Why bitcoin is redefining money and finance?
The essential problems in our monetary and financial systems are in the trust model and trusted third parties that we have to rely on. Current monetary and financial systems are extensions of power and monopoly. Money issuance power and monetary policies have been evolved into an absolute power controlled by a grip of people in central banks. The power is about freedom and enslavement.
Bitcoin makes removing trust and trusted third parties a reality for the first time in human history
Bitcoin holds the promise of removing trust and trusted third parties in money and finance. The major breakthrough in bitcoin is to make possible direct p2p transactions without trust and trusted third parties, which is guaranteed by the underlying technology - blockchain.
In the bitcoin whitepaper, it says, [Bitcoin is]
a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Commerce on the Internet has come to rely on almost exclusively on financial institutions serving as trusted third parties to process electronic payments...We have proposed a system for electronic transactions without relying on trust.
Satoshi also pointed out the root problem with fiat money and the central bank.
The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible. In this sense, it’s more typical of a precious metal. Instead of the supply changing to keep the value the same, the supply is predetermined and the value changes. As the number of users grows, the value per coin increases. It has the potential for a positive feedback loop; as users increase, the value goes up, which could attract more users to take advantage of the increasing value.
Bitcoin (or other cryptos) is an essential part to reduce the government role
What's behind the root problem is the central banks that have absolute power of money issuance and monetary policies. It is wise to keep government roles minimized to avoid power abuse and even dictatorship. And bitcoin and other cryptos are essential for reducing the role of government. As Milton Friedman, the 1976 Nobel Memorial Prize winner in Economic Sciences once said in 1999,
I think that the Internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash, a method whereby on the Internet you can transfer funds from A to B without A knowing B or B knowing A.
Bitcoin seems to be such a reliable e-cash as bitcoin is independent of central banks In issuance. It removed the power of central banks and more trusted third parties that we have to trust and rely on. But this type of behavior is dangerous as it undermined vested interests. In 2010, before Satoshi's disappearance, Satoshi left one of the last messages on Wikileaks asking for donations in bitcoin, saying
It would have been nice to get this attention in any other context. WikiLeaks has kicked the hornet's nest, and the swarm is headed towards us.
Benchmark: levels of trust and Trusted third parties in money and finance
To measure how bitcoin has been removing more trusted third parties and has been changing our monetary and financial systems, we detail different levels of trust and trust their parties with six factors of money. These factors fall into two categories.
Internal factors: money form, money issuance standard, and money flow.
External factors: power evolution, competition, and competition.
Let's start with the money form. The money form has been evolved. Finally, some heavy metals became the most widely used currencies like gold and silver. We use these metals for exchange, store of value, and more.
(1) Paper certificate with full reserve. Due to gold’s inconvenience, it is natural to use paper gold certification in circulation. but this way it introduced the new money form: paper money. It introduced credit as well. We have to trust paper note issuers that will (a) exchange the paper money for gold as promised. (2) It was a full reserve as promised. They are trusted to issue the same amount denomination as they reserved.
(2) Paper certificate with no full reserve. As it is not full reserved, it introduced credit money into the market circulation. We have to trust them in that (a) will exchange the paper money for gold as promised (b) have the ability to maintain the business and not bankrupt as they introduced credit paper notes in circulation.
(3) Use fewer valuable metals in the coin but have the same value as gold. It introduced a partial issuance standard based on authoritative credit. Like using copper in the coin. Typically, authorities introduce the inferior coin. It granted the authority "partial power" of money issuance. We have to trust the authority.
(4) After the collapse of the Bretton Woods system, we are forced to be a national credit-based issuance standard. The money issuance is based on national credit and the central bank has the exclusive power of money issuance. The constraints of god had been removed. Typically, the central bank has unlimited credit to provide more money and the only thing they need to worry about is devalued currency (or inflation). And the whole economic model is thus quite different from periods of the gold standard. (a) The central bank has the absolute right (b) Central bank can manipulate the money supply and money price (interest or other means) to reach their goals. (c) The economy is driven by more money supply, thus devalued currency in terms of purchasing power. As the more money supply will become debt, the national debt will be ever-growing. The fiat money is actually a total credit base currency.
(5) Non-full-reserve banks. Banks provide various money-related services. We need to reserve a portion of the money in the central bank. So, banks typically provide much more credit money into the market.
(6) As the money becomes digitalized, we actually have to trust the banks about all our accounts, where our money is simply digits in the bank IT system instead of paper money. We further need to trust account updates like the money movement and other money services. After all, the banks have the superpower to reset your password and modify your account balance, and we have to totally trust them. Bitcoin uses blockchain networks for the bitcoin movement, which is completely independent of traditional financial networks. Furthermore, bitcoin ownership is guaranteed by the private key exclusively. Without a corresponding private key, nobody can move the bitcoin around, even by law. It introduced the concept of "absolute ownership" for the first time in human history. But it also raised concerns about the illegal use of bitcoin and other cryptos. This was predicted byMilton Friedman as well,
The way I can take a $20 bill hand it over to you and then there’s no record of where it came from. You may get that without knowing who I am. That kind of thing will develop on the Internet and that will make it even easier for people using the Internet. Of course, it has its negative side. It means the gangsters, the people who are engaged in illegal transactions, will also have an easier way to carry on their business.
(7) Ethereum introduced smart contracts that further extended asset representations on the blockchain.
(8) Decentralized Finance (DeFi), the banks on the blockchain, mimics the functions of traditional financial services, thus has the potential to remove traditional financial services and financial service agencies.
(9) Decentralized exchange removed trust in traditional exchanges.
Transparency vs Privacy and Freedom vs regulations
Bitcoin as the basis of the new world
The whole world is measured by US dollars. When US dollar dominance becomes unsustainable, the world will become more chaotic and entropy increases until a new consensus come out. Considering the national debt scale of every country, the current monetary system is collapsing. We need a new consensus on the money thus the value system and global value chain that reduces the entropy thus brings new orders to the world.