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Since the dawn of time, man has conducted business through a barter/trade system. In some instances, the world has used salt or exotic spices and at other times precious metals and gems. Depending on the time and place on earth, you could be spending some salt to purchase a blanket of silk in China or you could be using a “greenback” note containing some intricate art to purchase tea in the 1860s America. By completing that purchase, you have now done what is called a remittance. You have conducted a transmittal of something commonly accepted as a standard of exchange, this is what defines money. So what is money really? According to Webster’s dictionary money is defined as, “something generally accepted as a medium of exchange, a measure of value, or a means of payment. (Money)” In our current world, surrounded by ever-advancing technology, we have come to a point where the need to move money quickly and securely is becoming of utmost importance. Our current financial transactions have become slow and inefficient. Could this be the rise of the digital currency age?
So, how exactly is currency moved today? Our current US system utilizes FDIC Insured Banks, as a consumer would use a plastic debit card, with an implanted microchip, to move “money” from your bank account to a business for settlement of payment. Unfortunately, even though you might see that your account has been credited; your settlement did not complete its remittance yet. That’s because the bank did not send the funds to the business; the bank only sent a message to the payee notifying them of the transaction, the specified amount to be settled. This current system works but if you are on the receiving end of the transaction you will be waiting some time for the deposit to fully remit.
Currently, most US citizens utilize the US Dollar and demand is the only thing giving it value. What would happen if demand depreciated? Would the dollar become essentially worthless? Absolutely, demand is the key to the value of a currency, thus the value of a currency is directly related to its supply. Often overlooked, most Fiat (currency established by a central authority or government but lacks actual value) currencies are actually inflationary currencies, meaning governments have the ability to increase its supply, and hyperinflation becomes a potential problem. A current example of hyperinflation is in the small country of Venezuela, where the country’s Fiat has become so worthless that a loaf of bread would cost a wheelbarrow of that nation’s currency. Would you feel comfortable carrying a wheelbarrow full of cash? This brings us to the need to find a store of value in a currency relatively small and secure.
Most people in the US argue that gold is what gives most Fiat currencies value. However, after 1971 in the US, the dollar was no longer backed by gold. It became a promissory note of the United States. President Franklin D. Roosevelt, with the Gold Reserve Act of 1934, ordered all gold to be turned into the Federal Reserve; and outlawed the ownership of the precious commodity. How can we trust our, governments if they can just strip us of our own hard-earned wealth?
The Following is a quote by Warren Buffet about the intrinsic value.”It gets dug out of the ground in Africa or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”(Warren Buffett)
The security measures set in place, make digital currencies a viable solution to Fiat/gold simply because they cannot be confiscated and do not require unnecessary security. Cryptocurrency is very secure, often having a 24 phrase password protecting the account and cannot be accessed by unauthorized users without the account keys.
Alan Watts and Gold
The following passage is about gold by the famous lecturer Alan Watts. The lecture goes on to prove that value is merely ascribed and moved on ledgers, nothing more.The great banks of the world at one time got absolutely sick of the expense and security measures involved in shipping consignments of gold from one bank to another and so they decided that all the chief banks of the world would open offices on a certain island in the South Pacific which was balmy and comfortable and there they would store all the gold in the world. And they put it in great subterranean vaults reached by deep elevator shafts and then all they had to do when one bank, one country owed gold to another was to trundle it across the street. And this was very efficient. It went on beautifully for five or six years. And then the presidents of the World Bank’s got together and said, “Let’s have a convention out on this island and take our wives and families.” So about seven years from the date of opening, all those presidents and their wives and families went out to this Pacific island and they inspected the books. And everything was beautifully in order. Then the children said, “Oh Daddy can’t we see the gold?” They said, “Of course you may see the gold.” And they said to the managers, “Let’s take our children down to the vaults and show them the gold.” And the manager said, “Well it’s a… it’s a little bit inconvenient at this time and perhaps the children would not really be very interested, after all, it’s just only old plain gold.” And the president said, “Oh no, no, come now, they’d be thrilled. Let’s go down and see.” And there was further humming and hawing and delays and finally it came out that a few years before there had been a catastrophic subterranean earthquake and all the vaults had been swallowed up and all the gold had disappeared. But so far as the bookkeeping was concerned everything was in perfect order. What this means then is that money is nothing but bookkeeping. It is figures. It is a way of measuring what you owe the community and what the community owes you….(Watts)
Past Stores of Value
In the 19th century, on the tiny Pacific Island of Yap, the inhabitants invented their own type of currency. Rai, which are huge circular limestones, were used as their medium of exchange (Wheelan). These extremely heavy stones held value because they were not indigenous to the area and were extremely expensive to cut, carve, transport and could not be easily counterfeited. They were rarely moved and often positioned right in front of the owner’s house. Ownership would be transferred from party to party upon settlements but regardless the stone would not be moved. Also, there only being “X” amount of Rai, if one was lost it would still be counted towards the entire supply. Blockchain works in exactly the same way. If a user loses their ability to access their respective accounts, total supply of the blockchain is unaffected. Some could even argue that Rai was the first blockchain.
