Beginner

How did money become the basis of trade for such a long time? To have an answer for such question we must understand what money is and the different ways money has been used through the time.

Definition of Money

Money is often defined it by the roles it plays:

  • It’s a store of value, meaning that money allows you to defer consumption until a later date.

  • It’s a unit of account, meaning that it allows you to assign a value to different goods without having to compare them. So instead of saying that a Rolex watch is worth six cows, you can just say it (or the cows) cost $10 000.

  • And it’s a medium of exchange, meaning it’s an easy and efficient way for different parties to trade goods and services with one another.

History of Money

Even though we’re able to define what money is, when it comes to its origins, money has been mum about them. For such a central element of our lives, money’s ancient roots and the reasons for its invention are unclear, most of the available knowledge is based on conjectures and logical inferences.

Some economists assume that bartering of goods and services inspired money’s invention. On the other hand there are anthropologists and archaeologists contending that early states invented currency as a means of debt payment.

Several investigations suggest that money independently appeared for different reasons and assumed different tangible forms in many parts of the world, starting thousands of years ago and bartering had nothing to do with it but instead, money grew out of older systems of credit and debt. In small-scale societies, debts concern obligations to others while among hunter-gatherer and farming groups daughters given away in marriage create debts that are partially repaid with goods known as bridewealth where full repayment requires that the recipient of the first bride provide a bride in return. No cash needed.

Revisionists argue that a transition to a new form of money-friendly debt started at least 5,500 years ago in the agricultural states of Mesopotamia and Egypt. In Mesopotamia, the silver shekel — a lump of metal, not a coin — was a basic monetary measure. Rulers decreed that one shekel’s weight in silver was equivalent to a bushel of barley. Shekels of silver, gold and other metals were used in other ancient societies. Precise weights of shekels appear to have varied from one to the next one and therefore are difficult to pin down. Farmers were taxed to support royal lifestyles and public works, what the farmers and other commoners couldn’t pay in goods was recorded as debt in shekels. Merchants and tradespeople acquired goods from temple and palace officials on credit.

Coins stamped with images of animals or rulers, acting as denominations and guaranteeing the metal’s value, first appeared in the kingdom of Lydia around 2,600 years ago. Located in what is now Turkey, Lydia sat on the cusp between the Mediterranean and the Near East, and commerce with foreign travelers was common which was one of the major promoters for this coin mint to happen. To understand why, imagine doing a trade in the absence of money or in other words through barter. The chief problem with barter is the double coincidence of wants. Say you have a bunch of bananas and would like a pair of shoes, but it’s not enough to find someone who has some shoes or someone who wants some bananas. To make the trade, you need to find someone who has shoes they’re willing to trade and that wants bananas which is no easy task.

With a common currency, the task becomes easier: You just sell your bananas to someone in exchange for money, with which you then buy shoes from someone else. And if, as in Lydia, you have foreigners from whom you’d like to buy or to whom you’d like to sell, having a common medium of exchange is obviously valuable. That is, money is especially useful when dealing with people you don’t know and may never see again.

The Lydian system’s breakthrough was the standardized metal coin. Made of a gold-silver alloy called electrum, one coin was exactly like another—unlike, say, cattle. Also unlike cattle, the coins didn’t age or die or otherwise change over time. And they were much easier to carry around. Other kingdoms followed Lydia’s example, and coins became ubiquitous throughout the Mediterranean, with kingdoms stamping their insignia on the coins they minted. This had a dual effect: it facilitated the flow of trade, and it established the authority of the state.

The spread of money throughout the Mediterranean didn’t mean that it was universally used; soon after Lydia, cities and states in Greece, Persia, India and China began to strike their own coins, but even then most people were still subsistence farmers and existed largely outside the money economy. But as money became more common, it encouraged the spread of markets. Once a small part of the economy is taken over by markets and money, they tend to colonize the rest of the economy, gradually forcing out barter, feudalism, and other economic arrangements. This happens mostly because money makes market transactions so much easier and also because using money seems to redefine what people value, pushing them to view things in economic, rather than social, terms.

Governments were quick to embrace hard currency because it facilitated the collection of taxes and the building of military forces, coins funded armies and wars of conquest. In the process, coins became legal tender for all sorts of transactions. Marketplaces were a result of this system, not its cause, revisionists argue.

