It may be true that a digital decentralized ledger will be used, but in the end, the government will still run the ledger. Banks aren't going to be hurt at all by this, and I don't think paper is going anywhere anytime soon; of course, governments do want it to go away..
While it may be a ledger that utilizes cryptographic primitives, it is no longer decentralized if run by the government. While I disagree with the idea that base protocols like bitcoin or ethereum make for sound money, I think it's likely that some decentralized stable asset takes the place of existing fiat.
My government denominates my tax obligations in my government's currency. This includes taxes based on transactions of non-currency goods.
So there's always demand for my local currency so long as my government exists.
What demand is there for a decentralised digital currency? What motivates stable demand for it compared to the currency I can pay my taxes in and which my employer can be legally compelled by the courts to settle debts to me in?
Can you explain to me how to solve the decentralization problem then? It seems that with the current generation of blockchain, the problem is that eventually it will become no longer feasible to store the entire ledger on one device, and therefore some level of centralization will be required in order to keep the system functional. Throw in the enormous amount of (ever increasing) energy required for proof-of-work systems like bitcoin, and it seems unlikely that true decentralization is possible with current technology.
Storing the entire blockchain isn’t as important as having check point blocks that are agreed upon via consensus. At that point, you can prune the historical blockchain state and new nodes can sync from multiple nodes to get the latest state, starting with the most recent checkpoint.
With things like state receipts, light clients can rely on other network nodes to provide the state of transactions that were recently confirmed, without giving up security.
This does require that some nodes are processing and storing the most recent N blocks and their transactions. Today, non-mining full nodes do this for free out of kindness, but in the future, this could be offered as a paid service instead.
Proof of work is only one option for securing a chain. Research into proof of stake and delegated proof of stake will hopefully make PoW a thing of the past and drastically reduce the energy requirements to secure a blockchain.
The Ethereum team has two main focuses right now:
1. Proof of Stkae transition (Casper)
2. Implementing sharding
At the same time, teams are working on sidechain technology such as Plasma, Plasma Cash, and Loom which will essentially allow transactions to happen on another blockchain whose state is persisted in the root chain.
This not only benefits blockchain users (higher scalability, little to no fees), but is also good for the blockchain network since the data persisted to the main chain is only a set of merkle roots from the sidechain, no matter how many transactions the sidechain has.
