Tag: decentralization

30. Defining the Level of Sovereignty in Comparison with the Position of Leading Central Banks

Posted on by Ana Nives Radovic

One of the biggest threats in today’s economy is deflation. When prices are falling steadily, consumers and businesses are less inclined to spend and invest. Also, the weight of debts automatically increases as they do not degenerate with prices. In particular, central banks target an inflation rate of more than 0 percent to 2 percent to reduce the risk of deflation. If the inflation rate is excessively low, interest rates are lowered, and the money supply is increased.

By observing the data related to global economic growth and policies of leading central banks in the world, it can be noted that since 2014, there have been billions of share repurchases. At the same time, a huge amount of money was spent to lift up prices of corporate shares from the companies themselves. The reason for governments to borrow was to cover their operating costs, while companies borrowed to increase and develop new segments, as well as to buy their shares, making up the prices. However, none of them was able to follow the rule of selling or buying at the lowest or highest, since during the crises, corporations took advantage of such a chance to buy back their own shares at reduced prices. Now that these prices are high again, they give the impression that almost everyone wants to buy, even though it must surely end. It is easier than ever to predict what will happen when stock prices collapse.

Since the global financial crisis emerged in 2008, a real war against savers has begun to lower interest rates and consequently the recompense of savings. This is followed by the lower refinancing rate almost zero level and Quantitative Easing programs. The increase in liquidity caused by quantitative easing programs does not wash out the real economy but is largely directed toward the financial sectors. The accumulation of public debts has reached such a level that monetary policies will have to transform, and inflation will make its return with its instructive dislocations, unemployment, and various types of injustices.

Measures that the leading central banks have applied to trace the path to economic recovery, combined with tighter regulations and heavier taxation, have led to an end of private investment and a deflationary spiral. In this situation, it became very obvious that currencies, especially those that are under the control of the leading central banks, are not only an expression of the value of commodities like the indicator, but they also serve as a connection between the present and the future. Price stability, which describes the situation where price fluctuations are very low or do not exist, does not concern the decisions of economic subjects, as they are standardized across all economic areas. On the other hand, the behavior of economic subjects, responsive to inflation or deflation, influences the development of inflation. Individuals try to preserve their real cash balances because they are not fooled by the monetary illusion created by inflation, and they require the maintenance of their purchasing power in real terms.

It is difficult to envisage that virtual currency, without the assistance of a government, without regulatory mechanisms, and likely to cause unstable inflation, may one day be used on a large scale. A strapping regulatory framework would also be required to guarantee that different users are not harmed. If account, exchange, and transaction costs are low with cryptocurrencies, it is notable because there is no protective covering and recourse in case of prejudice to the users. In the traditional monetary system, several components work to protect the citizens, but these structures have a cost, where deposit protection is a good example. Regulatory requirements are increasing according to the use of the currency to cover the new risks that appear. The Bitcoin network allows the currency to change owner but does not allow lending funds.

It seems that the method of the spread of monetary policy is not working or is at least detained. The spread means that the effects of changes in the key rate have a collision on the economy as a whole, down to the rate of inflation, which can be explained by the caution of banks to lend to the private sector as a result of recent stress tests and the rules set during 2010. Therefore, explaining the meaning and the purpose of the digital currency has led to defining its level of sovereignty in comparison with the existing monetary system or the position of leading central banks, where many people think that a country is sovereign and that if it has contracted a debt in a currency, it is free to reimburse it in another country it chooses.

All of these show that the users are hence reliant on its volatility, which is the spot on which bitcoin enthusiasts must not fail to turn down any liability, clearing up that the rate of conversion of regular money into bitcoin may be dissimilar from what is relevant when we convert bitcoin into regular money. This does not mean that one might require a bitcoin address to send money since an email or a phone number is enough. However, if the beneficiary does not have a digital wallet in some of the major supported currencies, they will receive bitcoins that could be exchanged on other platforms.

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

29. Formation of a Private Blockchain Explains Optimizing the Reconciliation Procedures between Financial Institutions

Posted on by Ana Nives Radovic

The usage of blockchain in the financial sector could revolutionize the situation fundamentally by reducing the significant complexity of the reconciliation processes. This platform intends to make this process straightforward by performing only one computation and submitting a harmonized representation to the stakeholders, consequently eliminating dissimilarities in theory.

