Old Properties Still Apply

Before we look at potentially new properties of digital money, we must ask the question, “Does it make sense to apply the physical properties of money to digital assets?“

Let’s look at the properties again:

• Medium of Exchange

• Unit of Account

• Portable

• Divisible

• Durable

• Fungible

• Store of Value

• Relative Scarcity

Now let’s ask, “Which one of those properties don’t apply to a digital transaction?“

The answer, if we’re honest, is none. They all apply.

A digital asset must be portable. Without good portability, you might end up with slow transactions which make it difficult to do commerce.

A digital asset must be divisible lest it become a collectible like artwork or a non-fungible token (NFT), which is just a digital collectible.

A digital asset must be durable, which in the context of the digital realm, means it must be resilient in the face of bad actors such as governments and hackers. That means digital coins can’t be hacked, transactions can’t be prevented/censored, or easily stolen.

A digital asset must be fungible in order to preserve value across transactions. If digital coins can be distinguished from others, then the quality of the transactions diminishes. We’ll explore this one in further detail below.

A digital asset must be a unit of account in order to assign value to goods. It must be the common denominator for expressing and comparing goods against.

A digital asset must be a good medium of exchange in order to facilitate transactions regardless of the size of the transaction.

A digital asset must be relatively scarce to protect the long term value of the asset.

A digital asset must be a store of value in order to preserve wealth through time and space (which means it’s portable, durable, and relatively scarce).

Consider that cryptocurrency must undergo its own adversarial environment scenario if the market is to decide which ones can become money. We must consider the adversarial environment and those properties which are useful to protecting the transfer of value.

Exploring Digital Monetary Properties

As of this moment, there are over 20,000 cryptocurrencies. There are so many variations of technology that it’s become difficult to define what exactly makes a cryptocurrency.

What makes a crypto?

Grossly oversimplified… in general a cryptocurrency is a currency. You use it to pay for things like goods and services. The defining feature is its sovereign nature. It’s the first digital asset which can be defined using the same definition as physical property minus the physical qualities. It’s scarce, it can’t be copied, and you own it like you would land or other physically scarce things.

Cryptocurrencies have many different properties which could be good candidates to get this discussion going. These properties relate to their adversarial nature. In other words, these properties are potentially necessary for the cryptocurrency to survive in an environment where each participant in the cryptocurrency network is a potentially bad actor.

To get us started we’re going to grab the most common ideas and features which seem to bind cryptocurrencies into a single asset class and we’re going to analyze them. Those are concepts like decentralization, privacy, scalability, programmability and absolute scarcity. I’ll define them simply so you don’t have to make any assumptions.

I’ve spent some time looking for other potential candidate monetary properties and have found many that some people believe provide some kind of economic value but most are completely irrelevant or subsets of the potential properties I’ve listed above.

Let’s look at each of these concepts and see what, if anything, we can make of them. (For the less tech savvy among us, I’ll keep it simple. There’s no reason to over complicate these things).

Decentralization

Decentralization is the idea that no single party controls the cryptocurrency network, no one controls the issuance of the assets, and no single party can influence the state of the network. The software typically facilitates these things automatically without human intervention. Think of the network like a spider web where each point where threads meet is a computer connected to the network. If a single computer gets compromised, the rest of the network is safe because the software automatically detects bad actors and omits it from participation (The way this occurs is fairly technical but fascinating none the less. If you’re interested you can watch this video here).

In terms of the internet, decentralization is a powerful property a cryptocurrency can have since it ensures a freedom to transact where no single entity, not even government armies, can prevent you from making transactions (not without turning off the entire internet). It’s a powerful concept. But is it a monetary property?

Gold can be considered a decentralized asset. No single party controls the supply or the issuance of the gold. No single entity can prevent you from making transactions using gold (not without physical violence). And no single entity can control the entire gold market.

