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Hi, I'm <strong>Markus Schmidt</strong>. I <strong>study Computer Science and business  in München</strong> and I dont want to talk much about me, I just want to <strong>create stuff for the steemit community</strong>. I decided to start with an article about the history of traditional financial arrangements and sorry for my german precision in the article, I hope the article is not too dry:)  
Now understanding the history of traditional financial arrangements isn't essential to understanding how <strong>Steemit,Bitcoin</strong> or other cryptocurrency works. However, it would be an interesting subject to look at and I hope everybody will enjoy the informations I provide here. I will use mostly Bitcoin as an example of cryptocurrency. Let’s begin!

<h1><strong>Barter --> Credit --> Cash</strong></h1>

The path to Bitcoin is littered with many failed attempts at e-cash systems and other credit card payment systems. Here's about a couple schemes.

https://s14.postimg.org/51alngtcx/Screen_Shot_2016_08_22_at_13_35_30.png

Some of them are academic proposals that have been well cited, others are actual systems that were deployed and tested. On of the many system is PayPal. It's the only current  system that we have from  the history of cryptocurrencies  that's still bring used today.  

Now we'll look  at traditional financial arrangements.  I’m not going to give you  a full history of cash, and  the assent of money, and all the things  that went into the invention of cash.  But I will look at some of  the basics just to remind ourselves.  They will help us understand the different  types of proposals that we'll see.  If I rewind in time and go back to  a time before there was a government,  before there was currency.  

https://s16.postimg.org/vvnihkfv9/barter_1.png

One system that worked for  acquiring goods was <strong>barter</strong>.  In a barter arrangement  you may have two people.  For example, here we have one  person who wants to have a tool.  And we have another person  that needs medicine.  Now, if each of these has  what the other person needs,  then they can do a swap, and  they can both satisfy their needs.  For example, one person can give  medicine to the second person, and  the second person can  give a tool in return.  Now, the problem with barter is,  what happens when the two people  don't have what the other wants?  
In this case, for example,  we might assume that this person has food,  which they're willing to trade for  a tool that they want.  The other person has a tool but  they don't have any need for  food, they want medicine instead. 

https://s16.postimg.org/nvpj32an9/barter_2.png

This situation can be resolved with  the introduction of new parties.  For example,  let's assume that there's a third person.  This person wants food, and  they have medicine available,  that they're willing to trade for food.  In this case,  it's possible to arrange a three way  swap where everyone gets what they need.  

Now, the drawback of a barter  based system is coordination.  It's hard to coordinate all three people  to have them at the same place, but  also to situate them in time,  where everyone's needs and  wants align in time so  that they are able to complete the swap.  In order to deal with  this draw back of barter,  one of these two systems  emerged to replace it.  One system is credit.  One system is cash.  It's currently a subject of academic  debate which of the two emerged first.  For the purpose of this article we don't really care about that debate.  

<center>https://upload.wikimedia.org/wikipedia/commons/0/05/Barter-Chickens_for_Subscription.jpg</center>

In a credit based system, we can assume  that the first person, for example,  who needs a tool, they're able to  acquire the tool from another person.  However, they don't have  the medicine that this person wants,  all they can offer is food.  Since this person doesn't want food,  the arrangement could be  that they still make the trade,  the first person gets the tool.  But the second person gets a favor  that's owed to them in the future.  In other words, this person has a debt  that they need to settle with this  person in the future sometime.  Now, we can say that this  person's needs are satisfied.  She acquired the tool that she wants.  But really she has a new need  as a result of this arrangement.  She has a debt and she would at some point  like to cancel that debt in the future, so  that's her new want. 

https://s4.postimg.org/hcxwemlvx/barter_3.png

 Now, she can at some future time,  she may come across a third person.  And in this case the third person  wants food, which she has.  

https://s10.postimg.org/dvg3v4rg9/barter_4_5.png

The third person is offering medicine and  if she remembers that medicine is  what the person she has a debt with  wanted to acquire, then she can  trade her food for the medicine.  And then when she has the medicine,  she can go back to the original person and  cancel the debt.  As a result, everybody's happy.  

https://s16.postimg.org/ml5c3cjr9/barter_6.png

A second alternative we can look  at is the cash-based systems.  In this case, we'll assume the same  scenario, except for in this case we'll  assume that this person also has some  money, something of monetary value.  In this case,  when the person above wants to acquire a tool  from someone who's offering the tool,  they can offer cash instead since they  don't want the food that they have.  So in this case they do the swap.  This person's satisfied,  she has acquired her tool and  this person has acquired money,  which is the value of that tool.  

https://s3.postimg.org/9pu5de8s3/barter_7.png
https://s3.postimg.org/5i24cvljn/barter_8.png

Then later,  if this person happens to come across  other person, she still wants medicine,  this person is offering medicine,  she can swap it for the money, okay?  Finally, to complete the cycle,  the original person has food.  This person needs food and has money,  they can pay for the food.  And the money goes back to the original  person who held the money in the first  place, and everyone's needs are satisfied.  

https://s14.postimg.org/vot3l39o1/barter_9.png


Now we can contrast and compare  cash systems versus credit systems.  In a cash based system one requirement  to bootstrap the system is you need  an initial allocation of cash.  The whole trading cycle would not have  worked had the one person not originally  had some cash on hand.  

By contrast, in a credit based system,  there's no allocation that's needed.  It can work right out of the box.  However, the credit based  system does have one drawback.  And that is the party that gives the tool  to the other party in exchange for  a debt is taking on some risk.  There's a chance that that person  never comes back and settles the debt.  
Cash also allows for  a finer grain precision when you want to  say how much something is worth.  In barter-base systems, it's hard to say  if a tool is worth more than medicine or  medicine's worth more than food.  With cash, we can apply a mathematical  quantity to how much something is worth.  For these reasons,  this is why we use a blended system today.  We used a combined system of cash and  credit,  where debt are measured in the amount of  cash it would take to settle the debt.  

<h1><strong>Direct application(P2P fire-sharing)</strong></h1>

A fairly direct application of this  ideas can be seen in some proposals for  P2P file-sharing.  Two systems that use these idea  are Mojo Nation and Karma.  
Mojo Nation was a short lived project.  It lived about two years, but  it's sort of the intellectual ancestor  of other protocols that are used  today like BitTorrent and Laughs.  Karma on the other hand  was an academic proposal.  In both of these cases,  we consider a P2P file-sharing system.  Where some people have files,  say movies or music,  that they're offering to send  to other people in the network.  And they'll do this in exchange for  other files that they want to acquire.  

In this case, both of these  systems suggested that users,  when they enroll in the system, are  allocated initially some amount of cash,  called Mojo or  Karma in the systems respectively.  Then the users were able to spend this  money to acquire the files that they want,  so if you're downloading  from someone else.  Then you're paying cash to that person.  When someone comes to you and they get a  file that you have, that you're offering,  they pay the cash back to you.  And the idea is to try and  keep your balance floating around the  amount that you were initially allocated.  

This also solves the problem of  arranging barter between users.  If different users have disjoint sets  of files that they want to share and  files that they want to acquire,  then by using currency they don't have to  find that perfect person who  has exactly what they need and  is looking for  exactly what they're offering.  

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