While the everyday significance of money seems clear, its nature remains intricate and elusive. Though currency is often linked to coins and notes, its historical forms are diverse. Early societies used commodities like tobacco, salt, cowrie shells, stones, even ramen noodles as currency. Today, technology has ushered in a novel payment form: digital currency.

The Traditional View of Currency

The traditional viewpoint, linking economic and monetary dominance, originates from models with extensive network effects where first-mover advantage plays a pivotal role, leading to a “winner takes all” scenario. In cross-border transactions governed by these models, utilizing the same currency proves beneficial.

Moreover, these models suggest that the currency of the primary commercial and financial powerhouse is the logical choice for the dominant position. This currency will boast widespread international commercial and financial connections due to its major economy status. Robust financial markets will be in place. Given the populace’s familiarity with their own currency, there will be a substantial “installed base” in network economics terms.

Consequently, exporters and investors from other nations will be drawn towards the currency of the leading economy for transactions. This explains how the British pound became a global currency in the 19th century, succeeded by the dollar’s ascendancy in the 20th. The unfolding scenario in the digital currency realm remains uncertain – could another cryptocurrency replace Bitcoin?

In the international monetary and financial realm, individuals, banks, enterprises, and governments engaged in cross-border activities are inclined toward the dominant currency. This leads to difficulties in comparing prices of commodities and financial instruments denominated in other currencies. Settlements become harder to predict, and investment liquidity diminishes. Other currencies, not being dominant in international transactions, lack the same transparency, predictability, and liquidity. The absence of a coordinated system for transitioning between international monetary standards arises from decentralized decision-making by individuals, banks, enterprises, and governments.

Hence, the designation of an international currency exhibits inertia. It persists even if the conditions that initially established and maintained a specific national unit’s supremacy weaken. Unless a substantial shock prompts agents to abandon established norms and coordinate a shift from one equilibrium (common use of one foreign currency) to another, the currency remains entrenched. This explains the continued dominance of the British pound well into the 20th century, despite the United States surpassing Britain in economic growth and financial influence. The shock of World War II was pivotal for the dollar to eventually surpass the pound.

These assumptions hold implications for the longevity of the dollar’s leading international status and the types of shocks required for the renminbi to supplant it. Could it be a pandemic, the rise of DeFi, a global conflict, or even the influence of Bitcoin? The ever-changing landscape prompts reflection on the times and values.

The New Perspective

The conventional comprehension of international currency status leans more towards theory than empirical evidence. Rather than engaging directly with the evidence, the discussed theoretical models merely reference historical facts for inspiration. Even scholars deeply invested in the findings were hindered by the limitations of the existing empirical foundation.

All of these considerations propel us to question the established norm. We advocate for supplanting the traditional (“old”) perspective on international currencies with a fresh “new” outlook, wherein multiple national currencies can hold significant international roles, and the influence of viscosity and persistence isn’t as potent as once assumed. This novel viewpoint is rooted in sound theory. It rests on a body of knowledge concerning technological standards that emphasizes open systems, where users of one technology or system can seamlessly communicate with users of other technologies or systems.

Within this lies the potential of DeFi, the dynamic force of digital currencies, and the transformation of the global financial system. The Decentralized Finance (DeFi) or Open Finance movement amplifies this potential. Imagine a transnational, open alternative to all the financial services you currently use – savings, loans, trading, insurance, and more – accessible to anyone with a smartphone and an internet connection, regardless of their location on Earth.

The prospect of achieving a better alignment between the global economy’s structure and its international monetary and financial system suggests the feasibility of multiple consequential international currencies and numerous sources of international liquidity existing simultaneously. Nations need not solely depend on a moderately mature, gradually advancing economy in relative decline to fulfill their liquidity requirements. This is especially relevant if international currency status is not a natural monopoly, wherein swift profit growth leads to lock-in.

The Role of Institutions

International financial institutions (IFIs) wield a pivotal role in the socio-economic development of emerging or transitioning economies across diverse global regions. This role encompasses dispensing guidance for development projects, extending financial backing, and offering implementation support. Noteworthy IFIs include The World Bank, the International Monetary Fund, and the International Finance Corporation.

Distinguished by AAA credit ratings and a varied membership comprising borrowing and donor nations, these institutions uniformly pursue specific objectives:

1. Easing universal poverty and elevating living standards.
2. Promoting regional collaboration and integration.
3. Advancing sustainable economic, social, and institutional progress.