Referring to gold as decentralized feels odd. Gold lives in the physical realm and we tend to use the word “decentralized” in context of the internet these days. So is it fair to refer to gold as decentralized? Yes, but it’s weird. Being decentralized is a natural property of things we pull from the ground so it’s not a feature we often associate with them. Almost no one before the cryptocurrencies was referring to gold as decentralized. Maybe they referred to people who hoarded gold or nations states who outlawed its use as centralizing the gold market but it’s not the same as completely controlling a monetary technology.

So in context of physical assets, the concept of decentralization is baked right into the asset. It’s not optional.

But what about in context of digital assets?

Decentralization is extremely important for a cryptocurrency. The reason for this is that software can be manipulated by bad actors or well meaning developers who inadvertently introduce bugs. Decentralization prevents manipulation of the software, and thus secures the network. This is important, because as a financial asset, cryptocurrency must be reputable in order for people to trust it enough to transact with.

If we put this in context of an adversarial environment, we can see that decentralization must be present in cryptocurrencies in order to protect itself from adversaries. That said, it’s possible to build a cryptocurrency without decentralization. This means, decentralization is an optional feature. Gold doesn’t have this optionality.

In terms of a monetary property, decentralization is a key property in ensuring the safety and resiliency of the network. The fact that decentralization is optional means a cryptocurrency without it cannot be considered safe from bad actors and may fail in an adversarial environment. We can conclude decentralization must be present to survive an attack.

Thus, decentralization must be a monetary property of cryptocurrencies seeking to be considered money.

So can we add “decentralization” to the properties of digital money? I’m inclined to say yes. It’s that important.

Privacy

Privacy in the digital world typically refers to your personal privacy. With social media and governments sucking up every scrap of possible data they can from you and using it for clearly nefarious purposes, privacy online is becoming extremely important for the purposes of protecting your financial privacy, as well as, more importantly, your right to pursue privacy and anonymity. Governments are working extremely hard to prevent your right to pursue financial privacy… but that’s a story for a different day.

When we’re referring to precious metals or even cash, we can say they preserve your privacy by virtue of not being connected to the internet. People can transact with physical cash and gold privately and no 3rd parties would be aware.

But like “decentralization”, it feels odd to refer to gold and cash as private because it’s baked into its nature. When you put it in your pocket, people don’t know it’s there. We get that cash and gold can be used privately, but we just don’t usually check its privacy because it’s not necessary.

In context of cryptocurrencies, privacy is definitely something they can be without. In fact, most cryptocurrencies don’t have privacy at all (Roughly, 0.05% of the 20,000+ coins are private or have some sort of privacy feature). They can expose your data like your IP address, the contents of your wallet, to whom you’re transacting, what exchanges you use and more- it’s treasure trove of personal information!

Cryptocurrencies typically have a public ledger and software exists, called a Blockchain Explorer, which can allow anyone with access to the internet and your public address to see what you own by scanning that ledger. Imagine your bank having a search feature which allowed you to see all the transactions happening at your bank including the amounts and account numbers… including your own and anyone could look it up from anywhere on the planet.

This complicates cryptocurrency’s ability to be money. If every single digital asset can be tracked and traced, then we can say each and every digital asset has a unique history associated with it. This means governments or companies/exchanges can blacklist wallets and assets associated with a “tainted” history. In fact, this has already occurred and is still occurring. If you receive a blacklisted asset, even if you didn’t ask for it, you, as a US Citizen, can be sanctioned. Combine that with companies using software to associate your identity with your crypto and it’s complete history (in a process called Chainanalysis) we have to admit that an open and non-private, public ledger is the same as a surveillance ledger.

Scary stuff.

What I’m getting at here is this: each digital coin has a unique associated history. This means one digital coin isn’t the same as another. When you receive, say, a bitcoin, you inherit the entire history of that coin. There’s no way to make it private.

