The basic attributes of currency and the misunderstandings in the design of electronic currency

Since the advent of electronic currencies such as Bitcoin in 2009, they have been considered to be able to better handle issues such as inflation and exchange rates due to their openness, designability, and decentralization. However, they do not have value in themselves, which has led to heated debate in the industry. The author summarizes several basic properties of currency and raises some issues in the design of electronic currencies.

The basic properties of money

It has its own value. From shells, cloth coins, to knife coins and ant nose coins, the currency itself generally has a certain industrial value or appreciation value that can meet people's needs. Then there are the Jiaozi of the Song Dynasty, the silver notes of the money houses, and modern paper money, which are also endorsed by the government (or enterprises) and correspond to a certain amount of gold or other rights.

As a measure of value. Currency is used to measure the relative value of other items, and the value it represents should not fluctuate too much (currency value is stable). For example, the mass production of sea salt quickly made salt lose its currency function; the widespread counterfeiting of paper money in the Song Dynasty once made paper money lose its currency function. One of the reasons why the US dollar is popular all over the world is that its currency value is relatively more stable.

Convenient for storage and circulation. Generally speaking, items that are relatively easy to store and circulate are more likely to become currency.

The driving force behind currency change

The fundamental purpose of the emergence of currency is to improve transaction efficiency and social efficiency and reduce transaction costs. Therefore, the replacement of currency is driven by improving efficiency and will eventually develop in the direction of improving efficiency.

Paper money is gradually replacing minted coins, and online banking is gradually replacing paper money. This is driven by the convenience of storage and circulation under the premise of achieving value equality with government endorsement. The US dollar is gradually replacing the national currency in underdeveloped countries. This is driven by the drastic depreciation of the national currency that deprives wealth while the value of the US dollar remains relatively constant, and so on.

Misunderstandings in Current Electronic Currency Design

Pure virtuality. Take Bitcoin as an example. In terms of production, people who know computers can mine a lot, but those who don’t can’t. This disrupts the status quo of wealth holdings among all classes, but there is no convincing standard for currency (wealth) redistribution, which will limit its further popularization. In terms of demand, the more people recognize it, the higher its value. If no one recognizes it, its value will be zero. The currency value is greatly affected by people’s subjective recognition, which is very unfavorable to the stability of the currency value.

Anonymity. The biggest problem caused by anonymity is that the cost of committing crimes against electronic currency is extremely low. For example, in the cases of THE DAO and Mt.Gox, anonymous currency has to pay a huge cost to improve security and overcome people's safety concerns. However, economic development focuses more on overall economic benefits. For example, the real-name system for train tickets and mobile phone numbers can reduce crime, so the public generally accepts it. Therefore, the real-name system is relatively more feasible at the current stage. Mutual assistance is precisely because there is no excessive demand for anonymity, which makes transactions more convenient and safe, thus obtaining extremely good user experience and trust.

Government endorsement. Most people believe that government endorsement is a necessary element of electronic currency (called legal tender). In fact, currency did not require government endorsement at the beginning. Even in the era when shells were used as currency, there was no concept of government. It was only in modern society that government endorsement improved social efficiency, so the public accepted it. Currency essentially represents rights of a certain value, which only requires the approval of both parties to the transaction, such as cigarettes in prison, tea on the ancient Tea Horse Road, etc. The current development of the Internet has made it possible for people to transform their trust in the government into trust in technology. If the technology can be used to objectively achieve the stable value of electronic currency, safe and efficient storage and circulation, then electronic currency.

Exploration of electronic currency design scheme

Due to the borderless nature of electronic currency, it is almost impossible for a government to prevent its residents from holding foreign currencies. Therefore, in the global game, the only way out for countries is to accelerate the development of electronic currency to gain a leading advantage or dominance. Electronic currency designers do not need to worry about national regulation.

Therefore, without considering affecting government interests, based on the objectivity, openness and designability of blockchain, it is only necessary to anchor a basket of commodities or a basket of commodity price indices (or other representative and tradable indices) to give electronic currency a real and extremely stable value. At this time, it is generally relatively convincing to control the cost of achieving this goal and design the incentive mechanism for different participants in the process.

However, this article challenges almost all electronic currencies. Please send your comments to [email protected].