IFIs have not solely augmented funding for crisis response in the wake of the global financial meltdown but have also radically restructured their operational mechanisms. Nevertheless, certain gaps persist. It is imperative for IFIs to acknowledge that a majority of advanced low-income countries (LICs) are poised to transition to higher levels soon. This is attributed to their robust macroeconomic performance and integration into the international financial markets. Notably, with the nascent embrace of cryptocurrencies, these nation-states have a genuine opportunity to propel their political economies to new heights.

In the realm of finance, centralization refers to a focal point of control, in this instance, vested in banking institutions. Historically, centralized financial systems were deemed more secure and stable compared to individual management, serving as a measure to uphold stability in global financial operations. The extensive reach of these systems proved crucial for facilitating cross-border transactions. However, there’s a caveat: the stability of centralized finance is only as reliable as we endeavor to make it. In reality, centralized financial systems grapple with a spectrum of challenges such as fraud, counterfeiting, and dubious lending practices.

Despite the prevalence of centralized financial institutions, significant accessibility barriers persist. Although the majority of the global population owns smartphones and has internet access, many countries still encounter obstacles in providing reliable banking access and financial stability or accountability. Digital technologies, catalyzed by the COVID-19 pandemic, are reshaping payments, loans, insurance, and wealth management. While technology ushers in diversification, competitiveness, efficiency, and inclusivity in numerous economies, it might also accentuate market concentration. Additionally, novel threats to various crucial public policy objectives could emerge.

The advent of Decentralized Finance (DeFi) magnifies the implications of digital innovation for market structure and related regulations, such as financial and competition regulations, leveraging the foundational economics of financial services and their industrial organization. As the fintech landscape endeavors to fill the voids left by the centralized framework, DeFi lays the groundwork for a decentralized future. Blockchains like XPRL streamline cross-border remittance through their technological prowess and cost-effectiveness.

Where Does Decentralisation Fit In?

Decentralized finance, often referred to as DeFi, represents a novel financial system that operates in a decentralized manner and is built upon the foundational open-source networks of Bitcoin and Ethereum. This innovative approach offers numerous advantages over existing global financial systems. The inherent absence of a central control point or intermediaries within these systems renders them highly resistant to manipulation, fraud, and other vulnerabilities. Despite this lack of centralization, they possess the robustness and scope necessary to ensure reliable and accountable financial transactions.

Addressing the question of where decentralization finds its relevance, DeFi is poised to make the most profound impact on underbanked communities and societies undergoing financial turmoil. These marginalized groups can seamlessly access a global financial trading market and execute transactions with the sole prerequisites of an internet connection and a smart device (thus far). Additionally, these decentralized systems stand as bulwarks against censorship and are amenable to public auditing, making them an effective deterrent against corruption and tampering, augmenting an extra layer of security. Pertinent factors in this context encompass:

1. Intermediary Avoidance: DeFi circumvents the reliance on intermediaries such as brokerages, exchanges, and major banks.
2. Smart Contracts: The system leverages smart contracts on blockchain networks, reducing the need for intermediaries and enhancing transparency.
3. Platform Functionality: DeFi platforms facilitate diverse actions, including lending, borrowing, and seamless fund transfers across accounts.
4. Cryptocurrency Trading: Users can engage in cryptocurrency trading, derivatives trading, participate in staking initiatives to earn interest, and delve into speculative activities.

Nonetheless, DeFi is not devoid of challenges that remain to be addressed:

1. Technical Risks: Risks linked to hardware, software, or protocol vulnerabilities may compromise portfolios and lead to asset losses.
2. Smart Contract Risks: Malicious entities could exploit code vulnerabilities within smart contracts to manipulate blocks and divert asset transactions.
3. Financial & Procedural Risks: These encompass the risk of financial loss due to malicious exploitation and phishing attacks, potentially affecting both individuals and large enterprises. Mitigating these risks is vital for responsible engagement in the DeFi ecosystem.
4. Stability Concerns: The relative youth of the DeFi system raises questions about its stability and long-term viability.
5. Maintenance Implications: System maintenance requirements might have indirect repercussions in terms of factors like power consumption and environmental impact.

How to Mitigate DeFi Risks

The integration of crypto and DeFi education into the curricula of schools and colleges worldwide reflects the evolving landscape of financial education. As this domain is projected to expand over the coming decades, it becomes imperative to remain cognizant of the associated risks.

