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The Case for Crypto Bonds
Bridging Trust and Innovation
Throughout history, currencies and coins have served as a medium of exchange between strangers or enemies. As we navigate the digital age, we are witnessing a paradigm shift in the form of cryptocurrencies. Many remain skeptical of cryptocurrencies despite their potential due to their association with fraud and volatility. A lack of trust and an abundance of scams are characteristic of coinage-only economies and are not new. These economies are prone to bursts and often have incentives that can lead to fraud, war, and other unethical behaviors.
Historically, coinage-only economies have had disastrous implications. In his book "Debt: The First 5000 Years", David Graeber provides vivid examples. When Spain colonized Mexico in the 16th century, they extracted vast amounts of gold and silver, which were shipped back to Spain and other parts of Europe and minted into coins. Similarly, during the Axial Age (800 to 200 BCE), the introduction of coinage increased slavery, warfare, and social inequality, as nations grew their economies by minting national currencies from defeated enemies' treasuries. While not as drastic as today's crypto war that we've seen unfold amongst the titans of centralized exchanges like FTX and Binance—the fixed pie all-or-nothing approach comes from the incentives created by a coinage-only economy.
In many ways, currencies' primary intent is to provide a form of low-trust exchange. On the other hand, bonds and debt have been necessary as financial tools to create incentives for mass exchange, investment, nation-building, and adoption. They represent a promise of future payment, which requires trust between the issuer and the holder. Trust is built through the quality of the asset to be developed or invested in, not the currency itself, which is secondary to the investment.
Bonds have a long history of building nations and infrastructure. Sidney Homer and Richard Sylla's "A History of Interest Rates" provides several examples. The Dutch Republic in the 17th century used bonds to finance various public works projects, including the construction of canals and roads. In the 19th century, the United States issued bonds to finance the transcontinental railroad construction. The United Kingdom also used bonds to finance various infrastructure projects during the 18th and 19th centuries, such as constructing the London sewer system. France, in the 19th century, issued bonds to finance the construction of the Suez Canal.
In the current digital landscape, there is a pressing need to bridge the real world with the blockchain to foster trust and enable tangible investment opportunities. Integrating self-custody crypto bonds into Decentralized Finance (DeFi) and the blockchain could be the mechanism needed to bridge the trust chasm. By leveraging blockchain technology's transparency, security, and efficiency, bonds will be issued and traded more efficiently and inclusively.
Blockchain bonds will democratize access to investment opportunities, reduce bond costs, and increase market efficiency. Moreover, they could also enhance transparency and traceability, thereby reducing the risk of fraud and corruption.
Work is needed to bridge the real world with the blockchain to create trust in the crypto economy. By tokenizing bonds on the blockchain, we can bring the stability and confidence of this proven financial product to the crypto world. This trust will pave the way for a new era of financial innovation, where trust is a foundational system structure and limitless growth potential. As we continue to explore the possibility of cryptocurrencies and blockchain technology, we must leverage proven financial products like bonds to foster trust and facilitate mass adoption. The future of finance will be on the blockchain, and bonds will play a pivotal role in shaping that future.
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