What is Distributed Ledger?
Think Groceries
You get all your groceries in your cart and walk up to the register, pay and leave along with everyone else. At the end of the day everything taken off the shelves throughout the day is added up, and subtracted from a list of inventory so the manager can know what to order in the next shipment. That list is kept on a computer in the back office and is uploaded to headquarters at the end of the week. This list is a ledger of all incoming and outgoing items sold at the store. A Distributed Ledger works in much the same way, with the difference being at the end of the day the ledger isn't uploaded to a database at HQ - but is uploaded to multiple locations at the same time - on multiple computers instead of just one. Each list is an exact copy of the original and updates in real time.
Why is this important?
Well, when dealing with the inventory of a grocery store - it isn't really. But imagine for a moment we are talking about a Bank. Each customer has an account and money moves in and out. The bank has a ledger of all these accounts and keeps track of who spends what and who gets paid. At the end of the day, the bank uploads their ledger to the bank that owns them, or "Headquarters" - That way, when accounts are settled with customers of different banks, they all can see who owes what and to whom. There are twelve "Reserve Banks" in America - These are the different "Headquarter" banks that all the other banks report to at the end of the day, week and month. As transactions are recorded and finalized between customers, these banks pay each other the difference when it's all said and done. This is a very simple explanation of our current banking system. it's a working system... and it has some issues... - but it works.
So, Distributed Ledger?
Right, Keep reading.
What our banks use now is a centralized ledger. All the data we produce (spending and receiving money) is localized in one area.. This is done for easy retrieval and quick reference. Everything is digital now - all our money is represented as 1s and 0s on a database - and is available inside the system pretty much on demand.
Problem.
This quick reference is a trade off for privacy. Everyone inside the bank, and inside their regulatory agencies (the government) will always know exactly how much money you have. What you spend it on. When you spend it and how you acquire it. Now, that isn't such a big deal if you don't value your privacy. But, if you do...well - you get the picture. These databases containing everyone's financial data are kept in one location based on what bank you use, and are open to those with who care to see.
Point of Failure
This location, if compromised - could equal your money being lost, stolen, or frozen by the government. Hackers are real, and so is incompetence. Major financial institutions are hacked all the time, and the mishandling of sensitive information by bank employees could cause a major breach in your financial security. And as for the government, I think we all know that if they want your accounts - they're going to have them.
There's More.
Have you heard term "Bank Bail-In"?
In 2008, the American government bailed out some of the country's biggest financial institutions before they could fail outright. Billions of dollars flowed into the sector to keep these business alive at the cost of the American tax payer. Since then, more legislation was written to perform this same function...just in a different way. A Bank Bail-In takes it's customer's deposits to stay afloat until it can resume business as usual. During that time, the bank basically issues an IOU.
The process of a bank bail-in typically involves the following steps:
- A failing bank is identified and the authorities determine that a bail-in is necessary to prevent the bank from collapsing.
- The bank's creditors, including depositors, are notified that their investments in the bank may be subject to a loss.
- The authorities determine the amount of the loss that the creditors will be required to take, which may be a percentage of their investments or a fixed amount.
- The bank's assets are then sold off or liquidated in order to pay the creditors their reduced amount.
- In some cases, the authorities may also inject capital into the bank to help stabilize it.
However, a bank bail-in can also have negative consequences for depositors, who may lose a portion of their savings. Additionally, the uncertainty surrounding a bank's stability and the potential for a bail-in can lead to a loss of confidence in the banking system as a whole.
This Legislation, in conjunction with other recent laws that encroach on our rights means the banks can take our money, and not only can we do nothing about it, but we won't know about it when it happens until it's too late.
And Then, This.
The Way Money Is Made...
It's probably different than you think. If you were to guess that the government can print it, you would be correct. If you were to say Fractional Reserve Banking, you would also be correct. This is when -
- Banks take deposits from customers and keep a portion of those deposits in reserve, usually in the form of cash.
