We frequently talk about how blockchain and crypto can improve global finance. However, blockchain and crypto won’t just improve global finance: they’ll create an entirely new financial reality.
At least, that’s the claim made by Xen Baynham-Herd, Head of Strategy at Blockchain, last week. In a blog post titled, “A New Financial Reality”, Baynham-Herd describes how new financial technology will change global finance as we know it:
“A world of greater prosperity is possible when we believe in a better future and have the ideas and financial tools to create it. New financial technology is changing the nature of money and providing grounds for this optimism.”
What exactly is that new financial technology? How is that new financial technology changing the world as we know it? Keep reading to find it.
Money and Credit: How Things Could Change
First, let’s talk about money and credit, described as “two sides of the same coin” by Baynham-Herd:
“Money is intertwined with the concept of credit, and the two have existed in tandem for millennia.”
An example is used of money and credit in prehistoric days. A thrifty cavewoman gives a hungry hunter a handful of nuts with the expectation that the hunter will use the energy derived from the nuts to hunt for more food. Then, the cavewoman gives another caveman a handful of nuts in exchange for fetching some water. The cavewoman has built a feast by exchanging credit in the form of nuts into “money” in the form of meat and water.
In this example, the cavewoman needs to trust the hunter. The cavewoman needs to believe the hunter will use the energy from the nuts to hunt meat. As long as that relationship of trust exists, the partnership is successful and the economy grows.
This is just one example of how credit and money have been intertwined over time.
Creating Trust in Centralized and Decentralized Systems
Today, our economy is more complex than it was during the caveman days. However, the basic concept of money and credit remain crucial to the economy. Money and credit are both based on trust.
Instead of giving nuts in the form of credit, we use highly-structured credit derivatives created by investment bankers. It’s the same principle built using modern tools.
Modern money is intertwined with modern credit. When you borrow money from a bank, funds are credited to your account. These funds can be used for purchasing goods and services. The bank has created money out of thin air.
The reason we can create money out of thin air is simple: money, at its core, is just an idea. Over history, it’s been tied to everything from shells to nuts to modern electronic databases. The principle of money has remained constant, but the practical features of money have changed.
Money is based on the concept of trust. You might request to get paid in USD because you trust that the United States has a diverse, stable economy and a long history of running a stable currency. That’s one reason why 1 USD means the same to you as it does to someone else.
The above example assumes a centralized system. The USD is operated by a centralized organization, and the value of the dollar changes (at least partially) based on decisions made by a centralized entity.
To date, we haven’t had a decentralized system for managing currency. New technology – like blockchain – is making that possible.
“Decentralized systems such as Bitcoin demonstrate that it’s possible to securely maintain a shared record, enabling peer-to-peer transactions without relying on trust in a centralized record keeper. Platforms such as Ethereum show us that it is possible to create programmatic and autonomous ‘smart contracts’. All the while, the promise of machine learning is increasing rapidly. Humanity’s organisational tool-set has been significantly expanded.”
Thanks to modern technology, decentralized economic management is not only a possibility – it’s a reality. We’ve created a system that doesn’t rely on a centralized organization for trust. Instead, trust is built into the decentralized system. We trust the system because it’s decentralized instead of trusting the system because a centralized organization told us to trust it.
New Technologies Are Making Decentralization Increasingly Possible
Next, Baynham-Herd describes the specific financial tools making this new financial reality possible. Blockchain technology is one of the most notable tools, for example, as are smart contracts.
Blockchain: With blockchain, we can verify data while syncing it in multiple locations without the need for a centralized recordkeeper. Blockchain has opened the door for cryptoassets like bitcoin.
Smart Contracts: We also have smart contracts, which can be implemented and executed in a decentralized way without the need for a third party. A smart contract is an agreement between two parties enforced by a decentralized system. The contract will execute when certain conditions are met.
We’ve already seen the effect that blockchain has had on currency management worldwide. Governments and national banks are exploring the launch of national, blockchain-based currencies.
We haven’t yet, however, seen the full impact smart contracts could create on our economy. Baynham-Herd explains that it could lead to a new financial future where money is “smart” and loaded with programmable features:
“When money is truly digital it will be programmable. This means the financial system won’t just do things more efficiently, it will do entirely new things.”
What kind of things could smart contracts do when powered by money? One possibility is to imbue money with the ability to lend itself at algorithm-optimized rates. Baynham-Herd describes that next.
The Future Will Have Free-Flowing Money and Credit
Baynham-Herd envisions a future where personal loans aren’t based on outdated infrastructure like credit scores.
Instead, loans will be universally acceptable and customized to each individual. They’ll also be dynamically adjustable to specific needs and circumstances.
The cash in your bank account will be dynamic – not static. It will be programmatically lent-out (something your bank already does with your money) by the minute, using algorithms that search the financial ecosystem for risk-optimized returns.
We’ll be able to pay salaries and bills in real-time, giving individuals and organizations the ability to control their personal finances like never before possible.
This will make lending cheaper for both individuals and organizations. It will reduce middlemen involved in the lending process.
It will also open avenues for the world’s poor. The world’s poorest will be able to access microloans, for example. They’ll also be able to capitalize on trillions of dollars of unregistered assets – like land informally owned by poor people in developing countries.
The End Result is a Democratized Financial Ecosystem
All of this is leading towards a single conclusion: the future will have a democratized financial ecosystem. It will be a future where we think differently about finance. It’s a future where we have more power over our finances.
Baynham-Herd sums it up:
“The financial reality we are building is one where we have access to information and services that drive us to reimagine our financial lives. Where we all have the tools that enable us to access markets, finance projects, and manage portfolios of investments. This is a world where we think differently about money and finance: where we increasingly believe in a better future because we are empowered with the capacity to create it.”
Ultimately, we don’t have to look far to see signs of this new financial reality. It’s all around us. Blockchain technology emerged just one decade ago and it’s already transforming our daily lives. It’s unknown where blockchain and crypto will take us next – but it seems we’re destined for a new financial reality.
We recommend reading the full blog post by Blockchain’s Head of Strategy, Xen Baynham-Herd, here.