To make this transformation take place, a greater part of mining instruments will fall behind the idea that it should correspond to three-quarters of the computing power of the network for two weeks to reveal that it runs the engine correctly and can consequently enforce this new standard reasonably. Experiencing any kind of bugs at this time will lead to solving problems at the earliest stage to prevent any risky situation before broader implementation.

It would be too optimistic and even unreal to expect that this technology could transform the payment industry in the next several years since the current technological usage is not tailored to the performance of mass payment resources that require short-time responses, as is the case with payment cards.

The formation of a private blockchain, shared with the smart contract tools, comes out to be the ultimate explanation to optimizing the reconciliation procedures between financial institutions at the same time as lasting visible to the supervisory body. In any type of transaction service, this is supposed to ease the automatic transmission of verified information, while automating the confirmation procedures and definite supervision, and that is the reason why these segments would take advantage to a great extent of optimization, effectiveness, and protection.

The creation of new units of account for most cryptocurrencies that operate on the blockchain platform is programmed once and for all by an intangible algorithm, without the possibility of modification if not by a majority decision of its users. In that regard, new units in the bitcoin system are created every ten minutes as compensation for the formation of blocks by miners and only in that way.

Initially fixed at 50 bitcoins per block, it is currently 25 bitcoins, i.e. a growth of the money supply in bitcoins in the order of 10 percent per year. This fee will be divided by two every four years, implying a limit of 21 million, which will be reached around 2140, though 99 percent of this limit will have been reached by 2032. Bitcoin is ultimately an intrinsically deflationary currency whose value is destined to grow over time, giving it a competitive advantage as a store of value. The very low transaction fees explain the emergence of a third demand factor for bitcoins as a means of payment.

Some online vendors, more particularly specialized in the provision of Internet services and the online sale of rather exotic items, now accept to be paid in bitcoins, due in particular to the almost total guarantees of anonymity associated with them. The latter factor of increasing demand for bitcoins is still in its infancy, if only because at present only a very small number of items can be paid for in bitcoins, and most sellers continue to display their prices in dollars, euros, and other currencies.

The battle between customary payment systems and peer-to-peer payment systems, and therefore between state currencies and cryptocurrencies, is likely to be the subject of regulation. In the camp of bitcoin and its derivatives, two positions are already taking configuration. The first, faithful to the purpose of the existent promoters, is to fight frontally against attempts at state control, to further modify the anonymity, invulnerability, and closed nature of the system, even if it is at the cost of less user-friendliness and increased consumption of resources.

This trend is illustrated, for example, by Darkcoin or the analogous Zerocoin project, which aims at complete anonymity of transactions. The other more conciliatory trend is alternatively to seek reputability by respecting the regulatory constraints and by giving the operators the means to satisfy them in the role they have chosen. This is the beginning of a division from which two managers of systems appear, where the biggest part of users choose to be in good standing with the authorities rather than defending central orientation.

It can hence be expected that a vast majority of users will select as the reserve currency one of which they are sure that the value will not decrease over time, with bitcoin being a good candidate. Others will favor currencies standing on a material asset such as gold or currency guaranteed by the state, but in any case, it is a subjective persuasion about the promise made by the money establishment.

It should be noted that the mere coexistence of several currencies is a protection of the public against the loss of value or the disappearance of one of them. At the first sign of depreciation of a currency, users could convert their assets into a safer one, which would certainly accelerate the decline of the fragile currency but prevent it from ruin. The position of each of the money issuers would, therefore, be delicate. They should be vigilant and quick to respond to the first signs of depreciation, but the numerousness of issuers would limit the effect of the bankruptcy of one of them, and the system as a whole would be robust.

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

12. Crossing All Barriers between Nations, Policies and Cultures

Posted on by Ana Nives Radovic

Bitcoin is the most common, the first decentralized and the most valuable digital currency that represents a means of payment on the internet outside the control of any financial, national or international institution, or a single company from any industry. Each relocation from one collection to another is recorded in the cryptogram of bitcoin so that the recorded history of all transactions makes it achievable to launch clearly.

What differentiates bitcoin from national currencies is its independence from any central authority that controls trade, but on a participatory functioning of all users. It is difficult to find a currency in our history that has already been free from political influence or national economy. Bitcoin is a universal currency that is even accessible to the population that does not use banking services, which is seen as the key potential of its development, considering the large number of people who do not have bank accounts or are willing to find some type of alternative for it.

