In our previous article, we discussed the trials and tribulations surrounding the concept of bankchains, and what challenges this technology poses. At the same time, it is clear for anyone to see how the benefits outweigh the costs. But what else can these bankchains do besides replacing the banking infrastructure?
Different Types of Currencies
In a traditional business environment, there are a multitude of different currencies that are all related to one another through currency trading markets. But in the world of blockchain technology and digital currency, the number of currency types is reduced to three main categories, which simplifies matter quite a bit.
Up first are the digital tokens, or native digital currencies as most people will know them. Even though these currencies are not “issued” in the traditional sense, they are introduced to the ecosystem through a decentralized process. In some cases, this process takes on the form of an entire network, such as Bitcoin or any of the other major altcoins like Dogecoin and Litecoin. This could be achieved with a bankchain as well.
But digital currencies can be issued through autonomous smart contracts as well, which is one of the developments the Ethereum developers may be working on for the future. After all, there are only so many coins that can be generated over the years, after which the hard supply cap of that currency has been reached.
Due to the scarce nature of these digital tokens, they become a perfect investment vehicle for speculators and day traders. Unfortunately, this makes these native currencies less “interesting” to the outside world, as they are not a proper representation of real-world assets. In the world where a bankchain would be introduced, this is the least favorable choice.
Secondly, there is something called a “derivative currency.” In the world of cryptocurrency and blockchain technology, derivative currencies are nothing new under the sun. Take a look at BitUSD, for example, which pegs the value of 1 token against the value of $1 USD.
Unlike what most people might assume, derivative blockchain currencies are still created in a decentralized manner, but they are only “issued” through known financial contracts. This creates more stable digital assets, as they are backed by the value of real-world assets or currencies. However, they are not the perfect solution either, and not even a bankchain can do anything about that.
Last but not last, there is a third breed of currencies that can be issued on the blockchain — the so-called IOUs. Whenever you have the chance to ask a Bitcoin enthusiast about IOUs, most of them will tell you how fiat currency is nothing more than a paper version of an IOU between the bank and consumer.
When talking about blockchain-based IOUs however, the story is slightly different. Unlike the two previous examples, digital IOUs are issued by a centralized or collective party, backed by real-world assets and currencies. To give you a few examples of what these blockchain-based IOU’s would be called: Bitstamp.EUR, Coinbase.USD, Purse.GBP, etc. This seems to be the most logical solution for a bankchain experiment.
Issuing These Currencies Is Not So Easy On A Bankchain
Before people start to spout conspiracy theories about how these currencies will destroy the concept of decentralization, take a deep breath, sit back, and relax. There are certain requirements that must be met even before any of these digital tokens can be issued on a bankchain, due to the difference in cryptographic systems.
Even if individual banks are planning to go through with the idea of creating a bankchain, they will still need to issue at least one native digital token to avoid any spam attacks against the network. One can not just create a blockchain out of nowhere and expect it to work its magic, as the process is far more complex than that.
One of the topics of debate in the world of cryptocurrency these days is the idea of creating permissioned blockchains. With the network participants being known entities, there is no need to create or distribute a native digital token. Also, all of these participants can be held liable if they were to disrupt the network.
Each of these scenarios has its own set of advantages and disadvantages. Many people in the Bitcoin community would rather see banks embrace the existing blockchain technology, rather than creating their own bankchains. It will be interesting to see how this scenario plays out over the next few years, though.
Share your thoughts on these various types of currencies that can be issued on the blockchain. How will bankchains determine which one works best for them? Let us know in the comments below!
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