The first part of the dissertation presents the history of money from its first emergence to today's modern monetary systems, followed by a description of social contract theory and fiat money. Finally, the thesis provides an overview of the themes and objectives of monetary policy.
Functions of Money
A person, a company or an entire economy may decide to keep (store) some of the money available in the present, for use in the future. This function of money, combined with its liquidity characteristic, facilitates the conversion of money into other forms of assets in the future with ease (Vaz, Milne & Brown, 2020).
Aims and purpose
Keynes has given more importance to this function of money, as he argued that it provides the means to give up a commitment to an action in the present time (Skidelsky, 2000). The specific functions (which are mainly microeconomic functions) include the three mentioned above: 'Unit of account', 'Medium of exchange', 'Store of value', adding three more: 'Common measure of value', 'Means of payment" and "Standard for deferred payments".
Structure of the dissertation
History of money
- Barter economy
- History of money before the invention of coins
- Invention of coins
- The evolution of fiat money and credit money
- Modern Monetary Systems
- Alternative currencies
- Social contract theory and fiat money
According to the Money Museum5, the Tetradrachm of the city of Athens in Greece, which was minted around 455 BC, was the first large coin for trade in the world. The monetary systems used in the area had a significant impact on people's lives, due to the uncomplicated, tangible and anonymous nature of the currency, and the word 'money' had the meaning of 'coins'. To the point that gold convertibility was stopped, all forms of credit were payable in the physical object that was the identification of the unit of account - legal tender.
The governance structure for this type of currency is centralized (Nian & Chuen, 2015). Jean-Jacques Rousseau coined the term social contract in 1762 in his book 'On the Social Contract' (McKinsey, 2020). The main meaning of the term "social contract" refers to the relationship between individuals/citizens and institutions/state.
In the literature analyzing Rousseau's view (Locke et al., 1960), there are two types of social contract. This perspective corresponds to the classical view of the spirit of capitalism or the theory of public policy.
Introduction to cryptocurrency and history of Bitcoin
The contest process creates a record of transactions, the change of which requires redoing the proof of work. These cryptographic protocols used blind signatures to protect the privacy of the members performing the transactions. At the time of the global financial crisis in 2008 the circumstances created by the problems of credit and fiat money increased interest in cryptocurrencies.
More detailed description of this paper and the Bitcoin is given in the following sections of the present thesis. The main idea behind the concept of Bitcoin is a decentralized and totally distributed network (Nian & Chuen, 2015). As mentioned above, the Bitcoin system began in 2008, with the first Bitcoin created in early 2009 (January 3) and the first version of the software released in February 2009.
The blockchain spectrum and cryptography
In 2008, a person (or a team) under the pseudonym Satoshi Nakamoto (Nakamoto, 2008), published a paper (the name of the article "Bitcoin: A peer-to-peer electronic cash system"), in which the author described the concept and functions of Bitcoin. In practice, the creation of Bitcoin is done by people competing to "mine" them, using computers to solve complex mathematical problems. The total number of Bitcoins was limited to 21 million units, with a division that could be up to eight decimal places (Guegan, 2018).
The underlying blockchain technology is a distributed ledger that maintains an ever-increasing chain of data that is confirmed by all participating network nodes. Not only these blockchain applications, but also the research community will benefit from a systematic overview of the current state of knowledge of all available cryptographic concepts that have been applied or can be applied to existing and future blockchain solutions. A large body of research (Conti, Kumar, Lal & Ruj, 2018; Wang et al., 2018), investigates security, privacy and a variety of other system challenges.
Description of Bitcoin and its function
According to (Conti, Kumar, Lal, Ruj, 2017), blockchain is a data structure based on a public link-only expandable (append only) list where the entire history of the network's transactions is stored. To change the block, transcoding must be performed after the CPU capacity is used to fulfill the proof of work. The network's nodes choose the longest chain as the correct one and continue working on it.
In the case where two nodes are announced simultaneously, the nodes of the network can take one or the other, work on the first and save (by making two forks) the transaction to work on the second block, if the latter is longer after transaction. The verification of payment is done from the user without having to run the entire chain, but by keeping the heads of the block of the longest proof-of-work chain. The risk of attack is limited to the cases where an attacker manages to change his own existing chain to recover spent money, but generating different chains instead of the original is not accepted by the nodes.
