity of the currency itself.

Like systems that have prevailed since the advent of fiat money, it supports:

4. Instant global transactions.

5. The ability to store value in a medium where it can be accessed from anywhere in the world.

Plus, unlike any monetary system that has existed before, this new kind of money can be engineered to well-planned and thought-out specs, including …

6. A predictable money supply neither subject to the laws of nature nor the whims of politicians.

7. Functions and features that can be pre-programmed, such as collecting insurance claims automatically, paying traffic fines and more.

One word of warning: Sovereign nations will not be the issuers of cryptocurrencies. Any so-called crypto issued by a central authority will merely be another form of fiat money in disguise, just another database they and only they can control. Slapping the word “crypto” into these fiat currencies will not change the nature of what they are.

Best,

Juan

P.S. The smart money is pouring into cryptocurrencies. Peter Thiel is betting big on Bitcoin. George Soros is diving into digital coins. So are the Rothschilds and Rockefellers. And that’s just a sliver of the crypto coverage you can find when you follow @WeissRatings on Twitter.

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