Thousands of years ago people exchanged seashells or even cattle for different useful commodities. Later on in history gold, silver and other precious metals were introduced as means of payments and exchange.
First coins were produced and used in India and China around 770 BC and eventually other cultures around the globe adopted it too.
In Europe coins were heavily used until the 15th century, when the first paper money was printed.
In China this had already happened almost 1000 thousand years prior to that. Money eventually evolved to what we know and use today with banknotes and coins.
Money is a medium of exchange that is widely accepted in transactions of goods and services.
It can be in various forms, such as commodity money, which refers to items with intrinsic value, such as gold and silver coins. Coin money is one of the earliest forms of currency that was widely used for transactions. The money supply refers to the total amount of money in circulation.
With the introduction of paper currency, the federal reserve system was established, acting as the central bank responsible for regulating the money supply and maintaining the value of the currency.
Paper currency is generally accepted in most economies today, although some people still prefer commodity money such as gold and silver coins.
And then in 2009, Bitcoin was created and other cryptocurrencies followed, which aim to transform the whole concept around money and currencies.
But what are some disadvantages when using traditional money? What are cryptocurrencies? Why do they exist and will they eventually be adopted by the masses and if yes, which one? In this article, we will try to answer some of these questions.
What are the cons of traditional money?
Also called FIAT money derived from Latin – not to be mistaken with the italian auto brand – FIAT
Well, FIAT or traditional money (what we use every day, Euro, Dollar, Pound, etc…) has started being the predominant means of exchange in the beginning of the 20th century and it has since become a global standard and some could call it a successful project. It is of course a system heavily regulated by governments and financial entities. But even an established global currency bears a lot of cons when it is used or exchanged.
Transferring traditional money takes a long time
and bears high costs
Trying to transfer money around the world, for example, could take in some cases a few days. You’ll also have to pay additional transfer fees depending where you are located and where you are sending the money. The cost of converting from one fiat currency to another also adds up.
Central banks have the solely authority to manage traditional money
Fiat money makes us reliant on third parties. People must rely on governments to produce it, banks to store it, and vendors to determine its value per product. From the customer point of view, there is little to no control. Furthermore, in some cases the more one earns, the more one is generally taxed.
Banks charge you almost for everything, even when just for storing your money
Banks can charge additional fees for a variety of reasons. Most banks will charge you if you withdraw funds or just to simply make money. Some could charge you just because you have a too small amount of funds stored. So, it’s definitely not the best offering for the average citizen.
What are cryptocurrencies? ₿
Bitcoin is the first one ever created. The unknown Satoshi Nakamoto is responsible for this new discovery. Nobody knows who hides behind this name. A cryptocurrency – currently over 10 000 out there – is a decentralized virtual currency built on blockchain technology. A bit confused? We don’t blame you. Let’s take it step by step:
Crypto
Comes from the word kruptos, which in Greek means “hidden”.
Decentralized
Means that unlike the Euro or U.S Dollar, the value of a cryptocurrency is not maintained and managed by a central authority. Instead, the tasks are shared widely among the cryptocurrency users on the internet.
Virtual currency
Because it is a type of currency that can be used for buying goods and services, or trading it for profit.
As of July 2021, the total market capitalization of cryptocurrencies is around $ 1.35 trillions, which can be compared to the GDP of Australia or 1.64% of the world’s GDP.
Good and clear until here. Just one other thing. Almost every cryptocurrency is highly volatile, meaning that the price jumps up and down very frequently and without following any rules except general demand and supply. Price can also be affected as we have seen by people of influence such as Elon Musk and his tweets, which is overall not a very good thing but this is a discussion for another time.
Why do they exist and will they get adopted massively? ?
Cryptocurrencies have the potential to make payments and transfers simpler, faster and safer. They can be sent and received between two people, without the need for a third party actor such as banks or credit card providers.
But adopting a typical (highly volatile) cryptocurrency as local or global currency, means being confronted with the potential risk of losing some of the invested value but at the same time, benefiting from the rising prices. This is not a perfect scenario for mass adoption.
The idea to have a cryptocurrency, which is stable at a specific price was not new but it didn’t come into existence until late 2014, when Tether (USDT) was launched (explained below). This gave birth to a whole new galaxy in the crypto universe but it also meant new use cases and opportunities for people in the traditional finance world. Below we explain some of the stablecoin types:
Fiat-collateralized (Tether or USDT, USDC, etc…)
These stablecoins are pegged to an existing fiat currency. The most known and most widely used stablecoin is Tether or USDT. This stablecoin pegs itself to $1 by maintaining $1 per Tether token minted. USDC is another coin. There are around $ 88 billions of USDT and USDC in circulation in the world that compares to more than the total GDP of Albania, Bosnia & Herzegovina, North Macedonia, Montenegro, Kosovo taken together.
Crypto-collateralized (DAI, etc…)
These kinds of stablecoins are pegged to and collateralized with one or more cryptocurrencies. The most known is Maker DAI, which uses ETH and MKR to back itself. Smart contracts make sure that the asset maintains its stability by injecting or withdrawing crypto, according to the market demand and supply changes.
Asset-collateralized (Paxos Gold, etc…)
These stablecoins are commonly pegged to fiat currencies and precious metals to maintain stability. Paxos Gold is for example backed by gold.
Non-collateralized (Ampleforth, etc…)
Non-collateralized or algorithmic stablecoins rely only on code and they use algorithms to change the circulating supply of an asset so as to get a stable value of the asset. Known examples are Ampleforth and Yam Finance V1.
Conclusion
Stablecoins gave birth to a new concept called decentralized finance or DeFi. Which is a completely decentralized environment, self-governing and out of the reach of regulating public entities and institutions. While still in its infancy, DeFi aims to completely revolutionize the financial world by offering every person access to instant, low cost and safe financial services, therefore solving the unbanked problem. According to the World Bank, as of 2021, around 1.7 billion people still do not have access to financial services.
This new technology and its applications, together with established FinTechs, provide a fantastic opportunity for both banked and unbanked individuals to bypass the boundaries imposed by traditional finance providers and connect with finance on a global scale.