This means 1 bitcoin is not the same as 1 bitcoin; it lacks the fungibility of gold where with gold 1 oz is equal to 1 oz (this is also partly why bitcoin isn’t money).

In fact, any cryptocurrency with a public ledger cannot be fungible and thus cannot be considered money.

Why? Because it fails in the adversarial environment test. Bad actors can compromise your identity, track and trace you, know what you’re purchasing, how much you have, and more. This isn’t to say open ledgers can’t be currencies but they share more in common with Central Bank Digital Currencies than a mere national currency like fiat cash due to the surveillance prone nature of public ledgers.

Does that mean cryptocurrencies can never be money?

Not at all. This is where privacy comes in. It’s 100% possible for a cryptocurrency to be private by default and without a public ledger. One such coin is Monero. It’s so private that there isn’t a way for someone to see how much you have, or see with whom you’ve transacted, nor can they see the amount of the transactions.

It’s akin to using physical gold or cash- but online.

When it comes to digital assets: No privacy = No fungibility. It’s as simple as that.

People have been known to pay premiums for “freshly minted” bitcoins to ensure it has no transaction history. This means its public ledger breaks fungibility. If someone is willing to pay more for one bitcoin over another then 1 bitcoin does not equal 1 bitcoin.

But does that mean privacy is a monetary property for digital assets?

Absolutely yes! Privacy is a monetary property of digital money. Privacy is not the same as fungibility even though they overlap in this context. If privacy is optional then it isn’t inherent to crypto as it is with precious metals or physical assets. This means, if we want cryptocurrency to be fungible, it needs to private. Privacy, like decentralization, isn’t negotiable in an adversarial environment.

So when it comes to digital assets, fungibility is intrinsically linked to privacy. Privacy is 100% necessary for a digital asset to be money.

Scalability

There’s a concept in decentralized networks known as “scalability”. It’s the ability of the network to scale with the demands of the network. As the number of people who use the network increases, the software should accommodate the added network pressures and automatically adjust to ensure the experience of using the network is similar for 100 people or a million.

If the network slows because it can’t scale with demand, then it compromises the ability of that asset to be a medium of exchange. Here’s how: In some blockchains transaction fees increase to de-incentivize people from using the network; in fact the network fees can jump to more than $200 per transaction. This makes it impossible to perform small transactions.

Imagine trying to use your debit card, but because it’s a busy shopping season Visa charges you an extra $200 on top of your $3 coffee purchase because the network is congested. $200 dollars isn’t an arbitrary number. This happened to bitcoin users recently during peak demand- this number can go even higher. This impacts people who can’t afford $200- many of whom are in poverty or live in 3rd world nations.

Right away we can see the importance of scalability in a network.

If the lack of the proposed property, scalability in this case, can compromise the monetary properties of the asset, then we have to conclude it’s an important monetary property.

In 2017, the bitcoin blockchain intentionally chose to cripple its ability to scale and now relies on high fees to de-incentivize users from using the network during peak usage (the argument at the time, without any scientific evidence provided publicly, was that bitcoin decentralization would be compromised if it was allowed to scale). Go back to our congested Visa example… that’s what’s happening on bitcoin.

As a result, bitcoin cannot support the global demand as a currency. If everyone wanted to use it as a currency, the network fees would skyrocket to the point where only the very rich could afford to make transactions. This essentially prohibits bitcoin from becoming a monetary system. It’s only use, at this point is as a savings technology like art or other scarce collectables. Sadly, Ethereum appears to be going down this path as well, sacrificing scalability- preventing it from becoming a good medium of exchange.

That said, there are many blockchains in the subsequent years which have proven that it absolutely can meet the demands of an increasing user base while keeping fees lows. Chains like Monero, Bitcoin Cash, and more can all scale without compromising usability and thus monetary properties.

Scalability is linked to a cryptocurrency’s role as a medium of exchange, just as fungibility is linked to a crypto’s privacy. You can’t have one without the other.

