How crypto becomes money

[ad_1]

Climbing 4.4% to new records on Wednesday after the release of a report that showed US inflation hit its highest level in 31 years and then lost all of that within the day, bitcoin played directly in. the hands of mainstream economists pooping its potential as currency.

Such volatile movements, they will say, prevent cryptocurrencies from serving what mainstream economics describes as the three functions of money: i) a medium of exchange, ii) a store of value, and iii) a account unit. A currency cannot play these roles, the argument goes, if its value changes so much without any predictability.

Sounds almost irrefutable, right? But what if the three-function framework is based on a flawed or too narrow definition of money?

You are reading Money Reimagined, a weekly overview of the technological, economic and social events and trends that are redefining our relationship with money and transforming the global financial system. Subscribe to receive the full newsletter here.

In “Money: The Unauthorized Biography” Felix Martin argues that throughout history people have tended to mistakenly think of money as a “thing” (like a banknote or a piece of money. a precious metal like gold) and not for what it is. est: a system of governance invented by society to track property transfers and settle debt in a generally reliable manner. By viewing money as something to own and accumulate, we have fetishized currencies rather than treating them as a means to an end.

In Martin’s construction, the universally accepted currency of a country or economy is the thing. It’s not the money. Money is just one tool that facilitates the extremely difficult task of recording, counting and evaluating transactions within an otherwise suspicious community of foreigners.

In this way, cash can be thought of as a decentralized peer-to-peer record-keeping device – as if, by giving you $ 10, my anonymous account in the dollar economy was debited by that amount and the yours was credited. If you deposit these funds in a bank, you transfer the account to a different accounting system, but it ultimately performs the same function.

The story continues

Over the centuries, this monetary model based on the national currency has become dominant, as sovereign states have shaped it into a system of organization and social control. Whether it was fiat currency or gold backed currency, the state set the rules and provided the foundation of trust – with varying degrees of success – by which people would use these record keeping arrangements. But that’s not the only way to think about how the money could be organized.

Today, a new generation of open, censorship-resistant, geographically independent value transfer systems has emerged. Cryptocurrencies and their underlying blockchain protocols can provide rules and a framework of trust for users without needing to derive their authority from governments, even if their users remain bound by the laws of their home country.

Many cryptocurrency proponents, filled with the same ‘focus on the thing’ instinct, tend to think that bitcoin replaces the dollar or at least provides a parallel alternative. But it is possible to see a path where blockchains and digital assets (a much better descriptor of tokens for these purposes than “cryptocurrencies”) completely remove the need for universal common currencies.

We have a long way to go, but if interoperability protocols and transaction processing can be scaled in a properly decentralized fashion, so that buyers and sellers of digital assets can trade en masse inter-chain atomics without having to trust intermediaries, which is akin to a global system of exchanging fractional numerical values ​​is possible.

Need a car? You can buy it, not with dollars, but with part of another asset, like your small stake in this non-fungible Beeple token. Ironically, this vision looks like a new digital version of an otherwise archaic value exchange system: barter. In this way, using the power to split digital property down to any size imaginable solves at least part of the “coincidence of desires” problem that has made this system inefficient for civilizations.

Now I can already hear mainstream economists laughing. What will you name these exchanges? We need a common currency to overcome the impossible task of finding real-time fair value for every asset in a gargantuan number of categories.

And, of course, to avoid using, say, a single currency as a benchmark price, we would need to build something of unfathomable complexity. We would need an open and accessible pricing platform that collects data from a global network of price oracles linked to quadrillions of reliable and verifiable devices deployed around the world. Based on a classification system for a wide variety of assets, it would constantly make available an almost infinite number of ever-changing cross-benchmarks in each asset relative to all other assets. It’s a bit impossible, or at least until we’re on the verge of the singularity.

But we don’t need to reach such a global state to start breaking the dominance of national currencies. The dollar could remain the global benchmark price, for example, but people wouldn’t have to get it in a transaction. In fact, we could strip the dominant currencies of their functions of medium of exchange and store of value while retaining their role of unit of account.

Already, the central banks of Singapore and the United Arab Emirates are exploring interoperability solutions for their central bank digital currency that would do just that. The implications for the dollar’s investment status as a global reserve currency are profound.

And if we reduce our imagination to a scenario much smaller than the universal digital barter system discussed above, the prospects for fragmented areas of in-kind exchange that bypass existing currencies or use them as benchmarks are much greater. .

Think about how Ether, seen by many not as a currency but as a crypto commodity that powers the Ethereum network, is already widely used as a medium of exchange for buying and selling NFTs. And, of course, despite all the contempt for “bitcoin cannot be a currency,” it has long functioned, along with the ether, as a fundraising vehicle for token sales.

In these situations, the dollar always lurks in the background as an explicit or implicit benchmark price.

Also, the more it goes, the more people start to “think” in bitcoin, ether, or some other digital asset. Many bitcoins like to remind everyone that no matter how much it is priced against the dollar, a bitcoin continues to be worth a bitcoin. Many believe that bitcoin, with its persistent and censorship-resistant supply mechanism, could evolve into the basic collateral layer of the global financial system, playing a role similar to Treasuries.

Whether in this world to come the dollar disappears completely from the picture or remains a benchmark price, the expansion of a crypto system implies that it could eventually be a universal unit of account. With a claim to the two other supposed functions of money – a medium of exchange and a store of value – will the dollar cease to be money?

The answer is that the dollar – the “thing” – was never money. It was a monetary element, a part – albeit dominant – of the society’s system for tracking transfers of property and settling debts. In the future, the role of the dollar in this system may be diminished, while the role of bitcoin, ether, NFTs and other digital assets may increase. None of them will be money like we thought.

[ad_2]