The Story About Currency...

Examine a story what the world looked like before money was invented. It's a story built on the idea of Barter.

From then on, banks became the intermediary or the middlemen of transactions. And to control the demand and supply of currency and to standardize trade, the government stepped in. The freedom of decentralization offered to the people by metal coins was somehow giving way to a more centralized concept of fiat currency through government-regulated financial institutions. This paper-printed currency has no intrinsic value of its own, whereas governments/central authorities give it an attributed value by declaring it as a legal tender in respective territories.

The power that was previously controlled by wealthy individuals became institutionalized in the form of banks and governments. People believed that these centralized bodies provided protection as well as a reliable trust system for trade and the flow of information. But still, the system had its taboo of negatives.

There existed scenarios when the banks or the central body suddenly collapsed. Discrepancies arose when they charged huge fees in exchange for keeping gold in their vault. Though the central authority seems to lessen the complexities in trade, it possessed several other threats which we have seen in history, like inflation and banks printing more currency.

The Crisis and Emergence of Blockchain Technology

The 2008 financial crisis is a fall out of a series of unfortunate events that happened simultaneously, ending in a tangled mess. The main reason cited for the crisis was the default of mortgage (claims on the property) loans by homeowners. 

Prior to the 2000s, the banks had strict eligibility conditions for customers who wanted a loan. Banks made sure the borrowers were capable of repayment. The banks would lend thousands of dollars to customers who wanted to buy houses. The only condition was the homeowner must mortgage a property with the lender. In case, the homeowners fail to repay, then the bank or whoever holds the mortgage gets the homes. 

After the year 2000, large investors and companies started to pump money into the housing market. They bought the securities on mortgage loans from banks and they got paid in interest from the homeowners. This was a profitable business model and the investors made large profits. Thus the demand for mortgage securities increased and the banks revised their loan prototype. Banks started lending loans to people with low income and poor credit. 

The credit rating agencies, however, wrongly rated these investments safe and increased the price of houses in the USA. This led to more and more investment in the housing market and the real estate bubble kept rising. However soon, the situation changed and the industry started witnessing its fall.

As the homeowners failed to repay their loans, houses were put to sale. Supply was increasing and demand was less. The prices for homes started to decrease. The investors and lenders started to lose money and the lending institutions started to collapse.

Things got much more perplexed when insurance companies started to collapse. Some big insurance companies had given unregulated insurance to these mortgages. All these issues led to the collapse of banks and other companies. An example was the bankruptcy declared by Lehman Brothers' financial holdings. Panic struck the world and the stock markets crashed, leading to the worst recession ever. 

So what does the 2008 financial crisis teach us? It took the timely intervention of the government, which pumped in huge money, bailing out big companies to make the situation a bit better. Globally the trust in banks and other financial institutions was at the lowest. This was because of the unregulated, greedy, and thoughtless decisions taken by these institutions. It was from the scars of the 2008 financial crisis, that a need for a decentralized, transparent, and trustless network called Bitcoin took its shape. This was the backdrop in which Satoshi Nakamoto introduced the Bitcoin digital currency.