Nostro Vostro Accounts
What are Nostro and Vostro accounts? The two terms come from the Latin words meaning “ours”(Nostro) and “yours”(Vostro). A Nostro account is what is on deposit at any given bank (Bank A). A Vostro account is an account that is yours but held by another (Bank B). These accounts hold trillions of dollars of stagnant capital and are needed to facilitate international transfers. An example of this would be attempting to process an international transaction between the Bank of America (Bank A) and Bank of China (Bank B). From Bank of America’s perspective their deposit at Bank of China is a Nostro account, and from the Bank of China’s perspective, Bank of America’s holdings at Bank of China are Vostro accounts. These accounts hold an estimated $30 Trillion globally.
A new and emerging solution would be blockchain, in which all transactions would be kept on a global ledger. This technology would ease and facilitate faster remittance as well as reduce the transaction fees incurred upon the masses. If all value is bookkeeping than why not keep the book globally? This would also eliminate the need for Nostro/Vostro accounts. Distributed ledger technology is bookkeeping on a global scale. All transactions would be recorded on one ledger, through the use of a peer-to-peer network, where the network replicates and saves identical copies on the ledger. This distributed ledger would not only be accessible in real-time from anywhere in the world but would also expedite remittances. This new “bookkeeping” would eliminate the need for Nostro and Vostro account thus freeing up the dormant capital. Not only would this change the way currency is used but it would give currency actual utility. We use gold as a store of value, but what is it really? A precious commodity? A mineral? A conductor? Gold has value because we give it value; otherwise it just sits there like the Nostro and Vostro accounts and Fiat currency. It’s time our store of value had utility.
Liquidity Problem
Currency is intended to be liquid. Even the word currency utilizes the word current, meaning to flow. When transacting large sums of currency across great distances, it is easy to see that the currency flows becomes difficult. Thus implementation of blockchain technology will have a huge impact on the world’s financial liquidity problem. Instant liquidity would now be available with the use of peer-to-peer blockchain networks. CEO of Ripplelabs, Brad Garlinghouse once stated, “We can stream video from the space station, but I can’t move my own money from A to B, especially for international payments, but that is also true for domestic transfers”(Groenfeldt, 2017). Ripple labs created a company that focuses on the XRP Ledger; building enterprise products that would work with banks and corporates. Their product, Xrapid, utilizes blockchain technology to provide financial liquidity and provide real-time remittance and settlement, from point A to point B in seconds, all for a fraction of the current costs. “On average, XRP, costs 81% less than the correspondent banking network used for decades to send global payments”(Hodor, 2018).
Blockchain
What is blockchain? Blockchain is a ledger or a database, which is stored in a distributed peer-to-peer network without any central point of control. (Chen, Hsing-Chung Kuo, Shyi-Shiun Chen, Han-Mi, 2018). Data is recorded on a block of information, along with a timestamp, and then passed along to the next time stamped “block”, thus creating a string of blocks known as a chain. Although, it is speculated that it was invented by an unknown entity with the alias Satoshi Nakamoto in 2008, blockchain may have been created in 1991, when a man named David Schwartz filed for his patent on computer systems, US patent 5025369. Regardless, 2008 brought the birth of “Bitcoin” which was originally intended to be an inflation resistant currency as well as a solution to the counterfeit money problem associated with fiat currencies (Blockchain). Having absolutely no ties to any central government or financial institution, this new decentralized digital store of value quickly gained popularity. From buying a coke to a Lamborghini, payments/settlements can be made quickly and securely via Bitcoin’s blockchain technology in a matter of seconds.
Implementation and Utilization
Blockchain has become a quickly evolving technology that presently has several avenues of utilization being explored. Blockchain is a ledger, or a database, that is stored in a distributed peer-to-peer network without any central point of control. (Chen, Hsing-Chung Kuo, Shyi-Shiun Chen, Han-Mi, 2018) Although the concept of blockchain is quite simple, this technology provides a secure and effective way to move and save different types of information or data, which becomes an ideal method to track just about anything. Logistics, healthcare, financial payments, digital media, and decentralized web are just a few of the many possibilities for utilization, but many other uses are shed to light daily.
