10 — Cryptocurrencies and Decentralised Finance (2009 – Present)

Part E — Digital and Decentralised Finance

The advent of cryptocurrencies and decentralised finance (DeFi) represents one of the most significant transformations in the monetary system since the introduction of coinage. By leveraging blockchain technology, these innovations enable peer-to-peer transactions without traditional intermediaries, redefining trust, transparency, and financial accessibility.

Economic Context

  • Global financial crisis (2008): Highlighted vulnerabilities in centralised banking systems and the need for alternative financial mechanisms.
  • Emergence of distributed ledger technology enabled secure, immutable, and transparent transaction records.
  • Growing internet penetration and technological literacy facilitated mass adoption of digital currencies.

Key Innovations and Instruments

  1. Bitcoin (2009)
    • Introduced by Satoshi Nakamoto, the first decentralised cryptocurrency.
    • Peer-to-peer electronic cash system independent of governments and banks.
    • Limited supply (21 million coins) ensures scarcity and deflationary characteristics.
  2. Other Cryptocurrencies and Tokens
    • Ethereum (2015): Introduced smart contracts, programmable agreements executed automatically on the blockchain.
    • Stablecoins: Pegged to fiat currencies to reduce volatility (e.g., USDT, USDC).
    • Thousands of altcoins and tokenised assets emerged, supporting diverse financial applications.
  3. Decentralised Finance (DeFi)
    • Platforms offer lending, borrowing, trading, and yield farming without intermediaries.
    • Smart contracts automate transactions, reducing cost and increasing efficiency.
    • Global access allows participation without traditional banking infrastructure.
  4. Central Bank Digital Currencies (CBDCs)
    • Governments explore digital fiat equivalents (e.g., Sand Dollar in the Bahamas, e-CNY in China).
    • Aim to combine efficiency and traceability of digital currency with state oversight.

Economic and Social Impacts

  • Financial inclusion: Access for unbanked populations via smartphones and internet.
  • Transparency and trust: Blockchain records are immutable and publicly verifiable.
  • Innovation in finance: New business models, investment vehicles, and automated finance.
  • Challenges:
    • Price volatility and speculative bubbles.
    • Regulatory uncertainty and potential for illicit use.
    • Scalability, energy consumption, and environmental concerns.

Significance

  • Redefines money as a digital, decentralised, and programmable medium.
  • Demonstrates the evolution from tangible commodity money to fully digital, algorithm-driven finance.
  • Lays the groundwork for the integration of AI and autonomous financial systems in the 21st century.

References

  • Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. Available at: https://bitcoin.org/bitcoin.pdf
  • Tapscott, D., & Tapscott, A. (2016). Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World. London: Penguin.
  • Pistor, K. (2019). The Code of Capital: How the Law Creates Wealth and Inequality. Princeton: Princeton University Press.
  • Brynjolfsson, E., & McAfee, A. (2014). The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies. New York: W.W. Norton.
  • Davies, G. (2016). A History of Money. Cardiff: University of Wales Press.
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