I believe that community is not just an add-on to a cryptocurrency, but rather it is an inherent part of what makes the cryptocurrency money at first place.
This article outlines why community building is the most important part of the crypto ecosystem.
Any modern currency is based upon three pillars:
2) Transaction system,
3) Community support.
These three pillars underpin the money system where ledgers are used to record transactions initiated by the community and to display a confirmed output of these transactions at a given point of time.
Up to this point, the crypto ecosystem has mainly focused on the ways in which the ledgers are designed and transactions are processed. Our project aims to focus on the community building and cryptocurrency adoption to prop up the revolutionary technology behind the crypto ledgers and transactions.
In order to understand that the community of adopters is an inherent part of the money system, we need to consider how the fiat system is designed and how bitcoin and other cryptocurrencies differ.
Fiat money system
Fiat currencies are predominantly maintained by banks’ ledgers, which are digital databases in the banks’ IT systems. These databases are double-entry accounting systems, that record transactions on currency accounts against equal and opposite transactions on different accounts. At any given point in time, the ledger consists of the banks’ liabilities (i.e. records of currency balances held in the bank) and the banks’ assets (i.e. by records of the property, which “back” the currency).
This looks like this:
Bank’s “liabilities” is just another term for the fiat currency. When you make any transaction with your bank account with a check, debit card or a payment order, your bank makes a record in its IT database decreasing your bank account balance against a corresponding increase on a different bank account or against a transfer of its assets to a different bank. This looks like the following:
Bank’s transaction when the recipient has a currency account in the same bank:
Bank’s transaction when the recipient has a currency account in another bank:
Digital records as above are predominantly what the modern money system is about. Like cryptocurrencies, fiat money is just numbers on computers. The fundamental difference lies in an institutional framework of how these numbers are backed, i.e. what makes them legitimate and widely accepted as money.
This is where the community support kicks in as an inherent part of the money system. In the case of fiat currencies, the community is the entire population of a nation (for a national currency) or a group of nations (for currencies like EURO). Institutions backed by these communities legitimize currencies and make them valuable. Let’s consider how it works for the fiat currencies.
As you can see above, customer accounts in banks are “backed” by the Central Bank issued currency notes and reserves. Essentially, what banks call an asset is nothing but a liability recorded in a ledger of another entity — the Central Bank. This is known as the two-tier banking system, where the Central Bank acts as an ultimate Bank for banks. The Central Bank runs banks’ accounts in the same way that banks run their customers’ accounts in the banks’ own ledgers. So let’s see how the Central Bank’s ledger looks like.
Banks’ transactions are recorded in the Central Bank’s ledger similar to how it is processed in banks’ ledgers.
When Bank A transfers money from its customer to a customer of Bank B, using a settlement system utilized by the Central Bank, it looks like this:
The Central Bank’s ledger is an accounting system that allows eligible institutions to hold reserves balances at the Bank and settle obligations to each other.
Even currency notes, which have physical form, have to be recorded in the Central Bank’s ledger as its liabilities. Paper bills are essentially a technology used to run payments with Central Bank’s money without banks acting as intermediaries.
The Central Bank’s money (primarily the money held in reserves accounts at the Bank) is usually perceived as the ultimate secure and liquid asset; however, as you can see above, the Central Banks’ liabilities have to be backed too. In this case, liabilities are backed by Treasury Notes.
So our next question will naturally be how are these Treasury notes are backed in turn? Let’s have a look at the Treasury’s ledger:
Treasury Notes are backed by a vague asset, called “Due From General Funds.” The US Treasury explains what this stands for in the following way:
General Fund liabilities, primarily federal debt, are obligations of the U.S. Government that have accumulated since the U.S. Government’s inception. These Department-managed liabilities are separately reported on the Consolidated Balance Sheets, with a corresponding amount reported as Due from the General Fund. Due from the General Fund represents a receivable, or future fundsrequired of the General Fund to repay borrowings from the public and other federal agencies.
In other words, “Due from The General Fund” is nothing but a word used to describe that the money system is backed by the people, by the community of people that accept the money. It is not a financial asset in the normal meaning of that word, because there is no debt or equity instrument called the “receivable, or future funds required of the General Fund.” It is not definitely not a commodity either. It is just an accounting representation of the community support. This is the only source of backing for a currency.
Now, if you aggregate all the components of the money system into a consolidated ledger, eliminating all the interim steps, it looks much simpler:
1) Banks back their customers’ currency accounts with the Central Bank’s money
2) The Central Bank, in turn, backs its money with Treasury Notes (which means that the Central Bank’s reserves are just an intermediary and the Currency Accounts are indeed backed by the Treasury Notes, once the interim step is eliminated).
3) And finally, Treasury Notes are backed by the community of the people.
Once you take all the interim steps out, you can clearly see that the currency accounts maintained by banks are eventually backed by us, the people. Our acceptance of the system turns the numbers on the computers into money.
Banks, the Central Bank or governments are just intermediaries that exist to run the system. Blockchain is the very technology that was created to make these intermediaries redundant.
One of the fundamental reasons why we have intermediaries running our money system is the necessity to rely on the institutions to maintain the ledgers and process transactions. Only someone reliable and trusted can be responsible for keeping the ledger in the right order to prevent mismanagement and fraud. However, while trusting these institutions to run the system, we also give them the privilege to create money in a way which is not always the most transparent and beneficial for the community. The technological dependence, a necessity to have a trusted third party, entails a socio-economic dependence.
Satoshi Nakamoto described this issue in the following way:
The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.
and offered his solution:
I’ve developed a new open source P2P e-cash system called Bitcoin. It’s completely decentralized, with no central server or trusted parties, because everything is based on crypto proof instead of trust.
The revolutionary idea offered by Satoshi Nakamoto was to create a ledger capable of keeping records and processing transactions without a reliance on a trusted third party. The blockchain is a shared public ledger on which the entire Bitcoin network relies. All confirmed transactions are included in the blockchain. This way, Bitcoin wallets can calculate their spendable balance and new transactions can be verified to ensure bitcoins that are being spent are actually owned by the spender. The integrity and the chronological order of the blockchain are enforced with cryptography.
As we demonstrated above, the fiat system’s ledger without intermediaries would look like this:
Where “Due from General Funds” means nothing but a community support for a given currency.
Bitcoin ledger does not involve double entry accounting because it does not require recording claims between different intermediaries like banks. The community support is simply implied — if people use bitcoin, it means they accept its legitimacy.
Bank of England honestly and clearly described this phenomenon in their research paper:
Digital currencies have meaning only to the extent that participants agree that they have meaning. That agreement takes the form of a public ledger and a process for how changes to it are made, including the creation of new currency. Not being an IOU or liability of the central bank (or the state) does not prevent digital currencies from being used as money…
In theory, digital currencies could serve as money for anybody with an internet-enabled computer or device. At present, however, digital currencies fulfil the roles of money only to some extent and only for a small number of people. They are likely at present to regularly serve all three purposes [i.e. story of value, medium of exchange and unit of account] for perhaps only a few thousand people worldwide, and even then only in parallel with users’ traditional currencies.
In summary, the only way to make Bitcoin (or other cryptocurrencies) serve as real money is to make the community of adopters as big as possible and have merchants accepting crypto in all corners of the world.Tags: bitcoincryptoeconomics