Proof Over Trust: The Underlying Elements of Cryptocurrency
August 16, 2019
People tend to forget that money is a social construct and that the notes don’t represent the intrinsic value of the material. Paper money is not the commodity itself but the medium for exchanging goods. It is valuable because we agreed that it has value.
Reading up on the history of money I found that initially, people were sceptical of paper money and questioned how the note could be worth anything. The majority of people adopted the notes for the convenience and ease of use. Eventually paper money was adopted but unregulated with each bank issuing its own notes that were inconsistent with one another. When used in markets, this caused some confusion and disappointment for people when their money was devalued or outright rejected by those who used competing bank notes.
With this in mind we can imagine that after some resistance, digital money will be adopted and cash will eventually be used less and less out of convenience. The question being, what role will cryptocurrency play in the future of commerce?
It is important to note that blockchain technology and cryptocurrency is not just the process of digitizing money. The whole structure is innovative so that people don’t have to put their trust in a third party to ensure exchanges are legitimately executed. It is a system of proof maintained by a distributed ledger system.
The idea of a distributed ledger is not entirely new, the Micronesian island of Yap is best known for its monetary system that is in essence is a distributed ledger system.
The people of Yap used stone money called Rai, large stone doughnuts that were mined and transported to back to Yap from surrounding islands. Rai ranged in size from 0.04-4 meters, the largest weighing over 4,000 kg. The stones were used as any other money for exchange, could be inherited, and played a role in politics and warfare. The value of Rai was not directly tied to the size or craftsmanship alone, but the history of the stone as well.
Once the Rai was transported to Yap it did not move due to size, it was both impractical and risky to move the stones. The monetary system did not rely possession then, but on the public agreement of transactions that ownership had changed. The whole system relied on the oral tradition of the people and the consensus that owners of Rai procured them fairly and legitimately.
A distributed ledger is essentially the same system of Yap but operating at a much larger scale around the world.