LeoGlossary: Currency

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An item that is used medium of exchange for goods and services.

Since the evolution past the barter system, currency is the primary medium of exchange since it allows for standardization. This is usually focused within a particular nation although it has extended globally for the more common currencies.

Fiat currency is the best known today. These are the USD, EURO, JPY, and GBP. They are originally under the control of the government although most are overseen by the Central Bank with the commercial banking system responsible for the issuance through debt. When banks issue out loans the money supply increases.

Currency of this nature also serves as legal tender for the country. This means that all creditors are required to accept it.

History is filled with private forms of currency. As stated, it is really a medium of exchange. Today, we see a lot of excitement surrounding cryptocurrency which is a built entirely on the Internet.

Many are forecasting the impact upon the entire global monetary system. Cryptocurrency has the potential to fill roles other than just currency.

Ledger Based Money

Since the introduction of double entry accounting in the late 1400s, money was forever changed. This brought the liability to the balance sheet. It was important because, suddenly, people could track who owed what to whom. This also brought forth the idea of credit.

For centuries the banks maintained the global ledgers pertaining to currencies of the world. While they dealt with banknotes as vault cash, they also maintained an accounting of who held what. This is the fundamental value banks brought to the table.

Ledger based is in contrast to commodity backed money. Many feel this was the prevalent form of money throughout history. This is incorrect. Over the last 600 years, there were examples of where businesses had to compensate for a shortage of coins.

Another problem was that merchants in major trading centers did not have a standard unit of account since they were dealing with currencies from all over the region (or world). This obviously made transacting difficult since there was no exchange to swap the currencies (like the FOREX market today).

Commodity backed money (coinage) derived value from the metal itself. However, this was only part of the story.

Throughout history, there were imitation coins. These were duplicates of the major ones yet often carried lower value. This was interesting since they often had a higher metal content.

This shows that the economy the currency was tied helped to establish the value. As always, finance is rooted in trust and confidence. People behave based upon their feelings and expectations about the current economic environment.

Ledger based money scaled better and make settlement a lot easier.

While the belief is that we went:

barter--->coinage--->ledger money

the reality is it probably went:

barter--->ledger money--->coinage

In terms of the major economic expansion.

The digital world only took this to another level.

Blockchain

Currencies have been digital for a long time. Many discuss the idea of a Central Bank Digital Currencies for fiat currencies such as the US Dollar. The reality is that most transactions occur in the digital realm. Very little is done using banknotes. Instead, money is essentially numbers on a screen.

Here is where the ledger enters as a vital component to the monetary system. The ones running the ledger are effectively in control of all related to money. This is a lot of power which is obviously ripe for abuse.

It is also very profitable as the banks and other financial institutions prove.

Blockchains offers an alternative. It is essentially the same system. The main difference is who controls the ledger.

With blockchain, we are looking at distributed ledger technology (DLT). This reams the nodes that run the software are responsible for maintaining the balances of each wallet. The code prevents the double spend problem by having each node keep a duplicate of the ledger. All nodes match up against the others. Any difference from consensus is rejected.

Cryptocurrency is simply a coin or token that is built on a blockchain. This can be at the base layer as in the case of a Bitcoin or Ethereum. It also could be tied to a smart contract, making it a token. Most stablecoins are examples of this.

The excitement over cryptocurrency is that it removes the banking system from the equation. Digital wallets provide the use case that most turn to banks. This will send, store, and receive currency, all without having an account at a financial institution. As long as one maintains the private key, the currency can be accessed.

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