Cryptocurrency is one of the technologies that may power us in the 2020's. Few understand it's layered intricacies and fewer understand most of it's implications. All that aside the average person may be faced with payments only through this medium in the future so this blog post will try to lay out some of the pro's and con's to digital currencies and propose a new one.
Doubts about cryptocurrencies?
What the fork? Forking of the software behind cryptocurrency has been a challenge of early implementations. Bitcoin had an issue with throughput for it's transactions and needed to change it's technical implementation by a process known as forking the code base. These forks have been done due to digital currency thefts. Could you imagine your bank saying there was a robbery and they had to recalculate all of your accounts. Cryptocurrencies need a way to recover from theft with no impact on other accounts.
Major changes in the way transactions are handled always has challenges and acceptance issues. Paper money took government intervention to yield a stable currency in paper when it was issued by individual banks. Institutions such as the Federal Reserve was created to stabilize banks in turn. Cryptocurrency may need government intervention to provide safeguards and stability. The Peoples Republic of China is reported to be studying a central bank supported cryptocurrency and there are rumors it will be backed by gold. This has not been formally announced but if it is then other nations will have to respond. How this addresses theft and forking is not clear but the market will ultimately decide what is best. Stability is key to acceptance for cryptocurrency.
Power consumption is something most would not consider so consider this. To support the need to "mine" coins a great deal of electrical power is consumed. BitCoin alone is estimated to consume as much power as the country of Austria to mine it's coins alone. That does not include the dozens of other eCurrencies. We need to find a way to make this a greener technology.
If nation-states choose to support cryptocurrency the transactions per second would go up astronomically and the need for massive amounts of power just to offer the "proof of work" for each transaction block to be sealed may be prohibitive. This flies in the face of Climate Change initiatives. Then there is the issue of capacity in the network to keep transaction latency within tolerable limits. No small task either.
Intrinsic value is a topic that all currencies have to answer to. Most of the world's currencies are fiat in nature. By that I mean that they do not in of themselves have value but represent value by proxy. What backs them up is the government behind them and their ability to tax their citizens. For example, a silver coin has value in the metal it is composed of while a Euro or a Dollar are just finely printed pices of paper that have no value. Cryptocurrencies do not have the backing of governments. This may change in the future but for right now it's the wild west and all eCurrency are speculative by nature. This explains the extreme volatility that you see in the market place.
Introducing the GUV "Global Unit of Value"
Attempts are being made to bring stability to cryptocurrency market via baskets of currencies such as Libra. Nations are considering adopting the technology to achieve greater efficiencies with the backing of their resources. What the notion of the GUV brings to the discussion is the idea of living in harmony with existing fiat currencies and not replacing them. It essentially would be a derivative of fiat money. Technically, a second derivative of a basket of gold prices.
The GUV would use a basket of the 10 largest economies by GDP and in addition would weight them by their purchasing power of an ounce of gold bullion. So this would be a purchasing power measure the world could agree on and no single nation could manipulate to their advantage. Though I'm sure some would try. The basket of these weighted currencies would remain relatively stable as currencies go through thier fluctuations. It would de-incentivise the devaluation of currency to gain a trading advantage as transactions settled in GUV will remain the same and the currency would have to pay more for each Global Unit of Value.
Table 1 below describes the basket.
With this weighting scheme the UK and France have the highest weighting factors due to the strength of their currencies. Even though India is has the third largest GDP it's weighting factor is much smaller than China. These weighting factors would be recalculated as a percentage of the total weighting factor on a daily basis based on the currencies price for an ounce of gold bullion. .
A GUV would NOT be redeemable for an ounce of gold bullion. That would be revisiting the Bretton Woods agreement and would probably meet the same end as it did in 1971. That's a very short description of the basis for the cryptocurrency and the whitepaper discusses this in greater detail. Any cryptocurrency has roadblocks to achieving acceptance, most of which have nothing to do with technology.
When there is two people in a room you have politics. When your talking cryptocurrency you cross all boundries so you're really talking geopolitical implications. The infrastructure for global commerce has three basic instituions. Federal Reserve Banks, the World Bank and the IMF. In addition, the World Trade Organization was implemented to resolve trading squabbles between countries. All these institutions are plumbing for global trade that stabilize currencies and provide help of last resort for countries in need. Cryptocurrency is disruptive to the present environment so in some way this needs to be resolved.
Major Credit Card companies, ePayments companies such as PayPal, Central Banks and private institutions will all have a say on what is acceptable. When that does happen the circle will be completed on the internet and eCommerce will be totally digital. That brings winners and losers and a lot of politics. The GUV is intended to be an objective observer of the world economy which does not favor one particular nation or institution. Hopefully, it's a compromise that many nations could see as fair an impartial with the rules applicable to all.
What blockchain to use? Everyone is coming around to the idea that a blockchain is a sound ledger of transactions trusted by all parties. The question is which one(s) to use. Perhaps the market place will decide this or maybe an international agreement. Any agreed on solution has to be backed by Central Banks and take into account the infrastructure that is already in place to stabilize the world's economy. Taxation will need to be addressed as well as criminal activity.
Any of this could prevent the adoption of a singular world cryptocurrency and our economic future could be disrupted by fragmented cryptocurrencies that do not play well together ultimately forcing transactions back to the old way of doing things. What should become apparent to nations is that ignoring cryptocurrency and hoping it will go away is not the right choice. The world's economies need to come to agreement to foster economic developement in the 21st century!
|About the author|
Mark is an engineer in multiple disciplines. An avid music lover and gardener.
He also likes to keep the 'ol truck running in his spare time.