Welcome back to our Crypto Crash Course. In this section, we will turn our focus towards cryptocurrencies, tokens and why blockchain and smart contracts have the potential to change our banking, stock exchange and other funding mechanisms.
Let us start our discussion with the age-old theory of money.
In trade, barter is a system in which participants in a transaction directly exchange an article (goods or services) for other articles (goods or services) without a medium of exchange (such as money) [4]. Barter features immediate reciprocal exchange, not delayed in time. A seller of an article must not only find someone who is willing to give value for it but someone who is also willing to give in exchange some article which the seller wishes to acquire [5]. Alternatively, the seller must arrange a multilateral series of barter transactions having the same final result. This is called the “double coincidence” problem in a barter economy. The opportunity for exchange is severely restricted, which makes it almost impossible for a complex exchange economy.
Everyone who has ever played Settlers of Catan will recognise this problem when someone wants to trade a sheep for lumber and no one wants it, or you have that guy who always wants four ores for a brick.
Through introducing a common medium of exchange (money), in which a single transaction of barter (trade) becomes decomposed into separate transactions of sale and purchase, eliminate the double coincidence problem.
Money also separates the transactions in time (allows you to defer consumption until a later date [9]), and acts as a store of value [5], and its acceptability in settlement of debt. Money is also a unit of account, meaning that it allows you to assign a value to different goods without having to compare them [9]. Money is in fact anything which generally functions as a medium of exchange [5].
From an economist point of view, money is classified in three broad groups: commodity money and token money. (We are still talking about ‘normal’ money that we all use daily, and not about anything related to cryptocurrencies and tokens – we will get to that in the next article).
Commodity Money
Commodity money is money whose value comes from a commodity of which it is made (gold or silver). Commodity money consists of objects having value or use in and of themselves as well as their value in buying goods.
Token Money
This is representative money (token money), which has little or no intrinsic value but represents something of value.
Token money does not need to take a physical form at all. In our modern economy, payments are mostly made by means of entries in bank ledgers. In this case payments are made not by the transfer of some physical entity, but by the alteration of a financial relationship. A credit card is not money; it is simply an order to transfer money; only the deposit in the bank itself is money.
Another form of token money is utility tokens. These tokens limit their use to the respective platform. Banks, airlines and retailes often have ‘rewards’ programs that allow you to collect their respective “token”. Each of these tokens have a value within a particular platform or brand and can be used to get a discount, a free coffee, an entry into an airport lounge or access to certain services based on the amount of tokens you have. Some of these tokens can even be paid out in cash.
That’s a wrap on the Theory of Money. We did a quick history lesson on ancient trade through bartering, and why money was introduced – initially as commodity money and later also as token money.
Think of this article as a leisurely cruise to familiarize yourself with the bay. In part 2 we will be heading further out into the unfamiliar territory of cryptocurrencies and crypto-tokens. Our infographic below will remind you how the key concepts interact to make this new type of money and exchange possible.
** This was Part 1 of a 3-part explanation of money, coins and currencies. The next instalment will be published on medium.com and on our website.
References:
[3] Redka, M., 2021. The Future of Blockchain: Potential Use and Global Impact. [Online] Mlsdev.com. Available at: <https://mlsdev.com/blog/the-future-of-the-blockchain-technology-use-cases-geographical-expansion-potential-risks-and-challenges> [Accessed 22 June 2021].
[4] “Barter – Wikipedia”, En.wikipedia.org, 2021. [Online]. Available: https://en.wikipedia.org/wiki/Barter. [Accessed: 22- Jun- 2021].
[5] W. Newlyn and R. Bootle, Theory of Money, 3rd ed. Oxford: Clarendon Pr., 1978, pp. 1-18.
[9] J. Surowiecki, “A Brief History of Money”, IEEE Spectrum: Technology, Engineering, and Science News, 2012. [Online]. Available: https://spectrum.ieee.org/at-work/innovation/a-brief-history-of-money. [Accessed: 06- Jul- 2021].