Bitcoin mining
- Obtaining Bitcoin – purchase and mining
- Bitcoin mining software
- Bitcoin mining hardware
- Bitcoin mining process
- Rewards and Bitcoin halving
The meaning of the term mining is actually this, to add new blocks in the chain of the proof-of-work. A powerful GPU (Graphics Processing Unit) also increases the speed and the efficiency of the computer in relation to the mining process. The output of the process of hashing the nonce starts with a number of zeros (Conti, Kumar, Lal, Ruj, 2017).
As mentioned above, a miner is rewarded when he finds a nonce block. There is a limit on the number of bitcoins set since the currency's inception at 21 million. According to Meynkhard, A. (2019), the decreasing reward that Bitcoin offers every four years is a factor that increases its market value.
Other cryptocurrencies
Then Bitcoin's behavior in relation to the pandemic is described, trying to make a comparison of the impact on the typical financial system and cryptocurrency. They report that the cryptocurrency market has significant growth after a year of the virus world crisis. In their article, they mention that the price of Bitcoin was around USD 7,300 at the beginning of the pandemic and it reached the admirable price of USD 46,800 a year later.
Some of the issues raised by the emergence and use of cryptocurrencies may be resolved in the coming years, and that's when cryptocurrencies may become a real threat to central banks. Finally, due to the Bitcoin halving process, the real value of the currency does not decrease as new coins enter the market. This means that they cannot currently act as a reliable trading medium, as its strong fluctuations negatively affect the attitude of traders and create uncertainty in the market.
Due to the anonymity of this new form of currency, it is used in illegal activities, which is one of the most important disadvantages of crypto systems. Eclipse attacks on the bitcoin peer-to-peer network,” in Proceedings of the 24th USENIX Conference on Security Symposium, ser.
Adversaries to cryptocurrencies and Bitcoin
World economy and Covid-19 pandemic
Due to the severity of the disease, protective measures were taken by governments, limiting social contact, movement and travel and shrinking business activity for most of the industries. The negative climate that caused this radical drop in stock prices was mainly due to investor expectations about the decline in corporate profits due to factors imposed by the coronavirus pandemic. Economic activity shrank rapidly during the first six months of 2020 due to the containment measures and only showed signs of stability during the second half of the year due to the synchronized monetary and fiscal policy response.
Major industries, such as transport and travel/tourism have almost suspended activity and acted as part of the cause of deflation (European Central Bank, 2020). Similarly, the World Bank mentions in Global Outlook (World Bank, 2020) that the pandemic of Covid-19 brought a global shock with the resulting major recessions for almost all economies. The above evidence advocates that the pandemic has had an enormous impact on the global economy, and despite the corrective measures taken by governments (such as support to companies and employees) the effects of this economic crisis are still visible and affect most of the world economies.
Bitcoin response to Covid-19
The European Central Bank reported for 2020 that in the Eurozone economies suffered from severe economic shocks. The feature that cryptocurrencies give the opportunity to be traded from any country in the world eases, until their appointment, the possible liquidity restrictions, imposed by the authorities to limit commercial activity, related to the blocking measures. Given that cryptocurrencies have an open design and are not centrally managed, investors tried to avoid political risk by turning to the crypto market (Jabotinsky and Sarel, 2021).
One of them is the connection of the crypto market with the traditional market, and in times of crises the benefit of switching to new (crypto) markets is very small. Similarly, a number of other researchers have recently highlighted the positive impact of the pandemic circumstances on the market for Bitcoin and other cryptocurrencies and advocate that they have served as an alternative investment that outperformed the stock markets. other assets (Goodell & Goutte 2020; Next, looks at changing mindsets and different approaches to the potential use of digital assets.
Monetary policy and stability
Aim and means of monetary policy
Monetary policy and cryptocurrencies
One of man's inventions is money, an instrument that was initially used as a medium of exchange and later in human history gained more and more applications, such as as a unit of account or as a store of value. In this regard, it is expected that when the right framework is created and the high volatility of the cryptocurrencies is reduced, they will be established as an alternative medium of exchange. In concluding this thesis, it is worth mentioning that the author's resulting thoughts are that technology and development are moving forward and there is no turning back.
Furness, W., 1910, The Island of Stone Money: Uap of the Carolines, Philadelphia, PA: Washington Square Press. A History of Money, From Ancient Times to the Present, 3rd ed., University of Wales Press: Cardiff. In Proceedings of the 2013 International Conference on Compilers, Architectures and Synthesis for Embedded Systems, CASES ’13, Piscataway, NJ, USA, 2013.