Original author: Zeus
Original translation: Block unicorn
Preface
Money is fundamental to economic activity, but we rarely explore what qualities make money effective. As digital currencies challenge traditional notions of money, we need to re-examine what qualities enable money to perform its essential functions in a modern economy.
History shows that money is defined not just by its technical characteristics, but by its ability to evolve through different stages of development. True money must go through a challenging evolutionary path, something that most emerging currencies cannot accomplish.
The complete currency life cycle
To become a fully functional currency, an asset must successfully complete four stages of development:
1. Attract value
First, a currency must attract capital and attention. Whether through precious metals, government backing, or the potential for appreciation, all successful currencies begin by attracting people to hold it. This initial attraction lays the foundation for subsequent development.
Without this phase, the currency cannot gather enough critical mass for mass adoption. Many cryptocurrencies excel at this phase, leveraging speculation and network effects to build initial adoption and liquidity.
2. Scale development
Second, the currency must achieve sufficient scale and liquidity to support meaningful economic activity. It needs sufficient market depth to avoid excessive volatility caused by trading, and sufficient distribution to ensure that finding counterparties is not unduly difficult.
Scale brings credibility, network effects, and the necessary liquidity for wider adoption. Major cryptocurrencies like Bitcoin have successfully passed this stage, reaching market capitalizations in the trillions of dollars.
3. Stabilization mechanism
Third, currencies must develop stability mechanisms that make them reliable in commerce and contracts. Stability does not mean fixed value, but predictability and resilience under market pressure. This requires both technical mechanisms and institutional support.
Many emerging currencies fail at this stage. True stability requires a system that can function well under a wide range of market conditions, without breaking down or requiring external intervention. This means that the currency must have built-in coping mechanisms to cope with both excess and insufficient demand.
4. Economic utility
Finally, money must have real utility in ordinary economic activities beyond speculation. It must function as a reliable unit of account, medium of exchange, and store of value in a variety of economic settings.
True utility means supporting the full range of financial functions needed to support a modern economy: efficient payments, reliable contracts, reasonable lending markets, and stable planning cycles. This means that money becomes mundane and useful, not just exciting and novel.
Coordination issues
It is rarely appreciated that later stages require solving fundamental coordination problems that increase in difficulty as the system scales.
Consider the fundamental functions of money, such as providing a last resort function, implementing emergency stabilization measures, or intervening in a crisis. These functions are essentially public goods. They require entities to put system stability above their immediate self-interest – to take personal risks for the collective good.
In a decentralized system that is purely driven by self-interest, these critical functions lack structural support. The system may work well under normal circumstances, but break down when stability is critical.
We see this fragility repeatedly in the cryptocurrency markets:
During the March 2020 crash, exchanges like BitMEX had to suspend trading to prevent a liquidation cascade that threatened to cause a complete collapse of the entire ecosystem.
On Black Thursday, MakerDAO required an emergency governance response and community rescue due to undercollateralization.
LUNA initially survived market stress through massive intervention from deep-pocketed players, but collapsed when it grew to a size that even these backers could no longer stabilize.
These examples reveal a profound truth: while cryptocurrencies theoretically advocate trustless systems, their survival in crises has repeatedly relied on discretionary intervention by implicitly trusted actors.
This coordination problem becomes exponentially harder as the size of the system increases. Problems that might be solvable through informal coordination at smaller scales become impossible once the system grows beyond certain thresholds.
Capital formation requirements
In addition to stability, a healthy currency must support capital formation — the lending process that drives economic productivity. This is another fundamental limitation faced by existing cryptocurrencies.
Crypto assets are increasingly used as collateral, but rarely as denominated assets for debt. Few people are willing to borrow in Bitcoin (BTC) or Ethereum (ETH) because their uncertainty creates unmanageable risks for borrowers and lenders.
A well-functioning currency must provide a stable unit of account for agreements across time. Whether borrowers are building homes, financing businesses, or developing infrastructure, they need reasonable certainty about the future value of their debt.
Designing a complete monetary system
The limitations of existing cryptocurrencies are not temporary problems, but fundamental design constraints. Assets such as Bitcoin and Ethereum are primarily designed for the first two stages of development: attracting value and scaling.
Their fixed or highly constrained supply models create strong incentives for early adoption and speculation. This design works well for launching value and achieving initial scale, but becomes a liability when stability and utility are needed for broader adoption.
Without mechanisms to adapt to changing economic conditions, provide a last resort function, or stabilize in a crisis, these systems remain fundamentally incomplete monetary systems. They work well as ownership ledgers, but struggle to be fully functional currencies.
The complete framework of good money
Based on these observations, we can define what is needed to architect a complete currency:
Adaptive supply mechanism: A healthy currency must be able to expand when demand exceeds supply, and contract when supply exceeds demand, creating a natural stabilizing pressure.
Last resort function: A good currency requires built-in mechanisms to provide liquidity, stability, and intervention in times of market stress without the need for external coordination.
Productive reserve utilization: A healthy currency should put its accumulated value to productive use, rather than letting it sit idle or dissipate, creating sustainable value for the system.
Lending Market Foundations: A healthy currency must provide the stability necessary for functional lending markets to develop, allowing capital formation without incurring excessive risk.
Transparent health indicators: A healthy currency should provide clear indicators of system health, allowing participants to make informed decisions based on fundamental strength rather than just market sentiment.
The historical development of traditional monetary systems is not accidental - these characteristics evolved because they are necessary for money to function in diverse economic conditions.
Bridging the gap
This analysis is not to deny the achievements of cryptocurrencies. Bitcoin and other cryptocurrencies have achieved remarkable success by successfully completing the first two stages of development, demonstrating that it is possible to launch a non-sovereign monetary system through market incentives.
Their success provides a crucial strategy for the initial stages of monetary evolution. The core insight is that a complete monetary system needs to be designed with its eventual mature state in mind while still being able to cope with the early evolutionary stages.
Monetary technologies need mechanisms that allow for initial growth and speculation while providing a path to stability and utility once sufficient scale is achieved. They need to combine the launch capabilities that make cryptocurrencies successful with the adaptive mechanisms that are currently lacking.
Conclusion: The Path to Good Money
The evolution of money is not just a matter of technology, but of solving the coordination problems that increase as scale increases. A healthy currency must be designed to operate throughout its life cycle—from initial adoption to mature use—with mechanisms to adapt to changing conditions without constant external intervention.
This does not mean returning to a completely centralized system, but rather designing fully architected systems with the mechanisms needed for money to work built in. This means creating money that works not only under optimal conditions, but also under a wide range of economic scenarios.
As we continue to develop digital currencies, these insights provide us with a framework for evaluating their potential. We should not focus solely on technical features or short-term price appreciation, but rather on whether a currency has the full architectural elements necessary to function as a quality currency throughout its evolution.
The future of money will not belong to those systems with the most advanced technology or the strongest initial growth, but to those systems that are designed with a comprehensive understanding of how money actually works.
