Revolution or Revolution: Direct Monetary Interactions and the Nature of “Decentralization”
The blockchain revolution is approaching and one of its basic principles proclaims centralization by the Enemy. However, what do we mean by the term “centralization” and what forms of its opposition are we opposing? Many people praise blockchain with technology that can solve the problems of high costs, inefficiency and even corruption that permeates inherited systems.
Digital information is easy to copy, so quite recently, without a central authority ensuring order during transactions, we could not be sure that the same amount would not be sent simultaneously to two or more accounts - the so-called double waste problem. However, if earlier we needed banks, credit card companies, and payment operators to manage transfers, we can now entrust the security of our accounts to the blockchain.
Practically everything that we have read about this new technology - everything good, bad, special, shocking and unbelievable - ironically reduces to one starting point: the blockchain eliminates the need for central authority.
Revolution or Revolution?
Many observers described the processes launched by Bitcoin in 2009 as a revolution, but it would be more accurate to use the term “revolution”, that is, a set of profound changes, signifying a return to a forgotten, but once quite familiar state of affairs.
Blockchain offers benefits that go far beyond just transferring money as such. In confirmation of this idea, you can familiarize yourself with the 130 page report.International Economic Forum, which is just one of many indicators of how seriously they take the technology of a distributed registry of the government, business circles and organizations. However, for the time being we will focus on cash, since they represent a very convenient starting point, and besides, it all started with Bitcoin.
Bitcoin decentralizes money, and this effect has a whole series of consequences that users and observers can view as positive or negative, which often depends on their position on the political map or on which side of the transaction they are from. Many often overlook the very fact of the existence of different types of centralized Bitcoin addresses, and at the same time they cut them all together, repeating the mantra “centralization is bad, decentralization is good.”
Making money and supervising their handling
There are at least two types of centralization used in modern monetary systems. Moreover, their influence on our lives is significantly different. One of them is related to seigniorage and the creation of tangible money, the other - to the work of payment systems.
Seigniorage. Traditionally making money has been the prerogative of governments. This practice began about 2600 years ago, when in Anatolia, on the territory of modern Turkey, the minting of the first coins in history began. Coins, as a rule, possessed some nominal value that exceeded the value of the precious metal from which they were made. The difference between these values is seignorage, which, in essence, is a tax levied on direct users of money. In the case of fiat money, costs are generally close to zero, and profits are high. Today, most governments hand over the money creation function to central banks - independent and disinterested in benefiting from this process. This approach allows, in a sense, to prevent the use of money for abuse by any political structures. Politicians, however, still set targets for debt and inflation rates, so even this independence has its limitations.
Despite the fact that several thousand years have passed since the centralization of seignorage, payments as such have remained direct most of the time and have not been regulated by anyone. Regardless of who created your coins or banknotes, whether they contain precious metals or are provided with them, the payment always assumed that one person would transfer something to another.
Payment systems. Commercial banks today play a vital role in making money, according to central bank directives. The type of money they create is different from that described above, but it is used along with the currency — coins and banknotes — and the money supply issued by the central bank (including funds issued during the policy of quantitative easing) stored in its accounts and used by commercial banks. By creating money, commercial banks simultaneously create debt. In other words, they, as it were, issue them on loan, but not to someone specifically, but for the purpose of their common subsequent use. Their seigniorage is the percentage that credit debtors return to them along with the principal amount of the debt.
Anyway, there is another type of centralization existing in the banking system, and it is thanks to him that payments work. A huge part of the volume of operations today is carried out in electronic form. Online banking, credit and debit cards and wire transfers operate with much more money circulating in the system than cash. Centralization here is an integral part of the process, since at least until blockchains appeared, it was simply impossible to carry out electronic money flow without the mediation of a certain trust center that would keep records of operations.
This is not to say that the transition from cash to electronic money transfer occurred in one fell swoop. However, he was also not slow. A full launch of Western Union services took place in 1872. The company's translation system then relied on encryption books and passwords. As for the first electronic money transfers, they were made only in 1968 as part of the British electronic system BACS ( The Bankers Automated Clearing Services), five years before the establishment of the international standard SWIFT. By quantitative indicators, electronic payments surpassed cash only last year. Back in the mid-90s, most people still received salaries and paid bills using cash and checks. (However, despite the fact that checks could be written out, even without having a sufficient amount in the account, or cancel the operation prior to their clearing, the degree of operational efficiency of electronic payments was still noticeably higher).
Centralization and decentralization of payment systems
Centralization in payment systems offers new performance. Electronic payments have made a hitherto unprecedented level of control, return or blocking of remittances real. This approach allows you to get protection, for example, in case of detection of fraud. However, the same system is a single point of failure. A small malfunction in the online banking server or something worse, like an unfair buyback or even collusion with a view to manipulating the LIBOR rate , are just a few random examples of the failure of such a system.
Being the first example of the practical implementation of the blockchain technology, Bitcoin is both a currency and a protocol for creating money and a payment system in one bottle. It eliminates centralized control for virtually every aspect of the monetary system, from the right of seignorage to making payments.
This has both advantages and disadvantages. As I noted above, your point of view on this matter very much depends on which side of the transaction you are from. Payments to Bitcoin are literally “without a hitch and without a hitch”, so that the work of banking systems can hardly compete with them, that is, quickly, very cheaply and without any boundaries. However, e-currency has its own serious drawback - the volatility of the exchange rate due to the fact that the value of bitcoins in fiat equivalent is determined mainly by speculative market forces. Bitcoin has already deservedly earned the nickname of "digital gold", since it, in essence, is nothing more than a commodity, like gold or silver, which can be transferred to other people in electronic form.
There is a slightly different approach. Alternative blockchain projects like Waves are aimed at decentralizing payment systems and are not seeking to decentralize the money creation process. With this approach, the platform’s functionality is aimed at speeding up and simplifying the sending worldwide of symbolic units representing already existing monetary units: dollars, euros or pounds, as well as precious metals, such as gold.
The essence of the foregoing is that centralization is different. Centralization in the making of money may not be the ideal solution (depends on your point of view), but we, however, have lived with it for many centuries. Centralization in the payment system is a phenomenon that only recently became a natural component of our daily life. In this regard, blockchain-money is more like money that people have used for the last thousand years, rather than electronic money. Blockchain returns money to what they were 20 or more years ago, while at the same time offering the highest possible speed and convenience that can be achieved using only electronic communications.
