Blockchain Currency vs. Fiat Currency: 2017 Will Be the Year of the Direct Competition between the Two

If you’ve ever really thought about what ‘money’ actually is, then you’ll realise that there are major flaws in the current monetary system – and major challenges for Bitcoin adoption. The two monetary systems are trying to leverage the good in each other while avoiding the bad.

Marshall McLuhan is famous for his famous theory that “ The medium is the message message.” What he meant by this was that the mechanism by which content is delivered is absolutely critical to the way it is received and interpreted—in fact, he believed that the mechanism is more important than the content itself.

For example, the social media platform you use to communicate may have different rules — a 140-character limit, special requirements for images, a maximum length of 6 seconds for video, etc. McLuhan writes:

"The 'content' of a medium is like a thief bringing in a juicy piece of meat to distract the watchdog..."

The value embodied in the delivery mechanisms is indeed vast, and this value is constantly under surveillance. For example, we rarely question how our use of smartphones and social media affects us because we consume the content on these media—the values ​​they convey and the impact they have on our lives and relationships. Whether these values ​​and impacts are positive or negative is not the primary question. The point is that they are invisible in providing us with the content we want to see.

What is true about communication technology also applies to money. Money can be many things. It can be a unit of account, a medium of exchange, and a store of value. Historically, these are all more or less money, but there is broad consistency in the uses of money. But we rarely think about the mechanisms that provide the creation and management of money.

These are crucial because they mean that our value delivery embodies a certain value, just as a social media post or a TV show or a newspaper article has a certain value inherent in it.

Blockchain Currency VS Fiat Currency

Blockchain is a combination of technologies. Many institutions are looking to use this technology as a way to significantly advance the existing fiat currency system. However, there are some properties and values ​​in the nature of blockchain that, as far as we know, were originally conceived to be completely separate from currency.

The most obvious example of this is the peer-to-peer nature of blockchain. Users send funds directly to each other, without the need for an intermediary. (More precisely, updates to shared ledger balances don’t need to go through a central authority; blockchain solves the trust issues inherent in traditional online financial transactions.) This makes it fundamentally different from regular online transfers.

It is important to recognize the pros and cons. All blockchain transactions are processed without a middleman or trusted institution. This means that transactions cannot be unilaterally blocked or canceled, but it also means that these transactions cannot be reversed. If an attacker successfully accesses an address, then they can drain the funds from that address, and it is technically impossible to recover these funds.

This also means that in an open blockchain system there is no intervention: individuals can truly own their own money and use it freely (including creating and transferring their own forms of value). Of course, this greater freedom comes with greater personal responsibility. If users are not careful about their personal information, they may find themselves victims of hacking and fraud. One of the great challenges facing Bitcoin and blockchain companies in the coming year will be to break this cycle: maintaining the freedom that blockchain currencies bring, while providing customers with enough protection that they feel safe about using blockchain currencies. This may involve insurance and appropriate regulatory policies, as well as better user interfaces and key storage. Realistically speaking, few customers will use a new system unless they know their funds are 100% safe.

Money and Debt

Almost all information related to blockchain will involve the peer-to-peer nature of transactions, and the issue of irreversible transactions is arguably the most concerning issue for newcomers. However, there is another issue that distinguishes blockchain-based currencies from fiat currencies, and this issue has significant implications for the intrinsic value of both systems.

Our currency is debt-based. Only a small portion of the money supply (about 2-3%) consists of physical currency — coins and bills — while the majority of the money supply exists in the form of electronic balances in bank accounts.

Contrary to popular belief, banks do not lend out their customers' deposits, or even use up a small amount of their currency reserves, they lend out more money than they hold. Instead, the existence of these funds is borrowed: when banks make loans, such as mortgages, this money is created. This means that for almost all money, there must be a corresponding amount of debt.

The effects are quite dramatic. Debt-based currencies require interest payments, which means there is a flow of wealth between the end users of the currency and the creators. When politicians and economists talk about growth, it is based on increasing debt. Inflation is built into the monetary system and becomes a public policy problem because it is much better to use inflation to eliminate debt than to pay it off. And a highly leveraged system cannot cope with deflation because rising prices lead to defaults and catastrophic problems in the banking sector.

In contrast, blockchain money can be described as “positive money” because it is not based on debt. The original forms of money—gold and silver, livestock and grain—are positive money because they are real and cannot be mathematically canceled. They are truly owned money because their existence cannot be eliminated by an equal negative balance. This means that we do not have to pay interest on it. Once this money is ours, it is ours. Likewise, a known and fixed supply means that unpredictable or unwanted inflation cannot erode its value.

Hybrid Currency System

So here’s a message from fiat money mediums: your money is not yours, you have to pay for it, and it has no guarantee of value. You are just allowed to use it under certain conditions.

The news brought by blockchain intermediary is: you not only own your own currency, but also have full responsibility for it. There is no intermediary to protect you, but your savings will not depreciate either.

In their purest form, none of these monetary alternatives are suitable for the general consumer. Protest votes in referendums and presidential elections in recent weeks and months have demonstrated dissatisfaction with the current political and economic status quo. Conversely, the risks of entrusting one’s funds to a single person are also hindering blockchain adoption. 2017 will be the year when blockchain monetary systems go head to head with fiat monetary systems, and both sides will begin to take a series of meaningful measures against each other in order to gain traction and a viable compromise.