As we have seen in history, gold has become a favorite medium of exchange by people. Its properties such as being durable, scarce, transportable, and divisible have made them popular among its users. At present, however, gold has been replaced by fiat money for certain reasons. For example, the value of fiat money can be easily altered in favor of the State’s will.
Fiat money has been controlled to redistribute income, influence overall economic demand, and increase/ decrease inflation. However, this has serious economic implications. The control of fiat money is chronically inflationary and allows the State to expand its economy without restriction. It also increases the economy’s burden of debt, expands the gap between the rich and the poor, and precipitates extreme economic cycles.
The recent economic crisis has troubled people with the possible devaluation of their fiat-denominated savings accounts. This has prompted them with the search for a better monetary alternative.
A new substitute might possibly be in the form of digital currencies, bitcoin of which is the most popular. Bitcoin is not produced by a central authority such as the Government; it is created by “decentralized” digital computers. The validation of transactions made through bitcoins and other digital currencies is made by a “decentralized consensus system” that utilizes “blockchains.”
These blockchains are actually “public digital ledgers” among computers that contain details of account transactions made through digital currencies. They are contained in multiple computers making them difficult to manipulate. With bitcoin, for example, blockchains assures the bitcoin’s owner that only he/she can transact with his/her bitcoin. In addition, with these blockchains, a specific bitcoin cannot be created manifold.
A new technology, the “colored bitcoin”, can be another method of exchange between and among people. This colored bitcoin or any alternative that utilizes the blockchain technology embodies a particular asset.
These colored bitcoins can be obtained by, for example, buying gold at a gold shop. The shop then provides you with a gold-backed colored bitcoin which embodies the possession of physical gold. These colored bitcoins represent gold and can be used as a medium of exchange such as making purchases in supermarkets. When the owner wishes to do so, the colored bitcoin can be redeemed in gold from the shop at anytime.
However, a colored bitcoin is not without its risks. It is a physical thing that occurs outside of the entire bitcoin network. But there are answers to this problem. For example, gold can be kept by a reliable third party. In addition, people can also obtain colored bitcoins that are issued by various people. If this seems to be risky as well, then they can exchange at par with each other after all costs are taken into account.
Thus, the “gold-on-the-blockchain technology” seems to have greater benefits especially when people would opt for a world of digital gold money. Governments have created and utilized various regulations to prevent competition among monies. However, the blockchain technology has passed the stumbling blocks that governments have put in placed to inhibit a free money market. But the future of the blockchain technology is still uncertain as it is still a new technology we have come to face.
This is a summary from the article How the Blockchain and Gold Can Work Together on mises.org.