Cryptocurrencies vs Classical Definitions of Money

Xpost from reddit, but in the midst of a fierce worldwide debate how to define cryptocurrency value, I thought I'd take a step back to explore the fundamentals of money from both a classical sense and an Austrian economics perspective to ultimately show how skycoin could be a great solution.

In Adam Smith's Theory of money and banking by Nicholas Curott, money as described by Adam Smith is a medium of exchange backed by a form of collateral, competing in a free market against other mediums of exchange. He theorized that all banks would issue their own notes using their own reserves as collateral and competition between bank notes would regulate the supply of money and weed out less trustworthy or undercapitalized banks. I can only imagine Adam Smith’s reaction today if we told him that 99% of currency in circulation had no underlying collateral yet people choose to use it anyway….

Then there's the Austrian school economists who developed what are perhaps the most detailed and stringent definitions of money. Most Austrian school economists argue money needs to fulfill a number of characteristics, simply put:

1. It must be a liquid medium of exchange. Check, I think many cryptocurrencies these days are easily transferable and have this one in the bag.

2. It must be able to serve as a precise measure of value. i.e. something which is uniform, divisible, does not change over time, and can be used to compare the value of one good against another. Again cryptocurrencies have a comparative advantage in this area as they can be divided to many decimal places and do not decay over time.

3. It must serve as a fungible store of value. To be more specific, in addition to functioning as a medium of exchange a stable currency needs to have a redeemable value fixed to a resource of intrinsic value, or in itself have intrinsic value apart from the value derived from it being a medium of exchange. A currency’s suitability as a store value is not a function of demand or money velocity. A currency’s store of value derives intrinsically from its utility value. This is what the utility coins are trying to achieve: A number of parties have developed cryptocurrencies backed by gold, silver, and other hard assets in attempt to create a stable competing medium of exchange on the free market, very much in line with Adam Smith’s original vision of competing collateralized currencies. While this is an excellent attempt to solve the store of value issue it opens up an issue of centralization: your coins are only as good as the company storing your gold. Of course, what if there was a scarce asset with intrinsic value which could be decentralized so that no single entity could take it down or confiscate it? Well, how about bandwidth, storage, or some other computing resource of value? This is an ingenious solution to a difficult problem as it can be directly intertwined with the blockchain and thus decentralized. However, it is not without challenges, as the supply of something like bandwidth in the world is ever increasing and the pricing mechanism for exchange between something like Skycoin’s coin hours and bandwidth usage would have a significant effect on the underlying value of Skycoin. Pricing logic for these types of coins is complex and will need to be very carefully thought out.

I don't know exactly where the future will bring us, but I am fairly certain we will see a rise in dominance of commodity and utility coins. I can only hope we do not sacrifice decentralization to get there. That said, I believe Skycoin, Metalicoin, and Suncoin are an excellent place to start for cryptocurrencies that may fit a more stringent definition of money than your everyday shill coin.