A new awareness is rising across the globe regarding the innovative power of blockchain technology, such as ethereum, to both improve current processes as well as give rise to new ones that were previously impossible.
The technology has been adopted by many household brands looking to improve their productivity and innovative start-ups looking to disrupt industries or to provide new services.
It is even being adopted at a national level as the Bank of England has been looking to potentially offer a digital currency version of the pound, as has China’s Central Bank, with the deputy chair of Russia’s Central bank saying digital currencies – such as a crypto-ruble – are the future.
But, how would this work in practice from a high level view? How could the FED, for example, turn the dollar into basically a copy of eth?
There are a number of options. The first one is for the central bank to have one full node, which basically runs the entire system, with everyone else able to connect to it directly or otherwise through light nodes.
This would turn ethereum’s decentralized model into a centralized model whereby through their one node the central bank can increase or decrease monetary supply as required by economical factors.
The problem here is the node would be incredibly valuable. So, if someone manages to get access – and we have seen many hacks, including SWIFT – then they can award themselves a trillion dollars if they are profit motivated, or bring down the entire country if it is an enemy government.
That means a one node dollar would be very insecure, especially as it will have to be online all the time and it would have to allow everyone else access, which may include hackers or hostile governments.
The other option is for the central bank to basically copy ethereum and add some other slight modifications, especially regarding who can run a full node. They can limit it to just banks themselves and other financial institutions, while everyone else can connect to the system through a light node.
This could work with the only potential problem for the central bank being the fact that they would have to lose some control because they can no longer just increase or decrease monetary supply as now they need the consent of all the other nodes too, or there would be some chaos.
A third option has been raised by China’s Mint, according to Andrew Keys from ConsenSys, ethereum’s incubator. That is the digitization of fiat money like Yuan or Dollars through ethereum based smart contract tokens.
It is a very interesting idea because it provides the base security through ethereum’s network which is now the most decentralized blockchain with some 24,000 nodes, and the most secure.
On top, it can allow the bank to have full control over the increase or decrease of money supply, while also making possible much more complicated algorithmic analysis and automatic actions that respond to events as they move.
MakerDAO, one of the first tokens based on eth, aims to create the above for a stable coin which maintains its value, as seen by purchasing power, by automatically contracting or expanding supply dependent on relevant economic factors analysed through complex algorithms.
So it can work, and probably it is the best way for national currencies to start piloting and testing in this space as unlike a full blockchain, with a token they would have some training wheels, including the ability, if they so wished, to reverse transactions.
If such tests are successful and they go onto pilots, then ethereum may become of global strategic relevance, somewhat similar to the internet, which anyone can access across the world without requiring permission.
That is because national currencies and global commerce would be running through it, just as much of it currently runs through the internet, making the infrastructure of vital national interest for all countries.
Whether that will come to pass we’ll have to wait and see, but that is something now being considered across the world, from Britain to China, Russia and probably even America.