Cyber Currency – part 1/5 – Currency Basics

CURRENCY BASICS

  • Barter systems:
    • Involve direct exchange of goods and services
    • Have no intermediate token like money
    • There are some difficulties:
      • The barter process needs a coincidence of two exchange partners (same time, same place)
      • Some trading goods cannot be easily divided into small parts
      • Deferred payments are problematic
      • Storing wealth is not practical
      • Establishing fair common values is problematic
  • Tokens (in many different forms) enhance pure barter systems
    • They provide a “medium of exchange”
    • They have the ability to store value
    • Some desired characteristics of tokens include:
      • They should be in common use
      • They should be commonly recognized and widely accepted
      • They should be preservable
      • They should be transportable
      • They should be resistant to counterfeiting
      • They should have a stable value
  • Value anchors can be established to enhance tokens
    • Valuable metals (gold, silver…) can be used
    • A commodity with a stable value can be used, such as:
      • Gems
      • Real estate
      • Livestock
    • Trust in a national economy can anchor value (this is called fiat currency)
  • Fiat money
    • Has no intrinsic value and no hard value anchor (from Latin – “let it be done”)
    • Is established by decree or law
    • Is often anchored by trust in a national economy, reputation
    • Can be undermined by national meddling with value
    • Some examples from history:
      • China Yuan dynasty – 1000 AD – Marco Polo described paper money
      • Tally sticks – 20,000 BC, England King Henry I – 1100 AD
      • American colonies – Bills of credit – 1700
  • Trust
    • GENERAL – the ability to reliably predict future events based on experience
    • MONEY – confidence that the medium of exchange will hold a value
    • CYBER COINS:
      • A distributed journal of every transaction
      • Cryptographic resistance to counterfeiting
  • Cyber currency
    • A virtual token represented by an encrypted journal entry and an encryption key that prevents access by anyone without the key
    • Cryptographic hashing process – One way encryption – cannot be reversed
    • A distributed journal of transactions = “blockchain”

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