Andrey Didovskiy
Over 100 subscribers
To be aware is to be alive.
We use money every day but rarely do we stop to deeply internalize what it is, let alone how it works.
Money is an abstract concept, but at its core, it is a vehicle that captures & facilitates the transference of value. In order for something to be classified as a “money,” it must inhibit characteristics of three underlying principles; a store of value, a medium of exchange, and a unit of account. The presence of all three properties harmoniously interwoven & implemented to maximally satisfy its utility, results in what is known as perfect or “sound” money. Sound money inhibits one of humanity’s greatest paradigms — Stability.
Trifecta of Money Properties
However, as history has shown, traditional money has been faced with a tradeoff-trilemma, where there was no way to implement a solution that satisfies all three properties maximally; rather money so far has been established based on a variable combination of the degree to which each principle is applied.
To understand this better, let’s inspect these three principles through the lens of the two most dominant forms of money, Cash & Gold.
For brevity & simplicity the properties are presented as acronyms;
Store-of-Value = SoV
Medium-of-Exchange = MoX
Unit-of-Account = UoA
Good money must be able to retain its buying power during times of economic instability. Since the accrual of money is directly tied to the contributions of labor, money must not decay.
SoV = 30 | MoX = 50 | UoA =95
Examples of money that are bad as a store of value can be seen through the history of fiat (government cash) money. Since fiat money is controlled by a single entity, it is susceptible to single party risk known as inflation. The US Dollar was created in 1913. At that time, $100 US dollars could be used for the purchase of a car. As of early 2019, that same $100 would provide a downpayment on a bottle of water and pack of gum (~approximately $3.87 — A decrease of -96.13%)
If you are trying to measure the difference in buying power numerically; If you took $100 today and teleported back in time to 1913, your $100 would provide you $2,583.97 in buying power.
source - https://howmuch.net/articles/rise-and-fall-dollar
Monies most innate property. Good money must have the ability to fluidly transfer value between parties. That means that a good medium of exchange are portability (the ease of traveling with it) & divisibility (the ease of fractionalizing it).
Of course, it can be argued that anything can be used as a medium of exchange. Sure, I can trade you 2 tonnes of potatoes for 10,000 horses, but only if you trade me 60 tonnes of coal for 1 million watermelons. If a transaction of this size settles hallelujah, This is all lovely until You realize that the rent must be paid in silver & the baker only accepts chicken as payment. Now you have to go about finding a party that can offer you trade for the other items.
This is where gold falls short.
SoV = 87.5 | MoX = 40 | UoA =30
Applying gold for commerce is sub-optimal. Gold is bound by its physical properties of size, weight & intrinsic utility. Its value is defined by its size, so how much must be carried is uncertain. It is heavy, making it a burden to carry. It is atomically solid, making it a nuance for fractionalizing. It has multiple applications alongside money, (such as in computers for the conduction of electricity or in jewelry) which could attract malicious acts and incurs the risks of being robbed. This all goes to say that Gold has done excellently as a Store-of-Value. Ironically its value capabilities also translate into the malicious counterparty risks.
The Unit of account is a “metaproperty,” a property that is not derived directly but, rather, occurs as a result of the other two properties. Money is an output that measures the contributions of human labor efforts.
Just as inches & liters are unit of account for height/volume, both cash & gold are units of account for money/value.
Here, lay the largest divergence between the two & the case for cash as a superior system.
Coupled with geopolitical interests, cash’s portability & divisibility have created a socio-economic reflexive feedback loop, which in turn allowed it to become widely adopted in global commerce. Given that it can be used theoretically anywhere & anytime, cash systems are used to denominate prices. (If the 300 businesses accept cash, then when the 301 business arrives it too shall opt for cash — otherwise, the customers will not be able to purchase anything).
Circa 2009, Empowered by the profound capabilities of communication technologies, distraught by the existing broken financial systems, and amplified by the natural behavioral evolution of humanity, a new form of money arose, Hello Crypto.
Just as in the case with predecessor forms of money, cryptocurrencies satisfy the three properties in varying degrees. Since its arrival, crypto has taken on many different forms, but overall, it has solved for the property of an MoX.
At first, there was Bitcoin (BTC). Bitcoin promised to remove central third parties from transactions & belong to no single entity. By removing excess parties from transactions, the friction during settlement is reduced, making it easier to transact. By removing a single governing body, the fears of depreciation caused by inflation are minimized (if not removed).