Practicing due diligence is of paramount importance as it ensures informed decision-making. Here are some crucial steps to consider:

1. Trustworthy Selection: Opt for reputable providers, platforms, products, and services to minimize risks.
2. Multi-Factor Authentication (MFA): Implement MFA, a security measure often underestimated, yet capable of making a substantial difference in safeguarding your assets.
3. Privacy Maintenance: Uphold the practice of refraining from sharing your portfolio online. Keep your credentials confidential, treating your assets with the same discretion as other sensitive information.
4. Offline Storage Consideration: Explore alternatives to keeping your assets exclusively online. For example, consider cold storage solutions.
5. Stay Informed: Keep abreast of software updates from your chosen vendor and stay connected with the community for valuable insights.

However, while the potential of DeFi is immense, it doesn’t automatically guarantee universal adoption of decentralized finance systems. Centralized financial institutions possess the capability to process an extensive volume of transactions per second, a feat that decentralized systems are yet to fully attain.

To address this challenge, DeFi developers are actively working on scaling solutions. One such solution is the Lightning Network, an additional “layer” incorporated into the Bitcoin or Ethereum blockchain. It operates by reducing the number of transactions directly on the blockchain. Instead, it creates dedicated private “channels” between two users, facilitating transactions until an agreement is reached to close the channel. Additionally, technologies like XRPL hold potential. If effectively employed, transaction times could approach nearly a million transactions per second.

In essence, as the realm of decentralized finance progresses, a balanced consideration of its potential and challenges remains instrumental in harnessing its benefits while navigating its limitations.

Why Cryptocurrencies Are a Big Deal in the World of Finance

Despite significant advancements, cryptocurrencies remain a topic of contention, with Bitcoin being hailed as “digital gold” by some and branded as “evil” by others. While they are the latest fintech phenomenon at a fundamental level, they also represent a revolutionary technology that challenges the political and social foundations of society. Cryptocurrencies introduce a novel, decentralized paradigm for money. In this system, the need for centralized intermediaries like banks and monetary institutions to establish trust and oversee transactions between parties is eliminated. As a result, a cryptocurrency-based system eliminates the potential for a single point of failure, such as a major bank triggering a worldwide crisis, similar to the 2008 crisis caused by the collapse of US institutions.

Cryptocurrencies function as a decentralized form of money. They eliminate the requirement for centralized intermediaries like banks and monetary organizations to establish trust and oversee transactions between parties. Consequently, a cryptocurrency-centric system mitigates the risk of a single point of failure, like a large bank precipitating a global crisis as seen in the aftermath of the bankruptcy of US institutions in 2008.

Investing in cryptocurrencies can yield substantial profits. Over the past decade, the cryptocurrency market’s valuation surged, peaking at nearly $2 trillion. On December 20, 2021, Bitcoin’s market value exceeded $862 billion on cryptocurrency exchanges.

Among the prominent applications of cryptocurrencies is their role in the remittance economy. Currently, cryptocurrencies like Bitcoin function as intermediary currencies for cross-border money transfers. In simple terms, fiat currency is converted into Bitcoin (or another cryptocurrency), transmitted across borders, and then reconverted into the desired fiat currency. This method streamlines and reduces the cost of cross-border fund transfers. Notably, XRPL has played a significant role in the remittance sector, facilitating a substantial portion of cross-border flows through the XRP network.

Cryptocurrencies hold the promise of facilitating seamless fund transfers between parties without relying on a trusted third party such as a bank or credit card provider. To ensure secure decentralized transfers, public and private keys, alongside various incentive mechanisms like proof of work and proof of stake, are employed. Several key points to consider:

1. BTC was created 14 years ago.
2. There are approximately 19,000 cryptocurrencies in circulation, far surpassing the number of fiat currencies.
3. While only a few are likely to endure in the highly competitive Cryptoverse, some of these digital currencies have genuine potential to disrupt conventional banking and payment systems.

Supporting evidence includes:

1. The number of crypto users tripled in 2021, reaching around 300 million, and is projected to grow to 1 billion by 2023.
2. The blockchain industry, encompassing tokens and coins, is projected to expand to $228 billion by 2028, up from the current estimate of $5 billion.
3. Notable players in the payments sector are entering the Cryptoverse, including Mastercard, which owns Start Path, a startup engagement program aimed at accelerating innovation, enhancing trading safety and ease, and managing digital assets.

The Power of Innovation in Financial Systems

Innovation, by definition, is the introduction or development of something new. It is fundamental to our ability to recognize and solve shared problems in an efficient and long-term manner. Transformational new technologies, products, and services are frequently developed, deployed, and adopted quickly to address social requirements. Thus, across the corporate, governmental, and nonprofit sectors, we may increase our capabilities, asset utilization, and resource allocation. Due to the brisk evolution of new technologies in response to some of the challenges raised, there is now a need for scalable, long-term blockchain solutions like the XRPL.