Unlike regular currencies, bitcoin crosses all the barriers between nations, policies, and cultures. Its position on the market and its features show that it could be characterized as a libertarian currency based on open source and decentralized software. It has no legal framework, unlike other subjects of the monetary system, since it has no legal tender, though it may be refused by a trader.

Bitcoin transactions take place on its fundamental technology, the blockchain, which represents a distributed public database that contains a record of all exchanges since its initiation and is an innovative technology to make its functioning confident all the way through the world, holding a key function in transparency of the exchange. Bitcoin is accepted as a means of payment by a growing number of online and physical traders.

The technological and methodological features of bitcoin do not relate to any central currency issuer; currency managing is extended over every part of the network. The proper functioning of the system relies exclusively on cryptographic techniques, and anyone can generate money at the price of a resulting utilization of a time machine. The creation of bitcoin takes place via the process called mining. Mining is essentially a distributed system of compromises used to authenticate expected transactions by counting them in the blockchain platform, maintaining a chronological order in the system, protecting impartiality of the network, and permitting other computers to be in agreement on system status.

In order to be confirmed, transactions must be enclosed in a block that follows very strict cryptographic rules that will be verified by the network. These rules also take account of the creation of the comparable game of chance that puts a stop to anyone from simply adding new blocks successively into the blockchain. Mining is the track of action by which bitcoin transactions are protected, and for this purpose, the miners accomplish mathematical calculations for their bitcoin network with their computer equipment.

The hash of a block must be smaller than an assured value, and in order to accomplish this, miners must discover and insert the block keeping the hash small enough. The miners perform cryptographic hashes on what is called a block header, and for each new hash, the mining software uses a different random number. The only possible way to discover it is to find one that suits, which requires a lot of CPU work. This is actually the key to the groundbreaking aspect of the bitcoin system, since this verification of work causes all those found spots to vote with their CPU, and it is complicated for a single entity that would want to take advantage of to do so.

These procedures prevent everyone from having control over what is incorporated in the blockchain, as well as from replacing parts so that it can pull through. Instead of that, bitcoin permits each individual to firmly accumulate and switch over value on a network that cannot be detained, influenced, or blocked by any institution or individual.

When an operation is completed, the user can also give a small amount to miners to encourage them to take the transaction into account, which means that the transactions are not without charge, but that the transaction costs are insignificant. The aim of miners is to distribute a block, and they have an interest in finding a block in the course of the return they are allowed to give themselves.

It should first be noted that there is only one method for creating bitcoins that belongs to an algorithm, which is to say to a deterministic computer process. The money supply is generated by the computing power of the network computers, by correlation with the mining process, and the increase in the number of flow bitcoins is known in advance. At the same time, giving free access to powerful tools plays a significant role in protecting individual privileges and autonomy.

In this regard, bitcoin has many advantages that are increasingly creating a center of attention for many users and investors, first of all, because there are no exchange fees, while the transaction costs are much smaller in comparison to the traditional monetary system. Besides that, users are anonymous, while their transactions are public, observable and made in a way that, once recorded, they cannot be interfered with or changed.

Since bitcoin is not regulated by any central authority and the offer of bitcoin is fixed in advance, totaled at 21 million, there is no guiding principle or inflationary heaviness that is one of the key problems regarding traditional currencies. A single bitcoin can be divided up to 100 millionths, and since the volume of bitcoins that are currently in circulation exceeds 10 million units, according to Brito et al, it is expected to reach the limit of 21 million by 2140.

The monetary swiftness of bitcoin identifies itself in advance and operates through the mining process. These are the features that prevent any type of inflation from occurring since, by structure, the upper limit of bitcoin will not exceed the amount of 21 million, being, at the same time, also characterized by an outsized divisibility of bitcoin, even though so far it is applied for up to 8 or 10, but theoretically it is infinite.

Bitcoin offers a remarkable list of security-related appearances since the protocol is also designed to be very opposed to a wide range of hacking attacks, including attempts such as distributed denial-of-service. Users are also allowed to broadcast their credit card number over the internet, and what many users see as the key benefit of bitcoin usage is the fact that the transactions are both secret when it comes to their privacy, as well as completely public when it comes to the transparency of the process.

