20. The Multiplication of Mediators Reinforces the Strength of the Protocol

The more bitcoin is being compared with traditional currencies, the more it becomes apparent how some characteristics of money cannot be applied to it. Traditional currencies are characterized by three functions that serve for their legitimization and those are a unit of value accepted by all, a tool of reserve of value and saving, and a mode of settlement of current transactions.

Since bitcoin does not meet these three founding principles of a currency, its apprehension requires examining the extent to which these new instruments respond to the traditional definition of money and to what extent they turn aside from it, raising the question how to frame the existence and the use of this cryptocurrency.

More than an amount of centralization, bitcoin brings about a field for actors within the society. Traditional currencies, irrespective of their format, fulfill various functions, from the simplest to the most complex, that are essential for all processes in modern financial systems. They were given many roles that fundamentally go beyond being the measuring component and basic means of payment, since they also endow with admission to savings and borrowing, as well as other financial transactions. With the emergence of clearing houses between the various marketplaces, bitcoin is making possible to avoid soaking the network with microtransactions. This multiplication of mediators at the end of the day reinforces the strength and smoothness of the protocol, while maintaining peer-to-peer processes at the same time and as in any market, the line of work is structured.

ECB has published a document named “Virtual currency schemes” in 2012, explaining what are the standpoints of this institution regarding virtual currencies and in what way are they supposed to differentiate from electronic currencies that have physical corresponding item, such as banknote or coin, even if this element could evolve for the bitcoin. As a currency, the bitcoin is the object of numerous criticisms of an economic nature, but disparate and even contradictory. Criticism of national currencies is more founded in countries where the central bank is not very autonomous and where members of the government have greater decision-making power over the issue of currency. Since the objective of price stability is less appreciated in these conditions, the value of currencies becomes much more unstable, and episodes of strong inflation can take place.

The free banking system previously anticipated by Hayek implied the elimination of central banks’ strong impact on financial processes and the issuance of currency by commercial banks. The economists from the Austrian school considered that free competition would request the most secure currency as a common prevalence for mass distribution. Part of those critics was also related to the fact that Hayek’s vision does not determine conflicts between currency as a public good and the fact that commercial banks are taking an advantage from it. On the other hand the main critics of conventional or Keynesian insight point the finger at him of not being guaranteed by the national authorities of being unable to be shaped by the level of demand in order to satisfy the needs of the economy, and of being deliberately deflationary.

Electronic money is, in fact, only an improved form of fiat money, based on a bond of confidence that has progressively made it achievable to make a replacement for the sounding and tentative entity, as an appearance of conceptual and dematerialized value, in order to go to a document accepting value, first in contracts and then later between lines of account of the banks. Bitcoin is a simple virtual currency that is not accepted by all as a reliable standard of assessment, since for many subjects the record of its usage do not last long enough in order to represent a foundation for setting rules.

In some respects, cryptocurrencies are similar to goods. Conceptually, the mechanism of monetary creation mathematically simulates the extraction of a precious metal, but also they are particularly rare. Scarcity, corresponding with high demand, is primarily what supports the price of listed goods and that is also the principle that the idea of restraining the increase of the supply of cryptocurrencies is based. On the other hand, in the same way that it is increasingly difficult to extract precious metals from the subsoil, where the finest deposits that have been exploited first, the production rate of cryptocurrencies decreases with time.

This article is part of the academic publication Dividing by Zero by Ana Nives Radovic, Global Knowledge 2018

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