Let’s explore some key technological utility drivers! 

XRP – XRPL

The XRP cryptocurrency is part of Ripple Labs’ payment system, which was designed to make international payments easier. By allowing low-cost international transactions, XRP hopes to replace, or rather be the next generation of, outmoded financial systems.

Two main reasons why even long-term investors see XRP as the future of cryptocurrencies are:

• Ability to compete in cross-border trade at a large scale, at low costs, and quickly.
• The XRP Ledger’s efficiency is what gives XRP its speed and low cost.

Despite the fact that breakthroughs like XRP address numerous difficulties and friction points (inefficiencies), we have yet to reach a point in our financial technological progress where all systems and providers are connected and working together for the welfare of society, providing value to end-users. Interoperability concerns persist, and many see this as a major roadblock to our transition to a decentralised economy.

One example is the XRPL’s lack of smart contracts, which would allow contracts to be automatically performed, boosting security, autonomy, and execution speeds, as well as providing additional benefits to blockchain users. However, to address security concerns, an escrow mechanism exists to operate as a safety net, thereby bypassing this restriction.

Moreover, as we move rapidly towards the ever-illusive interconnected, interoperable financial nirvana, we are likely to witness many such technological workarounds aimed at solving user issues. Some examples are staking, wrapping, and hooks. 

Staking

Simply explained, staking is a method of receiving rewards for holding particular cryptocurrencies by putting them to work on the blockchain. They invest the money you deposit with them and share some of the gains with you, similar to a bank offering interest rates on savings accounts. Many cryptocurrency investors consider staking their assets in order to make them work for them by earning rewards.

Staking, like smart contracts, has safety and security concerns, since it increases security by making the blockchain more resistant to attacks and boosting the network’s ability to handle transactions. To ensure that security standards are followed, smart contracts are frequently required while staking cryptocurrency on a blockchain.

Wrapping

Wrapping is heralded as a key development in the DeFi landscape. Wrapped tokens allow digital currencies such as XRP to be used or exchanged on decentralised applications (DApps) even when they are not native to that blockchain. 

One of the biggest challenges to blockchain interoperability is that there are so many blockchains with competing means of communication. Think of this as a world before the Dollar became the world’s reserve currency, and before the Euro made business in Europe so much easier. 

Prior to the Euro(€) becoming a currency, there was the European Currency Unit (ECU) which was not a circulating currency, but instead used to price international financial transactions and capital transfers. Later, the Euro (€) was introduced as a currency created to accelerate growth, trade, and stability in a part of the world with vast amounts of international economic activity previously hindered by constant currency exchange requirements. Suddenly, some of the types of financial friction we discussed earlier were alleviated by this new currency that made economic activity cheaper. 

Wrapped currencies fulfill a similar function as the Euro; they allow users to spend tokens from one blockchain on another. For instance, wrapped XRP (wXRP) is worth exactly the same amount as an XRP but with the added function of being legal tender on other blockchains. This feature increases the interoperability and real-life applications of the technology. Part II will dive much deeper into the specifics, alternatives, benefits, and limitations of wrapping.

Hooks

Webhooks, or real-time notifications for blockchain occurrences, are critical for users of all types of dApps, including crypto exchanges, marketplaces, crypto payment apps, and any other type of DeFi app. Webhooks make it easier to get information on cryptocurrency price changes, confirm transactions, and receive payments on the blockchain, all of which can help with user profile administration.

• This crucial technology was made to solve vital user problems, which aim to bring smart contract functionality to the XRPL. Hooks are ‘’small, efficient pieces of code’’ that allow automatic execution of logic when certain conditions are met – much like smart contracts, this has advantages such as reducing human error and increasing trust & transparency on the blockchain. 
• Another advantage of developing hooks is the reduced dependency on an escrow function, which, as we saw earlier in this article, was deemed a friction point in conventional financial systems. 
• Removing the need to rely on soft staking and wrapping means enjoying the upside of increased efficiency, transparency, and automation afforded by smart contract usage.
• The main benefit of developing hooks is to introduce smart contract functionality in the XRP Ledger, thus expanding the use cases and functionalities of the XRPL itself. 
• Now, in addition to high transaction speeds and low fees, transactions on the XRPL can also fulfill more advanced functions which have long been awaited by the community. 
• Essentially, the XRPL is increasing what it can offer businesses and creative developers by maturing this capability, and we’ll likely continue to hear about.