How Technology Is Changing The Face Of The Dollar
The almighty Dollar. King of currencies, it’s become the de facto standard for global settlements for decades. But nature abhors a vacuum, and empires fall. Anticipating this, there’s a rising tide towards finance innovation and it centers around decentralization and a thirst for new currency standards. If we rewind a bit, we see how changes made in the 1970’s set the stage for how technology is changing the face of the dollar and its dominance.
Scarcity and DeFi
Let’s talk about scarcity for a moment. This is a powerful economic driver, but when Nixon ended convertibility to gold in 1971, it effectively disconnected the way scarcity worked with fiat currency. For generations, the gold standard had been a way to control inflation and deflation. That supply elasticity of gold helped keep economies in check, but today, the government can simply print more fiat money regardless of the supply of any commodity. The “value” of the dollar is more connected to U.S. policy than anything else. Now, inflation and deflation can be controlled by policy-makers. What all of these events have in common is that the decisions were made by a central authority. The future could be quite different.
In a world of decentralized finance, mathematical rules attempt to intervene where previously humans used commodities, later reverting to humans setting policy. Of course, the gold standard was supposed to prevent fallible humans from making policy mistakes, even though there are no guarantees those policies will work out. What’s intriguing about the blockchain is that you can manufacture scarcity in a digital world, without a central authority. Once the rules are set, humans need not intervene. The system regulates itself through math-based rules.
The Gold Standard
“Internet money” really took off with Bitcoin. The concept had been tried before, and the early dot-com boom toyed with various (but centralized) vendor-specific currencies, but Bitcoin finally proved that you could have a blockchain-powered currency system that both included scarcity and had certain rules baked in. Fast forward to today, and we see a number of fintech plays incorporating blockchain, which means that concerns about regulation could fall away as innovation presses forward — infrastructure inversion. After all, hasn’t every innovation faced regulatory scrutiny only to push past it when the benefits outweigh the risks?
Going back to 1971, what was meant to be a temporary solution wound up being permanent. What we’re seeing now is that just because fiat monetary policy is set by a central authority doesn’t necessarily mean the dollar is a “safe bet.” In light of bond markets slipping, and ongoing policy changes, what would we have done differently in 1971 if we’d had the example of decentralized currency? The intriguing thing about these pioneers is that they’ve learned from the past and have created new rules that aim to prevent a plethora of sins committed by markets of the past.
Changes Ahead
Bitcoin has been used as a sort of gold standard in this space, even though that could change in the future. Considering BTC as a sort of gold, we have to consider scarcity. There are only 21 million BTC that can be mined, so scarcity is baked in. But what if there was a currency that was able to expand and contract based on demand? This supply elasticity could offer key counter-cyclical pressure and alleviate downturns or run ups by adjusting dynamically to the situation. After all, manufacturing scarcity has its own risks — and rewards. Yes, the dollar via the central bank authorities attempt to do this, but again we return to the fact that this is only viable through the potentially-disastrous policies of a central authority. For the average consumer, they’re left to the decisions made by that authority.
This is why consumers and investors are becoming more interested in a different path forward. It’s why there’s been a surge in blockchain-related jobs. While the Fed wakes up to decentralized currency, parts of the economy are already seeing change as they embrace this tech. Not long from now, it’s conceivable that blockchain will transform how we’re paid, get credit, or get incentives.
The big question: What additional uses and innovations will we see in blockchain-based money? After all, gold had a value beyond merely accounting. Gold is prevalent in tech, jewelry, even design. What we’re seeing now is innovations in the mathematical models designed to control inflation and deflation. One example is Ampleforth, which works almost like mercury — as things heat up, it expands, and as they cool down, it contracts. Japan’s largest bank created its own cryptocurrency, proving yet another industry giant is willing to go up against traditional currencies. MFUG’s coin is still experimental, and attempts to manufacture scarcity at the outset.
Some of these are experiments, but all of them challenge the status quo. Decentralized finance continues to grow in popularity. Right now, cryptocurrencies are still finding use cases, but blockchain isn’t going away. As more business is done on the blockchain, we’ll see the dollar diminished further, forever changing what was once a global standard.
