The Blockchain Revolution: Decoding Digital Currencies

Abstract

Cryptocurrencies and decentralized finance have grown considerably since the publication of the white paper on bitcoin in 2009. This article presents an overview of cryptocurrencies, blockchain technology, and their applications, explaining the spirit of the enterprise and how it compares with traditional operations. We discuss money, digital money, and payments; cryptocurrencies, blockchain, and the double-spending problem of digital money; decentralized finance; and central bank digital currency.

Introduction

Few people took notice of an obscure white paper published in 2009 titled "Bitcoin: A Peer-to-Peer Electronic Cash System," authored by a pseudonymous Satoshi Nakamoto. The lack of fanfare at the time is hardly surprising given that innovations in the way we make payments are not known to generate tremendous amounts of excitement, let alone inspire visions of a revolution in finance and corporate governance. But just over a decade later, the enthusiasm for cryptocurrencies and decentralized finance spawned by Bitcoin and blockchain technology has grown immensely and shows no signs of abating.

Because cryptocurrencies are money and payments systems, they have naturally drawn the interest of central banks and regulators. The Federal Reserve Bank of St. Louis was the first central banking organization to sponsor a public lecture series on the topic: In March 2014, presenters outlined the big picture of cryptocurrencies and the blockchain by discussing its possibilities and pitfalls. Since that time, the Bank's economists and research associates have published numerous articles and explainers on these topics. This article represents a continuation of this effort to help educate the public and offer our perspective on the phenomenon as central bankers and economists.

Understanding how cryptocurrencies work "under the hood" is a challenge for most people because the protocols are written in computer code and the data are managed in an esoteric mathematical structure. To be fair, it's difficult to understand any technical language (e.g., legalese, legislation, and regulation). Because we are not technical experts in this space, we spend virtually no time discussing the technology in detail. What we offer instead is an overview of cryptocurrencies and blockchain technologies, explaining the spirit of the endeavor and how it compares with traditional operations.

In this article, we explore four key areas:

1. Money, digital money, and payments
2. Cryptocurrencies, blockchain, and the double-spend problem of digital money
3. Understanding decentralized finance
4. The makeup of a central bank digital currency