How Blockchain Can Transform Currency
This article was originally published by on Forbes.com (view original)
Blockchain technology has been making waves in the financial technology (fintech) sector with all kinds of applications. Whether we’re looking at database management, supply chain information or any other industry, distributed ledger technology has a lot to offer in creating a more efficient status quo, but what about going back to the basics?
Distributed ledger technology (DLT) and countless blockchains were first created with cryptocurrencies, even if the focus isn’t always on the “currency” portion of the term anymore. Should it be? Blockchain technology can completely transform the way we handle currency in the new economy by solving many of the age-old problems societies have been dealing with. Let’s take a look.
When blockchain technology and cryptocurrencies were first coming to market, one of the primary functions was to solve previously diagnosed pain points in the way we use money. When economies start making the shift from a paper currency to primarily digital currency, a whole host of issues begin to present themselves.
One of those issues posed by making the digital switch was the double-spending problem. Unlike physical cash, digital fiat currency does not exist physically, so businesses and financial institutions run into some tricky issues when digital money is spent quickly and an accurate record needs to be kept. Blockchain technology solved this.
With the open public ledger, all transactions are chronologically recorded and time stamped to ensure that the same value is not “copied” and spent again. The protocol for cryptocurrencies with DLT means that there is nothing to “copy” in the first place. Instead, the DLT is a continuously updated series of transactions of who has what. There’s no way to “copy” a bitcoin and paste it into one’s own account.
Blockchain technology and cryptocurrencies more specifically bring another major advantage to the way we use currencies. Unlike the current model of fiat currencies that are no longer backed by another asset, many cryptocurrencies have an explicit supply set permanently. Like gold, silver and other precious metals, there is a finite supply which counteracts hyperinflation and devaluation of currency.
However, not everyone is sold on the idea of using cryptocurrencies specifically as a medium of exchange in the economy. What if we were to take the advantages of blockchain technology, brought forth from the development of cryptocurrencies and implement that with currencies to form a more efficient currency system? The entire way we handle currency as a society can be shifted by taking the benefits of blockchain technology and combining it with a value-centered currency.
Blockchain In Action
The traditional financial world is already being disrupted by blockchain technology, but there’s an even further way to incorporate it with the way societies handle currency. Take the United Precious Metals Association, or UPMA, as an example. The UPMA is combining the traditional aspects of a valued currency (limited supply, intrinsic value and a value-based economy over a debt-based one) with the advantages of blockchain technology to change the way currency is handled completely.
A perfect example of this can be seen by "tokenizing" precious metals and specie tenders like gold and silver. Before the United States left the gold standard in 1971, each U.S. dollar represented a specified amount of gold. However, after leaving the practice, the U.S. dollar dropped significantly in value compared to the previous gold dollars. Just for reference, consider the fact that one gold dollar is currently worth around $25 paper dollars in today’s terms. That’s a drastic loss of value.
One of the difficulties of continuing with a value-backed currency like the original U.S. dollar is the logistical nightmare. Keeping an up-to-date record of how much currency is in circulation, who owns what and how much gold is needed to back the paper money can be a difficult task. Compound that with the issue of counterfeit money that pretends to represent value and the problem is even worse.
With blockchain technology, economies as a whole are able to relieve those pain points. Unlike the previous versions, there is an open, immutable ledger recording all of the transactions going on. On top of that, there’s no way for nefarious parties to create a counterfeit currency running on the same blockchain to dilute the circulation of currency.
Combining the nature of blockchain technology with another asset like gold and silver, which are both specie tender, and the entire way countries handle currencies can be incredibly different. While decentralized in nature, blockchain technology disrupting the way we handle currency also protects against bad actors diluting the currency supply.
By bringing real value and a veritably trustworthy system to the economy, blockchain technology has the power to completely transform the way currency is handled.