- The banks then use the remaining deposits to make loans to borrowers.
- When the loans are repaid, the banks make a profit by charging interest on the loans.
- The banks can then use these profits to pay for their operations and to pay interest to their depositors.
- This process creates new money in the economy, as the loans are essentially creating new deposits.
But did you know that banks can also create money? Like, out of thin air - in the form of debt? If you did know this, you are in a minority.
Lets say you want a loan for a house, you go to the bank and ask for the money and the bank approves the loan. They add the money to your account with the agreement that you repay it in the future. The bank didn't go borrow that money from someone else like many people believe - they just add it to your account with a computer. Remember, everything is just 1s and 0s now right? This is one of the most common ways money is added to our economy. This creation of money, and it's an addition to the overall supply over time, is what causes inflation (among other factors). The higher inflation, the lower the value of the original currency. The more money created as debt, the less the money borrowed is worth...
If you were to save your money today, It would be worth less ten years from now. Many people do not know this - but do your own research and find out for yourself. If I am wrong, send me a strongly worded email.
And Obviously, The Federal Reserve Does The Same Thing
When they believe that the American Economy would benefit from it doing so. Let's say the Fed wants to inject $1 billion into the economy, it can simply buy $1 billion worth of Treasury bonds in the market and deposit $1 billion of new money into the reserves of banks.
Nutshell
What is Bitcoin?
Bitcoin is basically a computer file which is stored in a 'digital wallet' app on a smartphone or computer.
People can send Bitcoins (or part of one) to your digital wallet, and you can send Bitcoins to other people.
Every single transaction is recorded in a public list called the blockchain, and anyone that wants to verify these transactions can do so by running their own full node (the ever elusive "distributed ledger")
- Unlike services like Venmo and PayPal, which rely on the traditional financial system for permission to transfer money and on existing debit/credit accounts, bitcoin is decentralized: any two people, anywhere in the world, can send bitcoin to each other without the involvement of a bank, government, or other institution.
- Every transaction involving Bitcoin is tracked on the blockchain, which is similar to a bank’s ledger, or log of customers’ funds going in and out of the bank. In simple terms, it’s a record of every transaction ever made using bitcoin.
- Unlike a bank’s ledger, the Bitcoin blockchain is distributed across the entire network. No company, country, or third party is in control of it; and anyone can become part of that network.
- There will only ever be 21 million bitcoin. This is digital money that cannot be inflated or manipulated in any way.
- It isn’t necessary to buy an entire bitcoin: you can buy just a fraction of one if that’s all you want or need.
Furthermore
Decentralization and Protection
- Bitcoin is created through a process called "mining." Miners use powerful computers to solve complex mathematical equations and are rewarded with new Bitcoin as a result.
- Bitcoin is stored in digital wallets, which are like virtual bank accounts. These wallets can be accessed from anywhere in the world, as long as there is an internet connection.
- Bitcoin transactions are made by sending Bitcoin from one wallet to another. Transactions are verified by nodes on the Bitcoin network and recorded on the blockchain.
- The blockchain ensures the integrity of the Bitcoin network by preventing double-spending and ensuring that transactions are irreversible.
Why Bitcoin is important if the banking sector fails
If the banking sector fails, Bitcoin could become an important alternative to traditional banking systems. This is because Bitcoin operates outside of the traditional banking system and is not subject to the same inflationary pressures.
Furthermore, because Bitcoin is decentralized and operates on a blockchain technology that is highly secure and transparent, it could help to reduce corruption and increase accountability in the financial system, ultimately leading to a more stable and sustainable economy.
In a scenario where the banking sector fails, individuals and businesses could turn to Bitcoin as a means of storing value and making transactions. Because Bitcoin is not subject to the same fractional reserve banking system as traditional currency, it is not subject to the same inflationary pressures.
Overall, Bitcoin represents a new and innovative approach to money that could provide an important alternative to traditional banking systems, particularly in the event of a banking sector failure.