February 28, 2021


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Centralization Vs. Decentralization – Are we waiting for a fight without a winner?

For more than 10 years, we have been waging a war between national payment instruments such as Bitcoin and centralized payment systems – which use national currencies.

In the Bitcoin debate, I deliberately omit the term digital currency or digital currency because the government entrusts the exclusive right to issue money of a particular national currency only to central banks. For simplicity, I will use the common term Bitcoin as a cryptocurrency.

Centralized payment systems are characterized by an extensive network of intermediaries that make a living in this system, a decentralized peer-to-peer payment network (peer-to-peer, direct communication between two users of a computer network with the same rights) used by its users without central authority or other intermediaries. Therefore, at first glance, the argument in favor of cryptocurrencies – the elimination of intermediaries while maintaining user security – leads to lower costs for users, thus greater computer performance.

Imagine such a decentralized system – there would be a company that would generate electricity from the roof of the solar panels and sell the unused surplus electricity directly from the computers to Company B, which required energy to run the refrigerators or air conditioners. All of this without a broker – broker, stock market or supplier margin.

There is a lot of speculation about the origin, origin and founders of Bitcoin and other cryptocurrencies, but it is interesting to note that the spread of cryptocurrencies was related to the global financial crisis of 2008-2009, when there was at least some confidence in the centralized financial system. Bitcoin type tools contributed to the development and survival of the fittest.

The main uniqueness of Bitcoin is its full localization; By definition, it is designed so that the author or other persons, groups or even governments cannot affect, lie or confiscate the account. There is no focal point on the network or anyone who can determine the network. The final amount of bitcoins is known in advance and their circulation is defined in the source code of the protocol.

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But is Bitcoin really as independent as the definition above and as valuable as the market value implies? (At the time of writing, approximately 3 33360/1 BTC is the final bitcoin value of 7 x 10 of 21 million units11 US dollar).

In the long run, the market value of any instrument should copy its core value – is the idea of ​​creating a source code for Bitcoin or its protocol justifying this market value so valuable and unique? Not for me, but cryptocurrencies have come under the search of many who see them as a tool to get rich, invest, play or have fun.

But what we are lying about is that the comparison of the market and base value of traditional assets is often lagging behind, especially today when it is plagued by a wide range of easing – the process by which central banks increase the money supply by buying government securities and other financial assets. Thus (in addition to supporting the functioning of the centralized system) “bubbles” exaggerate the assets.

We can thus observe new historic rises in real estate prices or stock market indices at a time when the economic downturn and the unprecedented debt of economies are technically represented. As a reminder, during the Great Recession of the 1930s, the Dow Jones stock index fell to 89%, while at the lowest point of the 2008 global financial crisis, global stock indices fell by 40-70%.

Following the principle of fundamental (or intrinsic) value of assets, the price of cryptocurrencies, including bitcoin, can (very easily and quickly) fall to zero from today’s value, while the value of traditional financial assets will fall to zero or real estate will always stop at zero.

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Nevertheless, central bankers are reluctant to realize the current investment pattern in cryptocurrencies and with relatively logical arguments (cryptocurrency prices are easy to handle, illegal activities are funded by cryptocurrency trading, the cryptocurrency market is uncontrolled and no one can guarantee their exchange and value in 2020).

Unlike private (i.e. decentralized) initiatives such as digital banks or online wallets, central banks guarantee this currency. Digital Currency Thus central banks will be as safe as rupee notes and coins. It may take the form of an electronic key stored on a physical device, such as a mobile phone or prepaid card.

Of course, the main goal of this project is to respond to public interest in digital tools and efforts to push cryptocurrencies to the margins of the financial markets. Chinese commercial banks are already testing the bulk of online wallet usage. Two-thirds of Bitcoin miners are said to be from China.

However, other large central banks are highly regulated, and it is not surprising that public interest in central banks’ digital currencies may exit the market, and in addition to cryptocurrencies, many commercial banks will lose steady returns – fees to small investors. Bank failures can lead to instability in the banking sector, which can benefit decentralized supporters.

However, historically, central banks have long been “fraudulent” in covering the value of rupee notes with real assets, remember the 1944 Bretton Woods Agreement (which could convert the US dollar into gold), and the United States dropped the US dollar into gold in 1971. Fifty years.

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In Czechoslovak paper banknotes, the text “Banknotes covered with gold and other assets of the State of Czechoslovakia” has been found since 1953 (Order No. 45/1953). Banknotes with this provision were in circulation until 1993. Today, the Czech National Bank publicly acknowledges that this cover section on rupee notes is only noticeable because the rupee notes are not completely covered by gold and other bank assets. Hungarian gold standard (1892-1914), when our banknotes were very close to full gold and trade security and exchangeability for gold.

Shamelessly raising the balance sheets of central banks by buying financial assets in the open market seemed to be the only possible solution in a crisis situation, although this decision may be short-sighted in the future. It is in the interest of central banks to keep interest rates at current low levels for a long time; Their growth will soon affect not only the private but also the ability to repay government debt. It is difficult to find new balance and solutions from this situation.

But we have forgotten about external influences and the power of the unfettered market. The winner of the struggle between centralization and decentralization is not the founder of Bitcoin or the central bank, but the user of these systems, who gets a transparent, efficient and secure system for his payments. It is up to the users to decide whether it is humane to return to its current form, digital currencies, cryptocurrencies, its combinations, or the gold or barter trade.