The invention of the block chain has given rise to a new specie of currency, that of cryptocurrency.
The arrival of cryptographic-based currencies has enabled key new traits previously not possible with traditional forms of money. Furthermore, the realization of such traits will likely have a dramatic impact on the environment in which these currencies compete. [sociallocker]
Table 3.0 now includes the specie of cryptocurrency when rated against the traditional and newly realized traits of money. The two newly-realized traits include the following:
- Decentralized: Defined as the delegation of power from a central authority to regional and local authorities. With regards to block chain-based cryptocurrencies decentralization implies a trust-less and distributed network. This trait is a dramatically new innovation as a direct result of the invention of the blockchain and was impossible with any other prior form of money.
- Smart (Programmable): The trait of smart currency indicates the capability to fulfill a growing array of functions still yet to be determined. Existing innovations in the cryptocurrency space foreshadow the potential that currencies could be designed as such to not only act as currencies but represent other forms of value as well.
Survival and Extinction
Extinction can most simply be described as the failure of a specie to compete in an environment to such at a degree that it eventually ceases to exist. The inability to compete itself may be the result of two primary causes; increased competition from superior species or a dramatic change in environment.
For the dinosaurs, particularly land-based species, the traits of size and strength were essential to their rise to prominence. Although these traits enabled them to thrive for centuries they did not allow them to compete as a specie forever.
The advantages they enjoyed at the time also meant that they required large consistent amounts resources, most particularly food and oxygen. As a result, at the end of the Cretaceous Period many specie were unable to survive what is widely believed to have been the arrival of a earth-shaking comet known as the K-T Event.
Evidence suggests that a large comet impacted earth and darkened the sky with dust and ash. The blocking of the sun starved sun-dependent plant life and resulted in a sharp reduction to the supply of oxygen.
The Journal of Geophysical Research-Biogeosciences estimates that this event killed off 75% of species. The traits that had once helped dinosaurs flourish now proved to be the traits that left them susceptible to extinction.
Meanwhile, studies show that the freshwater organisms of the time only lost 10% of their species. The commonly accepted explanation is that the freshwater species were already conditioned to endure annual winter freezes where their oxygen supplies were diminished.
Their relatively limited dependence on oxygen insulated them from the effects of changes to their environment allowing them to survive. Dramatic changes to the conditions brought on by the K-T Event changed the paradigm and a new combination of traits became necessary to ensure competitiveness and survival. Meanwhile, the majority of land-based species disappeared forever, their greatest strengths having become their greatest weaknesses.
Currency, like the dinosaurs, has already shown us that it is not always the immediately dominant specie that will survive the test of time. In an era that has seen hundreds of highly evolved fiat currencies go extinct, gold endures.
Charles Darwin’s theory of natural selection originated to provide an evidence based explanation of the past. We now leverage this theory to look forward and understand its implications on the future of currency. Given the ever-changing conditions of the future, will gold and fiat currencies continue to compete or go the way of the dinosaur?
The New Paradigm – Currency Competition
According to a study of 775 fiat currencies by DollarDaze.org the average life expectancy of a fiat currency is 27 years. The study also indicated the most common causes of any given currencies extinction are hyperinflation, monetary reform, war and independence.
With fiat currencies being so susceptible to failure, gold has long served as an alternative as it is more scarce and durable. In terms of scarcity, fiat currencies can be printed and inflated at the will of their authorities.
With regards to durability, the US Federal Reserve estimates the longest average lifespan of any paper bill is 15 years ($100 bill) with the shortest lifespan being 3.7 years ($50 bill). As a result, gold has maintained a relatively high value in the era of fiat currency and remains the primary alternative store of value when faith in fiat currencies waiver. In this way, these stores of value have primarily competed based upon only two of the traits of money; scarcity and durability.
Fiat currencies and commodities now enter a new paradigm where money can exist that possesses even more dynamic traits. Gold and fiat currencies are not capable of possessing the newly inherent traits that would make them decentralized or smart (programmable).
Cryptocurrency has arrived adding heightened competition. To date, bitcoin is the most widely recognized cryptocurrency, but it is not alone. In the 5 years that cryptocurrencies have existed over 200 have been established and the list is growing.
Furthermore, the currencies themselves are in a state of hyper-evolution as they continue to take on a varied array of distinctive traits that set them apart from one another within their own competitive ecosystem.
Equally as threatening to traditional forms of money, the conditions of the environment in which currencies compete is in a constant state of change. Undertones of growing distrust in centralized entities encourage populations to considered alternatives stores of value.
Sovereignty, once a trait that was necessary for the survival of a currency, may now be falling out of favor. Centralized failures such as the US financial crisis of 2008 or hyper-inflated fiat currencies such as Zimbabwe dollars or Argentinian pesos compound these sentiments. The most profound of these conditions is the growing awareness throughout the world that decentralized trust is possible.
It is interesting to imagine what Charles Darwin would make of the current state of currency. History would have us believe that the existence and survival of any entity, be it plant, animal, corporation, or currency is the subject to the laws of natural selection.
With this understanding, it is hard to imagine Darwin contesting the opinion that cryptocurrency will prove a competitive force against traditional specie of money.
Ultimately, the real question may not be whether or not Darwin would predict the survival of cryptocurrency, rather would he be willing exchange those British Sterling pounds for it? [/sociallocker]