Currently, financial payments are the most common use-case for blockchain. Each day, hundreds of millions of dollars are exchanged on a number of different blockchain ledgers such as Bitcoin, Litecoin and XRP. These transactions happen instantaneously while providing settlement to and from anywhere in the world. These payments can range in size from micropayments to billions of dollars and be moved while settling in seconds. The system also supports smart contracts, which execute procedural instructions, such as the arrival of a raw product or completion of a service (Chen, Hsing-Chung Kuo, Shyi-Shiun Chen, Han-Mi, 2018). While this type of implementation is ideal for international financial transfers, it also limits the central banker’s authority by eliminating the need for a third party to conduct financial transactions. This provides an efficient, cost effective and secure transaction. It is also ideal for the handling of personal information concerning identity, as the choice in alteration could only be changed by a governing authority if necessary. This technology could also be utilized to aid immigrants in gaining citizenship, by speeding up the immigration process and performing rapid background checks.
Healthcare, is another area that blockchain will have a significant effect upon. Utilizing this technology, healthcare professionals would be able to securely record, edit and share all prudent patient information instantaneously. Also in the unfortunate event of an accident, this technology would provide emergency personal the patients past medical and allergen histories, therefore providing the ability to make immediate decisions and effective decisions. For personal medical data, the most adequate type of a blockchain would be a private blockchain (Hölbl, M., Kompara, M., Kamišalić, A., & Nemec Zlatolas, L ,2018). New healthcare providers would benefit from the ability to access past patient records.
Utilizing blockchain in logistics, a manufacturer would be given the ability to track their product from initial assembly to final customer delivery. This would prove to be extremely beneficial information to a manufacturer because it could provide warranty information; items use statistics, manufacturing records, and sales records etc. Currently this information is not easily obtainable without the use of a blockchain technology.Considering that this technology was intended to move information securely and efficiently, blockchain is also ideal for the digital media industry. It would provide a excellent avenue for digital artists to sell or share their content with interested parties from remote locations around the world. For the music artists, blockchain could provide an added security to copyrighted songs and videos.
Two prime examples of blockchains are Bitcoin and Ripple, and although they differ in a few aspects; both currencies are digital stores of value. According to Peter Diamandis “At its core, Bitcoin is a smart currency, designed by very forward-thinking engineers. It eliminates the need for banks, gets rid of credit card fees, currency exchange fees, money transfer fees, and reduces the need for lawyers in transitions… all good things.”Blockchain works in one of two basic ways, proof of work and consensus. Below is a description of Proof of work.
Proof of work (POW), requires nodes to find a random value that, combined with the hash of transactions and of the previous block header, produces a given result. When a node identifies a possible solution, it broadcasts the result to the other nodes, which check it. If the majority of the nodes agree on the result, the block is considered valid and it is added to the blockchain, making each node update its local copy (the winner could also receive a reward; for example, in the form of a transaction fee). (Gatteschi, Lamberti, Demartini, Pranteda. 2018)
Bitcoin utilizes this protocol, which awards its network users a reward for utilizing their respective computing power. The latter is a consensus, described by its creators below.The Ripple Protocol consensus algorithm (RPCA), is applied every few seconds by all nodes, in order to maintain the correctness and agreement of the network. Once consensus is reached, the current ledger is considered “closed” and becomes the last-closed ledger. Assuming that the consensus algorithm is successful and that there is no fork in the network, the last-closed ledger maintained by all nodes in the network will be identical. (Schwartz, Youngs, Britto, 2018).
This consensus is achieved by the use of validators set up by anyone wanting to run the ripple ledger network and there is no central control over the XRP Ledger. Moreover, XRP can and will run without the support of Ripple thus proving that the ledger is fully decentralized. It must be noted that using this type of protocol ensures a highly secure ledger because each node will validate itself with all others in the network.
Evidently, there are major differences in the protocols used by Bitcoin and XRP, and thus cryptocurrency enthusiasts have formed two sides, XRP opponents and XRP supporters. XRP opponents argue that because the XRP software was originally majority run by Ripple’s validators, subsequently its block blockchain is centralized. XRP supporters argue that because of the nature of Bitcoin’s POW, it can easily be manipulated by a 51% attack.
A 51% attack refers to an attack on a blockchain – usually Bitcoin’s, for which such an attack is still hypothetical – by a group of miners controlling more than 50% of the network’s mining hash rate, or computing power. The attackers would be able to prevent new transactions from gaining confirmations, allowing them to halt payments between some or all users. They would also be able to reverse transactions that were completed while they were in control of the network, meaning they could double-spend coins (Frankenfield, 2019).
