How blockchain comes into the picture

Now, it's time to ask ourselves this question—Is blockchain the next logical step in monetary evolution?

The preceding quote shows how the concept of money has evolved over the years.

Throughout all of these stages, we have had an idea of value in our mind, but it has evolved hand in hand with our civilization and technology, from something that you can touch and actually use; to something that you can touch, but cannot use (except for trade); to just an abstract idea. As you can see, the form has changed, but the idea of value has always remained the same, and we represent and communicate the idea of value in terms of money.

This abstraction of value brings us to the next evolutionary step: digital cryptocurrencies, powered by blockchain technology. Similar to the fiat system, this form of money has value because people believe in it. But there is more to it than just a government promise. Promises made by people have been broken many times throughout history. Here, we have solid science, mathematics, and computer hardware, guaranteeing that blockchain works as expected. The following diagram better illustrates the evolution of money over the years:

In this new system, we have a mathematical algorithm controlling the money supply and putting strict limits and costs on it, similar to a gold standard. Is this system perfect? No; as we saw recently with the countless Bitcoin forks, having an open source software controlling the money supply, in a large and complex decentralized ecosystem, has given rise to some complicated governance issues. If every disagreement leads to the creation of a new version of the currency, this could lead to a lot of confusion.

So, even though they were initially called cryptocurrencies, Bitcoin and its digital siblings are not really currencies, as they stand now. Rather, they are digital commodities or assets; that's why cryptoassets is a more appropriate term for them. A currency needs to be stable, in order to perform its functions well. We still live in a fiat world, where all transactions are denominated in fiat currency. Even though there are ways to pay with Bitcoin and more, they are still converted into fiat at the point of sale. And their exchange rate is subject to huge volatility on a daily basis. That's why many electronic payment companies have started to issue stable coins: digital currencies pegged to a fiat currency, but using blockchain as the underlying payment processing infrastructure, as opposed to the legacy one. We'll cover such solutions in more detail in later chapters, after you are more familiar with how blockchain works.