If a cryptocurrency can’t scale, then it can’t be a good medium of exchange, thus the asset cannot be money.

For some chains scalability is optional. This optionality, like privacy, and decentralization, is key to adding them as necessary properties of digital money.

So yes, scalability is absolutely a monetary property of digital money.

Interestingly, scalability is the first monetary property of cryptocurrency which has no real world counterpart. We’d be hard-pressed to say metals and cash are scalable. It’s not technically the same idea. Gold can be mined and cash can be printed to meet demand, so, I guess, we can say it’s scalable but we’re really having to bend the idea of the term. For physical currencies it’s more accurate to talk about them in terms of logistics (minting, storage, transportation, etc) rather than scalability.

Absolute Scarcity

Before we get into absolute scarcity, we need to understand relative scarcity as it relates to money.

Relative scarcity is the idea that an asset must be relatively scarce in order to hold some value. The US dollar can’t be said to be scarce and as a result we see that it has lost 99% of it’s purchasing power over the last 100 years. There are many factors which play into the USD losing it’s value including inflation but it serves as a model to understand relative scarcity.

Gold is relatively scarce. We continue to find more pockets of gold in the earth and we add it to our collective holdings. We can say that gold has a small inflation rate. This small inflation rate has allowed for gold to meet the demand pressures of a growing population. Historically, as the population grew, newer entrants to the market required gold to do business, applying demand pressure for the yellow metal. The inflation offset the demand ensuring the price of gold was relatively constant.

We can see the results of this relative inflation when we compare the prices of modern goods in terms of gold vs goods 100 years ago. If you were to price a house today in terms of gold, you’d see the price of a house 100 years ago is roughly the same. In fact, for some goods, you can go back a thousand years and the prices of those goods would be the same today in terms of gold.

Gold’s relative scarcity tells us that its low yearly inflation rate serves as a pressure release valve for demand, allowing for relatively stable prices.

I know people tend to freak out when they come across arguments FOR inflation but that’s usually due to the constant barrage of fear mongering about hyper-inflation carving out your cash savings. Mind you, it’s a real fear but it needs to be understood in context. Fiat isn’t money. It’s currency. Paper currency has no value beyond the cost of producing the paper itself and the wishes and dreams of whatever “full faith and credit of the US government” means when describing what backs the US dollar- faith is an interesting choice of words for a government that’s destroyed 99% of your purchasing power.

In it’s place, low constant inflation is just a tool that has successfully served gold and silver for thousands years.

With relative scarcity defined, let’s look at the new concept called “absolute scarcity”.

Absolute scarcity refers to a cryptocurrency’s fixed supply. In bitcoin’s case it’s fixed to 21 million coins and no more. As of this post, there are currently 19,688,637 BTC minted. As time goes on, more will continue to be mined until the supply reaches 21,000,000 coins and no more will be minted. Many other cryptocurrencies also have this feature although in different amounts.

There isn’t a good physical corollary to a fixed supply of something. Perhaps we can say original artwork has a fixed supply or your unique self has a fixed supply of you, but we’re reaching here. Objects that are often in fixed in supply tend to be collectibles.

In terms of crypto, a fixed supply is absolutely scarce. Unless the community decides to change the underlying software, the supply will be fixed forever.

Can something with absolute scarcity be money?

This is a very nuanced question which requires understanding a few things.

Inflation refers to 1) the value of some currency going down and 2) the price effect reflecting that falling change in value with the price of the goods of services going up. With inflation, as the currency loses value, the price of things measured against it goes up.

For example, taking into account gold’s low inflation rate, if the population growth was stagnant or less than gold’s yearly inflation rate, the value of gold would go down and the prices of things would go up like we would expect. But because the population continues to grow at a rate faster than gold is mined, the demand for gold acts a pressure keeping things priced in gold low and stable, offsetting the effects of golds inflation rate, and often, interestingly, lowering those prices over time.