Once the Chinese had started making comparatively inexpensive paper from natural fibers, and discovered block-printing, paper currency came into use in the country. The first known use of paper currency in China is reported from the Tang dynasty and despite the fact that scarce information remains about this early system of paper currency there’s evidence that these were certificates issued by the Tang government to pay local merchants in distants parts of the empire. By using certificates, the government could avoid having to transport metal money far away. Each certificate had a certain amount of money stated on it and was redeemable for metal cash on demand in the Chinese capital. Most merchants never went through the trouble of going to the capital to get cash for their certificate, instead the certificates were used as money locally, since they were transfereable. The view of money as commodity began to shift only with the widespread adoption of paper currency.

Compared to traditional money made from precious metals, paper currency was easier to transport, and the use of paper currency also freed up metal that could be put to other use. In 1821, the Bank of England adopted the gold standard, promising to redeem its notes for gold upon request. As other countries followed suit, the gold standard became the general rule for developed economies. The discovery of major new gold fields over the course of the 19th century ensured that the money supply kept growing.

The gold standard, as it was intended to do, brought stability to prices and was enormously beneficial to property holders and lenders. However, it also brought deflation—that is, prices generally fell—because as countries, populations and economies grew, their governments had no easy way to increase the money supply short of mining more gold, and so money in effect became more scarce. Deflation was hard on farmers and borrowers, who longed for a little inflation to help them with their debts; when money gradually loses some of its value, so, too, do people’s debts.

What finally derailed the gold standard was World War I. Since governments needed more money for their militaries than they had in gold, and so they simply began printing it. And though many countries tried to return to the gold standard after the war, the Great Depression consequences made it end for good. Because of this currencies today are “fiat” currencies, meaning they’re backed by the authority of the issuing government, and nothing more.

In the United States, for example, that means the government accepts only dollars as payment for taxes and requires its creditors to accept dollars in payment for debts. But if people were to lose faith in the dollar and stop accepting it in everyday transactions, it would eventually become worthless. The reliance on fiat money, we’re told, gives too much power to the government, which can recklessly print as much money as it wants. Yet the truth is that this has always been possible. Even with the gold standard, governments revalued their currencies from time to time, in effect dictating a new price for gold, or they ignored the standard when it proved too limiting, as during the First World War. What’s more, the notion that gold is somehow more “real” than paper is, well, a mirage. Gold is valuable because we’ve collectively decided that it’s valuable and that we’ll accept goods and services in exchange for it. And that’s no different, ultimately, from our collective decision that colorful rectangles of paper are valuable and that we’ll accept goods and services in exchange for them.

Difference Between Money and Currency

While most of the time, the terms “money” and “currency” are used interchangeably, there are some suggestions that these terms are not identical terms; these suggest that money is inherently an intangible concept, while currency is the physical (tangible) manifestation of the intangible concept of money. By extension, according to this suggestions, money cannot be touched or smelled. Currency is the coin, note, or object that is presented as the physical form of money. The basic form of money is numbers; today some of the basic forms of currency are paper notes, coins, or plastic cards.

The powerful combination of computers and telecommunications, of smartphones and social media, of cryptography and virtual economies makes it seem like it’s a possibility to create a cashless society. What matters most about money is not what it is, but what it does. After all, people will use the currencies that lubricate commerce, allow people to exchange goods and services, and thus encourage people to work and create. Money, whether it’s represented by a metal coin, a shell or a piece of paper, doesn’t always have value. Its value depends on the importance that people place on it—as a store of value, a unit of account, and a medium of exchange. Money is valuable merely because everyone knows that it will be accepted as a form of payment. However, throughout history, both the usage and the form of money have evolved.

Definition of Cryptocurrencies

Cryptocurrencies are a form of virtual currency, meaning it’s a digital representations of value. The crypto part refers to the various encryption algorithms and cryptographic techniques that safeguard these entries.

Definition of Blockchain Technology

Cryptocurrencies are controlled using a technology known as blockchain or distributed ledger technology (DLT). Blockchain technology is central to cryptocurrencies as it allows transactions to be processed and authenticated without any central authority. It offers a commonly agreed record of truth to multiple, mutually distrusting participants in an economic system. A blockchain is a ledger which keeps track of cryptocurrency transactions which are grouped into blocks. Each block is cryptographically linked to the previous one so as new blocks are added the older blocks become more difficult to modify. New blocks are replicated across all copies of the ledger within the network, and any conflicts are resolved automatically using established rules.

A blockchain is spread across nodes usually in different locations. This is one of the key ideas about blockchain, and gives it its unique decentralized features. Because of this, anyone can submit information to be stored onto a blockchain and therefore it is important that there are processes in place that can ensure everyone agrees on what information to add and what to discard. Different networks use different methods but this procesess together are what’s called a consensus protocol and they are essentially the rules by which a network operates.

