The blockchain revolution is upon us, and one of its core tenets is that centralisation is The Enemy. But what do we mean by ‘centralisation’ — and which of its forms are we really trying to address?

The blockchain, the shared ledger protocol that underpins bitcoin, has been lauded as the solution to the high costs, inefficiencies and occasionally the corruption that plague legacy systems. Its significance arises from the fact that it renders intermediaries unnecessary for electronic transfers.

The root issue lies in the fact that digital information can easily be copied, so without a central authority to police transactions, it was previously impossible to know that the same money had not been sent to two or more accounts — the so-called ‘double spend’ problem. But whereas once we needed banks, credit card companies and payment processors to administrate our transfers, we can now entrust the security of our accounts to the blockchain.

Just about everything you have read about this new technology — everything good, bad, distinctive, shocking and bizarre — comes down to this one (ironically) central point: blockchain does away with the need for a central authority.

Revolution or retrovolution?

The movement that bitcoin sparked when it was launched in 2009 has been characterised as a revolution, but it might be more accurate to call it a retrovolution: a dramatic change heralded by a return to a forgotten status quo.

Blockchain offers benefits far beyond simple money transfer alone — this 130-page report by the World Economic Forum is just one indication that governments, businesses and other organisations are taking distributed ledger technology seriously. But we’ll focus on money for now because it’s a useful entry point, and bitcoin is, after all, where all of this started.

Bitcoin decentralises money. This has a series of consequences that users and onlookers might view as positive or negative, often depending on their position on the political compass or on which side of a transaction they lie. What is often missed is that there are different kinds of centralisation bitcoin addresses, which are often conflated under the mantra of ‘centralisation bad, decentralisation good’.

Money creation and curation

There are at least two types of centralisation in effect in our current monetary system, but they impact us in very different ways. One relates to seigniorage, the creation of money; the other to the operation of the payments system.

Seigniorage. Money creation has traditionally been the preserve of governments, ever since the first coins were minted in Anatolia (modern-day Turkey) some 2,600 years ago. Coins would typically have a face value in excess of their precious metal value. The difference between the two is seigniorage, essentially a tax on those who use money. For fiat money, the costs are essentially zero and the profits high. Today, most governments outsource the creation of money to central banks, an arms-length solution that gives a degree of independence and — again to a degree — prevents the creation of money for political gain. (Politicians still set debt and inflation targets, so this independence has limits.)

Although seigniorage has been centralised for millennia, payments themselves have been peer-to-peer for the vast majority of this time. Regardless of who created your coins and notes, whether they contained or were backed by precious metals or not, payment involved one person handing something over to another.

The payments system. Commercial banks play a vital role in money creation today, under the guidelines set out by central banks. The type of money they create is different, though it is freely interchangeable with the currency — coins and notes — and central bank deposits created by the central bank (which are used by commercial banks and include the money created in the course of Quantitative Easing). When commercial banks create money, they simultaneously create debt. In other words, they loan money into existence. Their seigniorage is the interest that debtors pay back along with the principle loan.

However, there is another kind of centralisation at work in the banking system, and that is the way payments work. The vast majority of transaction volumes today are electronic. Online banking, credit and debit cards, and electronic transfers constitute a far, far greater proportion of the money that moves around the system than do cash transactions. Centralisation is inherent in this process because — at least until blockchain — it was impossible to move money electronically without a trusted authority to keep accounts.

The transition from cash to electronic transfers did not take place overnight, but neither has it been particularly slow. Western Union launched the first widely-used service in 1872, a system that relied on codebooks and passwords, but the first BACS transfers (Bankers’ Automated Clearing Services) in the UK didn’t occur until 1968, and the global standard SWIFT was founded in 1973. Electronic payments overtook cash payments by number only last year, but most people were still getting paid and paying bills with cash and cheques in the mid-1990s. (Whilst cheques could bounce or be cancelled before they cleared, this is rather different to the turbocharged intervention that fully electronic payments facilitates.)

Reversibility and interference

Centralisation in the payments system introduces new characteristics. Electronic payments can be reversed, monitored and blocked in a way that was practically impossible before. That can offer protections, for example if fraudulent payments are detected. But it also introduces a single-point-of-failure (SPoF). That might be something a glitch in an online banking server, or it might be something more sinister, such as an unfair chargeback to a merchant, or even LIBOR rigging.

The point is that not all centralisation is the same. Centralisation in the creation of money is something that may not be ideal, depending on your point of view, but is something we’ve lived with for centuries. Centralisation in the payments system is something that has routinely been a part of our everyday lives for just a few short years. In that regard, blockchain money is more like the money humans have used for millennia than it is like existing electronic money transfers. Blockchain returns money to what it most commonly was 20 or more years ago, whilst leveraging the speed and convenience of electronic communication.

Bitcoin vs Waves

As the first implementation blockchain technology, bitcoin is at once a currency, a money-creation protocol and the payments system, all rolled into one. This is part of its genius. It removes every aspect of the monetary system from centralised control, from seigniorage right through to payments.

This has advantages and disadvantages — and, as noted above, these often depend on which side of a transaction you find yourself. Payments are beautifully frictionless in a way that the traditional banking system cannot seem to match: fast, low-cost and absolutely borderless. But one of the downsides is that bitcoin is volatile, its value in fiat terms set by largely speculative market forces. It has well earned its title of ‘digital gold’, because that’s essentially what it is: a commodity like gold or silver that can be transferred online.

Bitcoin’s decentralisation of both seigniorage and payments has its attractions and its uses, but it also has its limitations. Bitcoin can hardly be called a stable or reliable store of value, for example. The Waves platform takes a different approach. It does not seek to decentralise money creation. We already have money: USD, EUR, GBP, CNY and BTC, amongst others. What it does decentralise is the payments system. It takes existing forms of money and reduces the friction involved in using them. The Waves network is designed to make it as fast and easy to send tokens representing dollars, pounds or even gold around the world as the bitcoin protocol makes it to send bitcoins. It thus accepts the role of banks and governments (and bitcoin) in creating money and maintaining its value on their own terms, without allowing that money to be limited by the restrictions inherent in the legacy systems it currently inhabits. This has all kinds of implications and applications:

Cross-border transfer charges are a thing of the past.

Transaction speeds are in the order of seconds or minutes, not days.

Exchange rates are negligible, rather than the kind of extortion you’ll experience with regular exchange services, and especially airport bureaux de change.

It’s money — whatever form that money takes — but better. That is the revolution, or more accurately the retrovolution, that Waves offers.