This attack could come from China, where mining pools processes close to 74% of the worlds daily Bitcoin Transactions (Aki, 2018). XRP on the other hand is not susceptible to these types of attacks because not subject to 51% hash attacks. The picture below represents XRP and its decentralized nature.
There are additional differences that keep BTC and XRP independent from each other. Total supply of each of these digital assets also sets them apart despite both being finite supplies. The maximum supply of BTC is 21 million coins while XRP, even though deflationary, is at 100 billion. Transaction rates are also significantly different. BTC has achieved close to 7 TPS, while XRP performs a staggering 1500 TPS, which makes XRP scalable to VISA’s levels. The image below displays the speed at which XRP can operate.Actually $xrp is the standard (Xrptrump, 2018)
The final difference between these two digital assets is utility. BTC was originally created to be a secure form of payment. It has now become a store of value; often dubbed digital gold. XRP on the other hand, is quickly setting itself apart with its utility case. Not only can it be used to complete remittances in real time, it can also trade commodities, stocks and bonds, real estate as well as being a store of value. In my opinion, this makes it more worthwhile than any other digital asset on the market to date.
Use Case Example
Imagine, if you will, that you are Saudi Aramco and you just sold 2 million barrels of oil to ExxonMobil at $14 USD a barrel, the average capacity of one very large crude container supertanker. Now you patiently await payment from the refinery. How would the refinery send a payment of $28,000,000 USD? ExxonMobil would contact their respective bank to notify them that settlement of payment needs to occur in the above amount. The bank would then contact Saudi Aramco’s bank with a notification that they are soon to be credited with $28,000,000 USD.
Here is where it gets confusing. The ExxonMobil’s bank would contact SWIFT (Society for Worldwide Interbank Financial Telecommunications) to process the settlement. The fee associated with this transaction would be roughly $1 million USD. To send your payment to another bank, the banks will charge 8-15% on average in fees. SWIFT will then send a bank “message” to Saudi Aramco’s bank notifying them of payment, but has anything really been settled or transferred? All that transpired was each bank editing each other’s ledger.
Couldn’t we just achieve these remittances ourselves and eliminate the need for a 3rd party using a digital asset? Also if we are transferring value literally from one to the other, why the need for such high transaction fees?
Conclusion
Some might speculate that the crypto currency market has crashed, but as you can see within just the past few months the use case has grown exponentially. As you can clearly see from any of the BTC/USD charts, even though it currently is at the bottom of the Fibonacci channel, since its inception the whole blockchain market is still continuing to ascend.
The weekly or monthly candle stick charts contradict the “herd-mentality” of the cryptocurrency being in a bubble about to pop. Generally when the red, “down trending” candle sticks touch the bottom of the Fibonacci channels they effectively bounce back up as you can see. Are we in a crypto bubble? I personally don’t think so. Remember, and is widely known, that Amazon’s stock fell 90% before rising exponentially in an extremely short period of time.
I believe that in our lifetime we will have the unique privilege to experience the greatest digital asset in human history. XRP is a decentralized digital asset created in 2004. It has the power to move digital or fiat assets anywhere in the world and can convert any currency, or commodity into another in seconds all while maintaining maximum security. I believe we are on the verge of mass adoption of digital assets. Currencies only hold value as long as there is a demand for it as well as the faith in the counterparty which issues that currency. XRP will lead the way in the Fintech world and future digital stores of value.
Even though blockchain is a new and emerging technology, it is here to stay. I believe the world is in desperate need for a more secure, decentralized and dynamic financial system. In the near future I believe these technologies will solve the world’s data issues and XRP will play a pivotal role in the future world.
References
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Groenfeldt, T (2017, August 16). Ripple Uses Blockchain to Move Money Faster Than a Flying Courier. https://www.forbes.com/sites/tomgroenfeldt/2017/08/16/ripple-uses-blockchain-to-move-money-faster-than-a-flying-courier/#1f5688e03f3a#1f5688e03f3a
Hodor. (2018, June 22). “On average, Ripple costs 81 percent less than the correspondent banking network used for decades to send global payments”. https://twitter.com/Hodor/status/1010255274530271233
Hölbl, M., Kompara, M., Kamišalić, A., & Nemec Zlatolas, L. (2018). A Systematic Review of the Use of Blockchain in Healthcare. Symmetry (20738994), 10(10), 470. https://doi.org/10.3390/sym10100470
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