Crypto series 1 — Have you ever thought what is money?
Last time, I introduced WTF is NFT to you guys and hope you did have a better grasp of the blockchain knowledge. And now, I’d like to explain the reason why the blockchain and crypto is so important and why lots of people believe that is the next big thing. Before we take a deep dive to them, we need to take a history lesson first to know more about money history and evolution of financial system. What!? Are you serious? Yes, I am. Understanding the origin of money and the pros and cons of existing financial system can let us know how inefficient it is and how we can change and optimize it. So without further ado, let’s just get to our topic — what is money?
What is money?
Have you ever thought what exactly is money and what is it for? In a nutshell, money is created to help people exchange value more easily and efficiently. Easy huh?
In ancient time, people used to exchange goods from each other to get what they want. I have cows and you have chickens. Cool! Let’s have a deal to exchange goods. However, there are two main problems when we’d like to proceed the transaction. First, double coincidence of wants: if your goods are not what I need? I don’t like the chickens, but I need the pork!? Second, even exchange: if I give you a pound of beef and how much chickens you are gonna give me in return?
When it comes to the barter system, it’s very inefficient to match two parties and decide the quantity of traded goods. Therefore, people start to think what is the most widely-accepted commodity that everyone wants so we can make it as medium of exchange. Yes, that’s what we call money.
Properties of Money
In the beginning, people just make use of daily necessities with intrinsic value as money, such as coffee beans, rice and corns. When you want to make a transaction, just bring bags of coffee beans. But people gradually found out it’s a bit difficult to keep coffee beans, coz those commodity money would decay somehow. Therefore, people turn to use something persist across the time, such as gold. Gold is a good medium of exchange. It is scarce and durable, but it still has shortcomings. It’s too heavy to carry and too hard to divide.
So, there are some properties to make money a good money. These properties below ensure that will reduce or eliminate the transaction cost of the double coincidence of wants.
- Durability — Perishable good is not an appropriate option or you’ll discover your money gradually decrease with time passing. Money should be used over and over again. Picking something durable across the time is a must.
- Scarcity — Money should be limitedly supplied; the supply could be controlled by government or naturally hard to be created by human beings.
- Fungibility- Money should be a uniform form and be interchangeable with each other.
- Portability- Money should be divisible into small quantities so consumers are easy to carry them or conveniently transport them.
- Generally accepted- Money should be widely recognized and accepted by people based on the trust of government or its intrinsic value.
Functions of Money
As stated above, Money mainly functioned as medium of exchange, and it has also developed different functions. These other functions include: 1) a unit of account, 2) a store of value, and 3) a standard of deferred payment.
- Unit of account- When you go shopping and you’d like to buy a pair of sneakers, you won’t say this pair of sneakers worth 40 slices of pizza and you will say it costs me 3,000 dollars. Slices of pizza is not unit of account, but money is generally-accepted by the people as unit of account.
- Store of value- When you facilitate the transaction, you are not only exchange goods but also exchange value. Acting as medium of exchange, money is supposed to serve as store of value. But in some extreme cases, like living in a country with skyrocketed inflation rate, money probably is not a good option for storing the value.
- Standard of deferred payment- It is the function of being a widely accepted way to value a debt. Lender can loan money to another person for a period of time and borrower will repay another agreed-upon quantity of money to the lender. Debt is really crucial use of money because it allows us to buy goods and services now and pay in the future.
Whoof… finally finished writing the nitty-gritty of money. After reading this topic, I hope you can understand the nature of money and we can reflect on the meaning of cryptocurrency. Later, I am gonna introduce the evolution of the modern financial system to you guys and let you know why I think the modern financial system seems like a tricky scam.