SoV = 69 | MoX = 91 | UoA =25
However, Bitcoin has design specifications of its own, which are once again subjected to tradeoffs. First is the processing time. Central parties provide consensus (verification). With the removal of central parties, there must be an alternative engine for consensus, in the case with BTC, this engine includes a 10-minute delay for transaction processing.
When making purchases at a store, people want to finalize the deal immediately. Having to wait ~10minutes impacts BTC has a medium of exchange.
Under shorter time frames, Bitcoin is seen as volatile & uncertain, on the global time scale, Bitcoin appears as the herald in value preservation. Appreciating by over 1,000,000% in a decade & earning itself the title of “digital gold,” nothing in human history has shown as effective as BTC in terms of an SoV.
Here is the overlap of monetary properties between Gold, Cash & Bitcoin.
Gold — Cash — Bitcoin
Fast forward a few years, hundreds of new digital assets & a couple of Billion dollars, and we arrive at a form of cryptocurrency that brings promise to satisfy all of the woes of its predecessors.
As briefly mentioned in the beginning, stability is one of the most sought after paradigms in human life. But stability is an infinitely complex concept that does not exist in biological life; deterioration is constant.
Stability is subjective. Stability is ascribed based on how & what it is measured against. For example; If something is worth $100,000 on Monday 8:00am EST → drops to $90,000 at 3:00pm → jumps to $110,000 at 1:00am → to end up at $100,00 on Tuesday at 8:00am; does this classify as something stable
By the nature of their design, Stablecoins are a synthesis of all previous monies, becoming uniquely their own class. They inherit the benefit of being digital; maximal MoX. They are valued based on their utility; maximal SoV. And, of course, with the presence of MoX & SoV, they automatically excel as a UoA.
SoV = 87.5 | MoX = 91 | UoA =95
If only the world was perfect, it seems like we would have solved for money; however, it is not. Stablecoins are implemented based on its archetype, of which there are four (4), Algorithmic, Fiat Collateralzied, Crypto Collateralized & Commodity Collateralized.
Algorithmic stablecoins are assets that are systematically monitored by an autonomous, automatic software program. Typically Algorithmic stablecoins work by manipulating parameters relating to supply policies.
Pros: automatic, efficient
Cons: no intrinsic value, risk of programmatic failure
Fiat collateralized stablecoins are assets that ascertain stability from their underlying constituents. Ideally, they are pegged to their underlying assets 1:1 and carry their underlying identities;(USD = StableUSD | JPY = StableJPY)
Pros: familiar, good for commerce
Cons: reliant on old alternative systems, centralized
Crypto collateralized stablecoins operate under the same premise as do other collateralized models; deriving their value from its underlying asset. This is a newer & highly experimental model, and since they are composed of very volatile underlying assets, they require excessive collateral in order to maintain.
Pros: decentralized
Cons: dependant on volatility of underlying assets, require massive over-collateralization.
Commodity backed stablecoins represent ownership of the underlying asset according to its peg. Here a stablecoin can represent a portion of gold. One stablecoin = one gram of gold; therefore, its stability is in its value against gold (one coin will always equal the economic power of one gram of gold).
Pros: familiar, better suited for wealth preservation or exposure
Cons: reliant on old systems, centralized, not ideal for payments
On their own, the stablecoin archetypes are bound to the same shortcomings as are their underlying assets. However, by synthesizing elements from each of the archetypes, an adaption with the desired properties can be constructed.
Cash-Green | Gold-Yellow | Bitcoin-Orange | Stablecoin-Blue
All in all, at the current state of money in today’s radically evolving economy, the existing solutions will only provide limited solutions.
Here is a convenient side-by-side comparison of all three:
Turning our attention to the future, by comparing the trifecta of “sound money” to the promises of trifecta through Stablecoins, the similarities are striking and could be a peek into what’s to come.
Will Sound Money ever appear?
Is sound money even possible outside of just a theory?
Will Stablecoins be the holy grail of money for humanity?
Who knows.
But one thing is for certain.
Something will come.
Something will go.
&
Something will stay.
Best be as prepared as possible; every inch counts.
Ignorance is bliss & knowledge is power.
Excited to be on this journey with all of you 🥂