“Money is to any market economy what water, fire, or blood is to the human ecosystem – a basic substance needed for everything else to work.” – Nathaniel Popper, Digital Gold
The preceding quote is fascinating in that it is one of the few overt references that I have discovered concerning the analogy of blood within the human body and money within the global economy. Money is in essence, the lifeblood of an economy. To take this analogy even further – similar to blood in the human body, if the flow of money stops, the economy dies.
Therefore it is of extreme importance that whatever form digital money takes that it should be able to maintain this ability to flow throughout the global body.
Characteristics of Good Money
When considering the early iterations of digital currency and Bitcoin, it was determined that digital currency should be based upon the same characteristics that have historically been made for good coinage; in essence the digital currency must be:
Beyond the measurable aspects of money, there are the very important intangible aspects of money:
-Number of people willing to use it
It is worth noting that the intangible aspects are likely of greater importance to the success of a currency than the tangible aspects. If people do not have faith that the currency will maintain its value over time and only a small handful of individuals will use it – it does not matter how durable, portable, divisible, uniform, or scarce the currency is.
When considering the evolution of money, the next iteration should have the following aspects:
-It should be a more trustworthy and uniform way of valuing the things around us
-It should facilitate conversion or as stated by sociologist Nigel Dodd; good money is “able to convert to convert qualitative differences between things into quantitative differences that enable them to be exchanged.”
-It should be a universal money that could be spent anywhere, unlike the constrained national currencies within our present monetary system
The Ability to Create Money
Many falsely believe that money has always been the sole right of a government to issue and control. This is untrue. In fact, up until the Civil War, a majority of the money in circulation in the United States was issued by private banks, creating a patchwork of competing bills. Concerning the overall flow of money through the part of the global body known as the United States it has obviously been of benefit to have a single currency in terms of the flow of money. However, it is interesting to consider how things might have played out in terms of the economic downturn if there were a number of currencies flowing within the United States at the time, similar to the state of digital currency – Bitcoin as the leader, but a number of alt-coin alternatives.
Digital Currency Advantages
Speaking of digital currency, to include Bitcoin, there are a number of advantages to include:
–Anonymity – Doesn’t require you to hand over your identifying information each time you use it
–Fairness – Even the poorest people in the world can keep digital currency in a digital account without paying hefty fees
–Reduced Transaction Costs – Allows for the possibility for online services to charge a penny or dime – to view a single news article or skip an ad – skirting the current limits imposed by the 20 or 30 cent minimum charge for a credit card transaction
When considering the preceding advantages it is worth noting that Bitcoin is not purely anonymous in its present form. The simplified interfaces that are being developed to expedite widespread adoption of Bitcoin are reducing anonymity while making it similar to a digitized form of fiat currency. There was also discussion at one point of creating the option of colored coins to facilitate the ease of tracking for law enforcement; I am unsure if this has gained traction or not.
When developing Bitcoin, there were two primary challenges that emerged:
-The removal of the centralized third party, or trusted agent
Other digital currencies were in existence prior to Bitcoin, but they possessed a single point of failure – the trusted third party. If the individual or organization running the digital currency failed, so to did the entire monetary system. Bitcoin was the first digital currency to remove the trusted third party, and has therefore been referred to as a trustless system. This is a significant advantage offered by Bitcoin and the other alt-coins within the digital currency space today.
Double spending is basically the idea that when issuing a currency, the issuer must remove, or mitigate the risk that the same currency will not be spent twice. The problem of double spending was overcome through the implementation of the blockchain. The blockchain is foundational to digital currency and serves as the public ledger for documenting transactions. The blockchain is also the manner in which Bitcoin has been able to bypass the trusted third party requirement. To learn more about the blockchain refer to my previous article on this subject.
Overall for money to be successful as a medium of exchange it must be durable, portable, divisible, uniform, and scarce. Beyond these tangible benefits, users who opt-in to a particular monetary system must have faith in the currency and it must have a large and growing user base. A currency is only as successful as the number of people who will accept it as an exchange of value.
Bitcoin and other digital currencies offer a number of advantages to include pseudo-anonymity, fairness, and reduced transaction costs, among others. Blockchain technology is foundational to Bitcoin and other alt-coins; it eliminates the need for a centralized trusted third party and addresses the potential for double spending.
It will be interesting to see if a digital currency in some form (Bitcoin, Ethereum, or some other alt-coin) emerges as a widespread global means of exchange. Digital currencies offer a number of advantages and reduce friction within the global economy.
To learn more about the topics discussed in this article in greater depth refer to Digital Gold by Nathaniel Popper.