TL;DR: Bitcoin and cryptocurrencies as they currently have evolved are subject to access and use barriers that hinder their adoption by the world’s unbanked. Currency networks built on networks of trust relationships could provide a better alternative.

The big vision: Financial inclusion of all people

The Foundation aims to encourage efforts towards supporting the big vision of promoting the financial and economic inclusion of all people. It is fostering the development of a blockchain-based accounting system which mirrors and leverages existing networks of mutual trust. When the protocol was originally conceived the first use case considered was that of an immutable accounting system for netted IOU balances between trusted parties, be it with a direct or indirect trust relationship. The Trustlines Protocol is however being developed to support a wide range of use cases leveraging existing formal and informal trust-based relationships that can be mapped onto social graphs.

In this blog post, we will elaborate on the roots of the idea that started it all, i.e. the “people powered money” vision and why it matters.

The problem: a viable payment system for everyone

The original idea behind the Trustlines Protocol arose through observing a simple problem with wide ranging implications: Worldwide, there are about 2 billion people who are unbanked, and many more who one can be consider “underbanked”. The current financial system seems unable or unwilling to serve these people.

Bitcoin was supposed to solve this problem, among others, by making use of decentralized infrastructure which does not rely on the actions of banks or a monetary authority. However, after more than 10 years of existence of cryptocurrencies, it can be argued that the general market and usage trends are not enabling the creation of the requirements for this problem to be ameliorated.

Currently, cryptocurrencies rely heavily on the very system they were originally intended to provide an alternative to. As an example, to acquire cryptocurrency, one usually has to have access to fiat money, a government issued ID for KYC/AML purposes as well as a bank account and lastly access to a cryptocurrency exchange (unless you use solutions like localBitcoin or mine your own cryptocurrencies). In addition, fees tend to be high, which creates an additional hurdle for most people outside of the first world.

It can therefore be stated that the current prevailing system and usage of cryptocurrencies are prepaid and reliant on permissioned access via the traditional financial system, whereas in each case the respective opposites would be desirable properties.

To come up with solutions for the aforementioned barriers, one doesn’t have to look further than the evolution of money throughout history.

The evolution of money

Initially, probably the most common form of money was a fungible, portable, physical token with a limited and to a certain extent predictable supply, such as seashells, gold nuggets, etc. This form of money seems to have gotten out of fashion, mostly due to a lack of stability regarding the intrinsic or agreed upon value of the token and the lack of widespread acceptance as a means of payment.

In parallel, people have always transferred different forms of claims on third parties as a means of settling a claim on one’s self, i.e. as a means of payment. This goes back as far as the recording of debt relationship on 5000 year old clay tablets in Mesopotamia and continues to be used in the form of such informal credit system as Hawala. This has culminated in our current, mostly debt-based financial system where claims on financial institutions (deposits) are transferred digitally between parties to settle intra-party claims. These claims being mostly created by the mechanics of a partially decentralised fractional reserve banking and money creation system. Compared to the physical token alternatives as described above, the digital transfer of claims has shown to be a generally more preferred, efficient and practical way to pay.

Interestingly enough, the emergence of cryptocurrencies takes a step back in this regard and relies on a form of centrally minted “digital gold” in contrast to a partially decentralized fractional reserve banking and money creation system, which — as described earlier — is far from optimal.

So why not combine the technological innovation of cryptocurrencies with the characteristics of a claim-based money creation system, i.e. a fully decentralized, debt-based money creation system using decentralized, trustless infrastructure?

The original Ripple idea

It turns out, this was pretty much the idea of the original Ripple by Ryan Fugger. However, the Ripple of today has pivoted away from this idea and is executing on a similar vision on the inter-bank level.

The fundamental concept of the original Ripple idea was to build a digital network mirroring real world bilateral trust-relationships, i.e. out of an already existing social graph.

In this system, representations of value may reflect or be denominated in real-world fiat currencies, while existing as IOUs between trusted parties that have entered into bilateral credit-line agreements. Payments between non-trusting strangers are implemented by “rippling” balance updates through a network of trustlines. A path of trusted relationships has to connect both the paying and receiving party (e.g. a chain of friends-of-friends). In such a complementary currency setup, money is decentrally issued by users, based on credit given to trusted friends.

Obviously, one could build the described solution on top of a centralized database, however, in order to avoid possible negative influences like monopolistic rent-seeking, gate-keeping and data exploitation through a third party /man-in-the-middle, a decentralized setup is preferred.

“People Powered Money” enabled by the Trustlines Protocol

Consequently, the idea came about to develop such a system, which we call “People Powered Money” on top of Ethereum (or a sidechain of Ethereum).

Such a system would be…

  • Accessible with minimal technological requirements,
  • Accessible even without a bank account or fiat currency in the first place,
  • Permissionless,
  • Potentially less volatile than the majority of existing cryptocurrencies (but only as volatile as the chosen denomination of the system)

…and thus provide an alternative to the current financial system or traditional cryptocurrencies for un- or underbanked people.

We hope you are as excited about the concept and potential impact of People Powered Money on society as we are. If yes, please join us on this mission! Check to find out how you can get involved!

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