My research topic for the semester project is “evaluating the feasibility of adopting a decentralized monetary system”.
Decentralized market structures consist of a network of various technical devices that enable investors to create a marketplace without a centralized location. In decentralized markets, technology provides investors with access to various bid/ask prices and makes it possible to deal directly with other investors/dealers rather than at a physical central exchange. Traditional examples of decentralized markets include, but are not limited to the real estate and bonds markets which operate in a similar manner.
My research aims to conclude if we can implement a decentralized monetary system for our commercial and day to day transactions. My primary research will be focused on how cryptocurrencies have the potential to become a viable alternative to centrally issued currencies that are plagued by interest based valuations and can cause major economic catastrophes. I plan on interviewing a broker from the Psx stock exchange who has more than 30 years of experience in the stock market and is a CFA charter holder. He has firsthand experienced the market crash of 2008 and will be able to shed some light on some of the underlying causes for the financial meltdown experienced by the global economy. I will ask him specific questions to his view on market regulations and valuations. I plan inquiring about how debt and interest facilitate commerce and the effect they have on macroeconomics in the long term. In addition I will ask his opinion on adopting a decentralized monetary system asking to how the real estate and bond market operations. Finally I plan on asking him his opinion on cryptocurrencies and their short and medium term future and if they can solve the current problems of our financial system, while being somewhat regulated by government institutions for criminal activities.
The next research method I plan on adopting is textual analysis to find out how 2nd and 3rd generation cryptocurrencies like ripple, cardano and ethereum plan on refining the digital assets market so that they can be implemented in real world commercial activities. I will specifically look into their projected road maps and what improvements they plan on incorporating in order to cater to real world problems. How they are trying to secure contracts with other banking institutions all across the globe and how are governments and regulatory authorities reacting. I will seek to answer what forms of regulations governments plan on bringing to incorporate the digital assets into our current system. I will look into how a shift to proof of stake from proof of work solves power mining consumption issues and makes future currencies more viable than bitcoin. I will evaluate how assets that have no intrinsic value unlike traditional gold and petroleum based currencies but are tied to technology that secures and facilitates the transfer of peer to peer payments uphold monetary value. I plan on looking further into how it will effect criminal and black market trading activities from anonymous transactions that take place independent of government intervention. I will seek to find a solution to how governments and central authorities plan to tax citizen in the event of a shift towards cryptocurrencies. Finally try to amalgamate information from peer reviewed academic articles by people who are for and against a decentralized monetary system and cryptocurrency.
I was able to successfully conduct the interview with Mr. Lateef Akhtar from KHS securities pvt ltd. The interview provided me sufficient information that could be used to develop my argument and cite experiential evidence. He provided me crucial insight to the 2008 and market and how it had a ripple affect across the global economy. He blamed the crash on failures of massive financial institutions in the United States that packaged subprime loans to high risk mortgage candidates and credit default swaps issued to insure these loans. This phenomenon leads to a disruption of balance between the money available to back the loans up, rapidly developing into a global crisis. This resulted in a number of bank failures in Europe and steep reductions in the value of stocks and commodities worldwide, adversely affecting all currencies pegged to the US dollar. He recognized the convenience and facilitation of debt and interest on how it can have a stimulating effect on the global economy by increasing consumption, but warned against the risks associated when the delicate balance tips too far. He argued how central government institutions have a monopoly on the money in circulation and can manipulate currency value by economic tools that interfere with the natural process of trade.
One of the most interesting things I learnt was his mention of an ‘Invisible Hand’ as the latent market force that helps the demand and supply of goods in a free market to reach equilibrium automatically. He argued that for trade to truly flourish a free market system should be adopted that can help the economy achieve its maximum potential which can only be achieved through little to no regulatory restrictions. He was on the view that cryptocurrencies make it possible for our currency markets to have decentralized peer to peer transactions in a highly secure manner, free from outside intervention, operating freely on laws of economics. He identified one of the main reasons that prevent cryptocurrencies from integrating fully into our financial systems were the security issues they bring. They provide a unique challenge for governments to tax citizen and would have to completely revamp their existing methods of tax collection. Moreover since cryptocurrencies are stored in personal digital wallets, governments will find it very difficult to keep track of the individual net worth and transaction histories of citizens. This can lead to a free hand for corrupt individuals to conduct criminal activities and can finance terrorism without the government ever recognizing it. He however concluded that these issues can be sorted out with time and cryptocurrencies have the potential to effectively streamline our global financial system, leading to new levels of productivity humanity has never experienced before.
In my textual analysis I deeply studied the technological improvements by cardano. Cardano is a cryptocurrency in its infancy that seek to build upon the underlying framework bitcoin has provided and solve most of the issues that prevented it from becoming a primary method of value exchange. I found the underlying difference between bitcoin and second generation currencies like cardano and ethereum to be their shift from the proof of work to proof of stake algorithm. Proof of Stake (PoS) concept states that a person can mine or validate block transactions according to how many coins he or she holds unlike the proof-of-Work, where the algorithm rewards miners who solve mathematical problems with the goal of validating transactions and creating new blocks. POW mining was pretty costly and required a lot of energy, One Bitcoin transaction required the same amount of electricity as powering 1.57 American households for one day, which made it very counterintuitive. However using proof of stake nodes in the network don’t spend time and electricity to solve a mathematical problem to reach a consensus; instead, they place a bet on blocks. When a block is appended to the chain, whoever had placed a bet on it, gets rewarded. Making is very highly effective while providing a safer and more efficiently reliable network.
One of the most important advantages of cardano I found to be its solution to scalability issues. The security and availability of a block chain protocol relies upon many nodes possessing a full copy of the block chain data. Thus, a single byte of data must be replicated among N nodes. However cardano’s ouroboros update functions on the consensus algorithm. Ouroboros permits a decentralized way to elect a quorum of consensus nodes, which in turn can run more traditional protocols developed. This makes it practical enough to be used as a viable mode of transaction. Moreover cardano has decided to be released in a layered approach, dynamically improving according to market issues and demands. Moreover etheruem’s technology is being partnered by Swiss bank UBS that plans to use Ethereum smart contracts to improve the quality of counterparty reference data through anonymous reconciliation. Barclays, Credit Suisse, KBC, SIX and Thomson Reuters are all onboard for the project, which was kick started by UBS. This has the potential to develop a data consolidation system that functions in real time, maintain anonymity for all participants.
I was surprised to find out how cryptocurrencies are on the verge of not only integrating but also improving our existing operations within our banking institutions. This is very important for my research as it points to evidence that our crypto revolution might be administered sooner than we realize. Thankfully my research project is still in harmony with what I expected and the information I gather only supports my thesis.
The project will be on the same path from what I envisioned as I seek to gather more information to consolidate my point of view. Getting closer to the answering if decentralized cryptocurrencies are a reliable alternative to our traditional monetary system. However I realized I need to delve deeper into the regulatory aspect of cryptocurrencies and find out solutions that will ensure the safety of adopting such a system.
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