More On Fiat Money
As we have said, Banks have certain characteristiques:
- Point to a database. It's like your safe.
- Each bank has its own database.
- Recognized and prestigious institution.
- They have credibility.
- Few banks.
- Regulated system.
On the other hand, Goverments regulate Banks.
- License granted by the regulator.
- It establishes the regulations.
- The Bank offers a service to users, following standards set by the regulator.
- Banks may more or less like the regulations issued by the regulator, but these are mandatory.
- The Regulator therefore has a lot of power.
- To protect my money and access my funds, an identity is required.
- That identity is provided by the Government.
- The State is also the one that supports the regulator, which should be independent, but ...
More On Crypto System
There are differences between the different cryptos, but there are some fundamental bases that they all share.
Users = Users.
Identity = Wallet. Basically, the wallet with your keys is what allows you to enter the blockchain and operate on it. There are 2 types of wallets, custodial wallets and non-custodial wallets. We will focus on the custodial blocks.
- These custodial wallets work with 2 keys, the public key and the private key.
- Both are cryptographic keys, a long list of numbers and letters, very difficult to memorize.
- The public key is similar to the number of a bank account, while the private key would be the one that would be used to sign the operations.
If I want to transfer bitcoin to someone I need him to provide me with his public key and if I want to receive bitcoin from a third party I am obliged to provide him with my public key.
Instead, I have to be extremely careful with my private key, because if it falls into unauthorized hands, my account can be emptied.
Being a wallet with custody, there are only 2 people who know these keys, on the one hand, myself; and on the other hand, the platform where I create my wallet.
This has the advantage that if I lose my private key I can recover it by requesting it from the platform, but there is the risk of losing my bitcoin if the platform is hacked or if an employee of the platform is not honest or even if the platform goes bankrupt, and it closes and I can no longer access my wallet.
And all this has already happened, both in bitcoin and in other cryptos. It is true that the blockchain is very secure, but the platforms where the wallet keys are hosted have more vulnerabilities.
In non-custodial wallets there is only one person who knows the private keys: yourself.
If they are lost, there is no one
from the platform where you
created the wallet
who can help you.
The only possibility is to use the so-called "seed words", a set of between 12 to 24 words, which allows you to access your wallet and your funds again.
Naturally, as these word seeds are the key to your wallet, it is strongly recommended to make several backup copies and keep them in a very safe place, away from computer systems and the internet.
-written on a sheet of paper and kept in a safe place-.
- The Bitcoin blockchain database is unique, there is only one.
- It is not like the Banks that each one has its own.
- The bitcoin blockchain database is replicated at the miners' nodes.
- My only access are the keys to my wallet.
How The Wallets cCommunicate With The Nodes?
All nodes, by mutual agreement, run the same software and are in listening mode until a block arrives.
When the block is completed in the database, competition is generated among the miners to try to solve the hash function, which as we already said cannot be solved by a mathematical function, but by trial and error.
So that those teams that have great computing power will have a better chance of finding the correct solution.
But, it really looks a lot like the lottery. On the other hand, to avoid write collisions we know that the probability that 2 or more miners will find the solution at the same time is almost zero.
The market distributes the incentives to the miners at random.
The money is not in the wallet. It is in the database.
What I mean is the balances, which allows you to make transactions, they are in the database, not in the wallets.
So the miners are the new bankers.
Regulator = Developers or programmers. They develop the software that miners use.
- These developers are at the same time users, because open source software is used.
- It is a community of developers.
- They work by consensus.
- This can be a source of problems, because sometimes they will agree and sometimes they will not.
- When there is no consensus there can be a separation.
- This has already happened and is known as a fork.
- There are 2 software running and the single timeline is broken.
- Many times, changes in the codes are demanded by the miners, to introduce improvements.
But other times, that is not so clear and it may happen that modifications are requested that favour a group - for example, those with large nodes with powerful computing equipment - to the detriment of the rest of the miners.
Users also demand changes and improvements in the software from developers, related to usability, for example, being able to go to McDonalds and pay with bitcoin.
In short, being an open, decentralised system, there is room for disagreements and ruptures.
FIAT VS CRYPTOS
- Identity = Cryptographic keys.
- Centralized system = Decentralized.
- Single regulator = Open system, no guarantee of consensus.
- Another great advantage and characteristic of cryptocurrencies is that they do not know borders, and with them you can operate anywhere in the world, without having to ask anyone for permission.
It will depend on the political system. If I have a "good", rational, moderate State, truly concerned about the welfare of its citizens, then there are no incentives to distrust fiat currency and think about cryptocurrencies (except if you wish to speculate).
But if the political system is an extractive system, which plunders the productive sector, it is very likely that anyone will begin to consider fiat money as suspicious and have incentives to explore cryptocurrencies.
Because the State is not going to be able to plunder my bitcoin.
Do cryptocurrencies currently fulfil the same functions as money?
1.- Exchange unit. They do not yet function as a unit of exchange. It is true that you can buy things with bitcoin, but through the intermediate step of converting it into fiat money. As there is a lot of demand and liquidity for the exchange of bitcoin for fiat money, this intermediate step is usually easy to perform.
What's more, ATMs that offer you fiat money against bitcoin (and other cryptocurrencies) are beginning to proliferate.
2.- Deposit of value. Undoubtedly. Warren Buffet said that bitcoin was like a check. Both can be used to transact. They are instruments. But as such, their value was minimal.
This is true for check stubs, but it is not true for Bitcoin. It is true that there is no asset that supports Bitcoin. But its transparency, ease of use, liquidity and the fact that it is an open and decentralized system, has led many people to consider it as an alternative to fiat currency, gold and other assets, as a store of value.
That citizens use gold (and other assets) as a store of value is not very to the liking of Governments.
Still, the gold market is one of the least transparent markets, and despite growing demand, every effort is being made to keep the price under control.
But that citizens use Bitcoin as a store of value raises much concern in governments, especially in industrialized countries, where they want to penalize savings (negative interest rates, inflationary fiat currency).
What will happen in the future? Nobody knows. It is difficult to put doors to the field.
But a coordinated action by the majority of the world's governments could put an end to the cryptocurrency dream.
3.- Accounting unit. They do not function as an accounting unit. Nobody is even asked to pay their taxes in Bitcoin, in part because of the volatility of the currency that would make all planning impossible.
The world is watching with expectation the result of the proposal of a Florida authority in the USA, where citizens will be allowed to pay their taxes in Bitcoin.