This is known as deflation. Deflation is a decrease in prices due to demand pressures being higher than inflationary pressures.

If an asset has a fixed supply, what can we surmise will happen? A fixed supply will only experience demand pressures. This means, over time an asset will become more and more valuable. That’s great for people who hold it over a long period of time, but it means newer people will be able to afford less and less of it- affordability goes down- over time. If we account for a stagnant population, there would be constant unchanging demand for that asset (no new demand) and thus ultimate price stability- the demand for the asset is in equilibrium, thus prices would be perfectly stable relative to the asset. But we don’t live in that world. Our population is increasing exponentially. This means the demand for that asset will always go up. If an asset’s price always goes up, what does that mean for goods and services priced in terms of that asset? Well, their prices trend toward zero. It sounds great in theory, but how do merchants price their stuff to an asset whose price is always going up?

The world has never actually seen this situation making this idea theoretical but if we follow this to the logical conclusion, we can see that merchants would experience the opposite problem of hyper-inflation. Extreme inflation makes it so merchants are forced to reprice things on an almost hourly basis. It’s unsustainable. The same would be true for an asset which experiences only extreme hyper-deflation. How would a merchant effectively price goods against an asset whose value is pushing the price of goods to zero?

I can imagine a situation where merchants are constantly shifting decimals.

Small Coffee:
$1.00000
$0.10000
$0.01000
$0.00100
$0.00010
$0.00001

Again… this is unsustainable.

Obviously, the benefit of holding a deflationary asset is that your purchasing power goes up over time, making it a potentially awesome investment. But clearly, it can’t be useful as a money. There would need to be another asset which stores value, not deflates it. Often you hear people say bitcoin is like a battery… but what kind of battery has an unlimited capacity to store energy? None. On the other hand Gold, with it’s low steady inflation rate, keeps prices stable and monetary energy stored… like a battery.

We’re moving into a world where we’ll potentially see this extremely deflationary financial asset situation play out. While it’s still theory, I’m willing to wager that if the world were to adopt a fixed asset currency, the world would soon discover the huge drawbacks.

There are few cryptocurrencies which buck the trend of absolute scarcity. Monero and Ethereum are two. Monero has a yearly inflation rate similar to that of gold, making it a solid store of value and Ethereum has a low inflation rate as well but also burns its native coins at a larger rate than it inflates it making it disinflationary, so the value goes up.

Only Monero follows the trajectory of sound money like gold, so while Monero has an uncapped supply (there’s ~18.5 million XMR at the moment) its inflation rate relative to the population is similar to that of gold’s inflation rate.

It’s my opinion absolute scarcity is NOT a monetary property. While it might make an asset more valuable over time and allow for the creation of extreme wealth for those who manage to get their hands on it early enough, it doesn’t necessarily make it a good currency, let alone a good money.

Programmability

Programmability is one of those fascinating ideas that people often over explain and thus confuses people. It’s a simple concept. Think of the blockchain as an operating system like Windows. You can run programs on it. These programs on the blockchain are called smart contracts- it’s less of a contract and more of a program. So a blockchains ability to run programs on it is programmability.

Think of these programs like a vending machine. You insert a coin and the program goes and does something.

Programmability opens the door to an incredible array of possibilities. You can build decentralized companies, create tokens of real world assets, decentralized exchanges, store data, use it as payroll system, create blockchain-based domain names, and more.

It’s a really earth shattering technology that will create new opportunities and new jobs as the technologies mature.

Even though a blockchain may be programmable, as in the cases of, say, Ethereum or Cardano, it’s not a requirement to be a currency.

In fact, many blockchains aren’t programmable and it’s fine- the use case for those assets are as a currency.

But…

Is programmability a monetary property?

No. Not even a little.

We can safely remove a blockchain’s programmability and doesn’t change the asset’s ability to transact. It can exist separately on the network without changing the underlying asset itself.

Programmability is not a monetary property.