This is a topic so deep that many never bother to dip a toe in the waters. This article is intended to be that toe, hopefully with enough information that those chasing rabbit holes can take useful words and search out enough meaning so that they may progress forward to wet feet. I’m going to be talking about the direction of currency, trade and decentralisation — hopefully you’ll wake up, rather than fall asleep, we need you! :p
Whats happening you say? A tale of value transfer…
Trade is at its fundamentals a value exchange, my bananas for your eggs in arbitrary but agreed quantities. w00t, teh system works!
Ok, not that easy. And how the hell did we end up using these bits of paper?? Well the bananas and eggs example worked on some levels but being the complex beasts we are, we ascribe value to many things individually and arbitrarily…
This posed several problems. For instance, buying land with shit tons of bananas is not a smooth transaction. To make things easier we needed a common means of exchange which is the very concept of currency.
The ideal currency would have many properties but as precious metals ticked most of the boxes compared to other commodities we started using them to buy and sell goods. This worked, apart from the risks associated with holding large quantities of valuables and so people started to store them in vaults with trusted middle men.
Metals were a decent stab at the problem, but they had other issues like transport and hijackings so vaults started to issue notes of exchange with other vault holders in various locations. After about a few hundred years of abstraction we had moved on to everyone holding their metals in vaults and then trading the promissory notes. Wooohooo paper money — so much easier!!
This was great, we had the value of metals but in a convenient tradable form! Unfortunately the trusted middle men realised they could game the system by lending out more than they had while everyone else was busy shuffling paper… Pretty quickly this practice, known as debasement, caused the first bank runs when people realised there was only so much to go around. Of course measures were put in place limiting the dangers of fractional reserve lending, but the practice still continues…
Further adding to the pain these practices evolved into leveraged financial instruments and quantitive easing which essentially compound the effects of debasement. For instance the Bank of England “printed” £60Bln digital pounds (from thin air) and pumped it into the system around August 3rd 2016. Ahhh the magic money tree that many UK officials claim doesnt exist….
Ok, so monetary history and the utter lies were told about it are too numerous and dense to go through. Here’s a cartoon; many people became dissoloutioned and in 2008 Satoshi came along to provide an alternative with his Bitcoin whitepaper.
Blockchain time
Bitcoin as you may know, was our first taste of blockchain technology; a peer to peer network forming consensus on a distributed database. The genius of this network is that it uses cryptography to disintermediate the ‘trusted’ middle men, finally making them redundant… instead users of the network secure the keys to their own cryptographically unique tokens, and then transact on a peer to peer network.
This underlying blockchain technology has been blossoming since 2008 and the idea has been applied to many other problems with their own specific use cases. Piled together these blockchain projects formed an early market and as the decentralised assets were unique and had value, people started to trade them… but ironically on centralised exchanges. Because who cares about atomic ownership!
Well actually, the exchange hacks of MtGox and Bitfinex exposed centralisation and the trusted third party problem for what it has always been; risky promises. MtGox collapsed leaving people out of pocket and Bitfinex issued tokens for reimbursement that had a speculative price. They actually learnt a lot from this as we’ll cover later.
Moving past Bitcoin (and other blockchains largely in the same vein) by a few years we arrive at the big idea proposed by Ethereum: smart contracts. The essence of its offering being programmable currency, secured on the blockchain — aka Bitcoin with logic. Building out from this innovation we end up with all sorts of distributed businesses or applications that utilise tokens to drive new economic models. At this point we reach the birth of tokenomics!
These dApps (distributed applications), are services that are built on distributed services or protocols — like— but not limited to Ethereum. We’re now at the point where there are hundreds of tokens on Ethereum, all with programable logic — but yet were still largely using the centralised exchanges for a couple of reasons. This is mainly due to the fact that they are the incumbents, but also because ‘on chain trading’ is costly in comparison and slow. One of the better known examples is Ether Delta.
So this brings us to the currently blooming solutions; decentralised exchange or DEX for short. To be decentralised the trade must be executed via smart contract rather than through ‘trusted middlemen’ which is called an atomic swap.
Ether delta was one of the first movers in the Decentralised Exchange space but is also one of the most primitive. As mentioned ‘on chain trading’ has its down sides in relation to liquidity, speed and cost, but the advantages are atomic ownership of fund and the disintermediation of bureaucracy and red tape; any token can be listed/traded and thus there no waiting for the central exchanges to list choice projects.
The current wave of protocols such as 0x are more efficient and looking to solve these problems. Transaction speed and scalability issues are reduced by moving elements like the order book off chain and then settling the final transaction on chain. The liquidity problem is also getting solved by introducing relayers which are token pools or matching services with a graphical front end. In this category we can find services like Omega One, 0cean or Kyber, which will all be accessible through the 0x protocol.
Woooooop, so we have pools of tokens coming online through smart contracts and connecting with the rest of the network — the dreams pretty much a reality now! Decentralised atomic trading what could be better? Mmmm…. Use?
What do I mean by use? Simply put non securitised value (Abstract, rather than quantified numerically). Lots of things have value, its what incentivisation models aim to create — which is all of the crypto sphere… but currently the projects are isolated unto an island of their own coding.
My question at this point is that the futures coming, do you see it?
Understand that conversion from one store of value to another, cryptographically and without a centralised intermediatiary — is a quantum leap in monetary technology especially when automated. Moving forward this will create huge paradigm shifts towards concepts like Pull and beyond.
Its these shifts that have us excited.
FYI this is my first proper article on Steem please show some love if you enjoyed it :)
You can also find my crypto musings on Youtube, I should really move to DTube: https://www.youtube.com/channel/UCf6H4JCSEpXTtCBOTphga0w?view_as=subscriber