In other words, not a single name or other data that in any way could reveal the identity of the user appears in transactions, nevertheless, their numeric addresses are broadcasted and stored by all parts of the network. The blockchain is itself formed by a series of blocks, where each block traces the newest transactions that have not yet been validated and recorded in the preceding blocks, protected by the innovative types of technology.

The condition of every user’s account is open and it results from all the transactions that are connected with this process. The confirmation of the operation is not a matter of any central entity, but by the other nodes of the network, while the addresses are alphanumeric chains of approximately 30 characters. Each transaction is accumulated in a special register called blockchain, which is helpful in authenticating the whole procedure to complete it successfully, so that the transiting assessment was essentially owned before being finally deposited. Once the process is confirmed by the network, this block is added to the blockchain and consequently, it spreads the information.

Bitcoin can be used in transactions to buy goods and services both on online shopping sites and in physical stores that accept this currency. To make a payment with bitcoin, the buyer is supposed to have an electronic wallet via one of the available software services installed on their computer that uses an application installed on their mobile device and to go to a websit

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

2. The Danger Zone – Where Nominal Yields Do Not Effectively Reimburse the Risk of Collapse

Posted on by Ana Nives Radovic

From a certain point that the markets have already achieved, banks will no longer be capable to boost credit amount to reimburse for losses from their central bank, which might clarify the disintegration of the banking sector.

The phenomenon of negative interest rates embodies an inverted structure wherein the borrower deducts a calculated amount, based on the agreed-upon rate, from the owed sum. This results in a scenario where the more one borrows, the less one repays.

A discernible threat accompanies the rise of negative interest rates, particularly evident in Europe, as it poses a risk to financial independence and economic expectations.

After maintaining its rate at nearly zero for over seven years, the Federal Reserve of the United States announced its first increase in December 2015. Since then, global markets have entered a new era of monetary policy, characterized by exceptional measures adopted by almost all central banks worldwide in response to the previous decade’s financial crisis.

The looming question revolves around whether this upward trajectory will impede the slow economic recovery. Financial and economic entities have grown reliant on easy money, and uncertainties persist regarding their ability to adapt to higher rates. Hence, observers anxiously attempt to discern the potential outcomes by year-end.

In many global markets, especially in Europe, central banks are adopting a reverse trend, implementing a negative interest rate policy for the first time.

The gradual decline in interest rates has taken on a new dimension, enabling numerous countries to reduce their indebtedness. The injection of free liquidity into banks serves as a lifeline for governments. In the case of the European Central Bank, the objective is clear: infuse money into the financial system, fostering a more considerate approach toward indebted countries.

National central banks, expanding their balance sheets by purchasing lower-rated bank debt, inundate financial institutions with free money. However, these institutions, seeking yields, venture into the perilous territory of investing in assets where the nominal yield fails to adequately compensate for the risk of collapse.

This scheme, under ordinary circumstances, would never find traction in a financial system operating close to historical averages. Yet, with abundant liquidity awaiting investment, the hope for increased growth persists. Nonetheless, the mitigating factors fall short of eliminating the probability of a breakdown in such funds.

Moreover, the expectation that banks will offer money at lower rates for an extended period prompts them to make alternative income. Given that the interest rate is near zero, banks generate returns by lending money to others at a somewhat higher interest rate, creating a distinctive income stream.

Ordinary interest rates reflect the interplay between the present and the future, coupled with expectations of future prosperity. This dynamic explains why interest rates tend to be higher in the poorest countries, where the cost of time is minimal. On the contrary, financial interest rates, directly or indirectly influenced by central bankers, represent the cost of accessible money within a specified timeframe. Any deviation from these two scenarios is a harbinger of a crisis where money is supplied without adhering to economic principles.

Negative interest rates create a scenario wherein individuals deposit money with a bank, turning it into a cost rather than a return. In times when conventional savings show minimal gains, borrowing becomes more appealing, as the repayment amount is lower than the borrowed sum.

Consequently, traders seeking yields are compelled to explore speculative dealings and transactions related to commodities such as oil and gold. However, the overarching impact of zero or negative rates on the investment’s value contributes to the endorsement of negative rates on savings without commensurate performance. The inherent risk in banking balance sheets remains elevated, and investors, regardless of their risk aversion, are poised to bear the price of potential losses.

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