Definition of Consensus Protocol

Consensus is a pervasive problem in many areas of human endeavor; consensus is the process of agreeing to one of several alternates proposed by a number of agents. Consensus can be defined as an agreement, protocols are rules which describe how an activity should be performed. Simply put, consensus protocols could be viewed as “agreement rules”.

A consensus protocol (also known as consensus mechanism or consensus algorithm) is used to achieve the necessary agreement on a single data value or a single state of the distributed ledger at any given time. It provides a method of review and confirmation of what data should be added to a blockchain’s record. Because blockchain networks typically don’t have a centralized authority dictating who is right or wrong, nodes on a blockchain all must agree on the state of the network, following the predefined rules, or protocol.

Current State of Blockchain Technology

Bitcoin

Blockchain technology was arguably first applied to digital cash in 2008 in the initial paper describing the Bitcoin electronic cash solution called Bitcoin: A Peer to Peer Electronic Cash System. A purely peer-to-peer version of electronic cash meant to allow online payments to be sent directly from one party to another using BTC (the blockchain’s native currency) without going through a financial institution.

The first Bitcoin transaction was carried out in January 2009, when the pseudonymous creator of Bitcoin Satoshi Nakamoto transferred 10 Bitcoins to the first person who downloaded the software. However, it took till 2010 for the first commercial transaction using Bitcoin to take place. A programmer named Laszlo Hanyecz ordered two pizzas through an intermediary by paying him 10,000 Bitcoins.

Bitcoin uses proof of work (PoW) as its consensus protocol. The proof of work mechanism requires Bitcoin miners to compete to solve complex mathematical equations using their computers in a very energy-intensive process. It’s difficult on purpose, miners go through an intense race of trial and error to solve a cryptographic puzzle in order to find the nonce for adding a new block and only blocks with a valid nonce can be added to the chain. The winner gets to add the latest block of transactions to Bitcoin’s blockchain and they also receive Bitcoin rewards in the form of newly minted coins and transaction fees. Solving the puzzle “proves” that you have done the “work” by using computational resources in a known as mining.

Bitcoin’s scripting language is simply called Script.Script is used almost exclusively to lock and unlock bitcoin, not to build applications or run programs. All Bitcoin transactions use Script to define how outputs can be spent. In other words, the script of a Bitcoin transaction determines to whom the bitcoin was sent.

Ethereum

Ethereum, like Bitcoin, currently uses a proof-of-work (PoW) consensus protocol so it shares the drawbacks inherent to the protocol. But on the other hand, the Ethereum blockchain takes it a step further by also serving as a platform for smart contracts and decentralized applications. Ethereum’s white paper was published in 2013; a couple years before the project’s launch in 2015, by its co-founder Vitalik Buterin, detailing the use of smart contracts, which are self-executing agreements written in code. The smart contracts allow for the creation of decentralized applications, or DApps, which are applications that work without a central entity behind them.

The blockchain’s native currency is called Ether or ETH. Ether is used mainly for two purposes—it is traded as a digital currency on exchanges in the same fashion as other cryptocurrencies, and it is used on the Ethereum network to run applications. Therefore all decentralized applications built on Ethereum allow Ether and other crypto assets to be used in a plethora of different ways including as collateral for loans or be lent out to borrowers to earn interest. Collateral refers to assets pledged as security for repayment of a loan.

Ethereum offers multiple languages for programmers to develop smart contracts. The two most active and maintained languages are:

  • Solidity

  • Vyper

DecentralChain

DecentralChain utilizes leased proof of stake (LPoS) as consensus protocol. In PoW models, miners’ ability to validate block transactions is determined by their hardware’s computing power, and the miner who completes and adds the block first is rewarded with a block reward comprised of transaction fees and newly minted coins. In contrast, PoS models assign the task of validation in proportion to the size of one’s stake; each node that holds a certain amount of cryptocurrency is eligible to add the next block to the blockchain, granting those who hold the largest stakes the greatest opportunity to produce a new block; the chosen validator then receives a transaction fee if they produce the valid block or is penalized they fail to do so.

Leased Proof of Stake aims to improve upon the traditional PoS model by allowing users to lease their stakes to other users (leasing is seen as risk-free, as owner’s retain custody), thus increasing the latter’s ability to produce new blocks. In return, the lender receives a percentage of the transaction fee earned by the validator. In doing so, the consensus protocol aim to address the possible problem of centralization in traditional PoS models and allow all users to earn rewards. This extends the ability to participate in the network not only to minority stakeholders, but also to users running lightweight nodes.

DecentralChain offers a unique approach to decentralized application development by avoiding high gas fees for all the transactions. The native language used on the blockchain is called Ride, a non-Turing-complete language which in turn helps keep the system secure and predictable .