Inside Blockchain, Bitcoin, and Cryptocurrencies

Niaz Chowdhury

• Publisher: Auerbach Publications
• Year: 2019
• ISBN:
  9781000517620
• Edition: 1
• Topic: Business
• Subtopic: Finanza
• Index: Business

This book covers blockchain from the underlying principles to how it enables applications to survive and surf on its shoulder. Having covered the fundamentals of blockchain, the book turns to cryptocurrency. It thoroughly examines Bitcoin before presenting six other major currencies in a rounded discussion. The book then bridges between technology and finance, concentrating on how blockchain-based applications, including cryptocurrencies, have pushed hard against mainstream industries in a bid to cement their positions permanent. It discusses blockchain as underlying banking technology, crypto mining and offering, cryptocurrency as investment instruments, crypto regulations, and markets.

Cryptocurrency

V

Chapter 12

Evolution of Money: From Barter to Bitcoin

It is a fact that all cryptocurrencies including Bitcoin are network protocols. It might be difficult to grasp how on Earth a network protocol becomes a currency. The answer to this question lies in the concept of money. A network protocol becomes a currency just like a piece of paper becomes US dollar or British pound sterling. To understand the underlying philosophy of cryptocurrency, knowing the origin of money, its functions and the evolution of the monetary system are essential. This chapter provides the basis for this requirement. The discussion presented hereafter is not a comprehensive discourse on the mentioned topic but will help readers relate the concept of cryptocurrency with regular money and comprehend how the monetary system works. In addition to briefly introducing money to readers, the chapter covers topics as early as from the age of bartering through commodity and representative money to contemporary money commonly known as fiat currency before introducing digital money and cryptocurrency.

12.1 Money

Perhaps the most common element that we regularly use in our day-to-day lives is money. Despite the Bible warning us that “the love of money is the root of all evil”, it is no exaggeration that in modern societies “money makes the world go round”. That said, it still seems somewhat deceptive that a piece of paper or a metallic object pays more than what it is worth in the name of money. This scepticism makes us think that there must have been a missing piece of a jigsaw puzzle hidden somewhere; otherwise, the entire idea makes no sense. In reality, there is indeed one missing piece, and that is an assurance given to the bearers confirming their ability to avail anything of the value of the amount written on the paper or inscribed on the metal in exchange for the object. In our contemporary world, this assurance is actual money. A government of a country generally grants this assurance on which people rely. Therefore, money can be defined as follows:

Any item or verifiable record accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context is called money [ Mishkin, 2007 ].

12.1.1 Functions of Money

English economist William Stanley Jevons in his 1875 book Money and the Mechanism of Exchange identified four functions of money [Jevons, 2014]. Modern economists later agreed upon those functions and authors of macroeconomics textbooks also adapted Jevons’s view. Many modern textbooks list all four functions as Jevons stated, while some rearrange them into three [Milnes, 1919]. The following briefly elaborate on these functions.

1. 1. Medium of exchange: Money is a widely accepted token giving its bearer the right to exchange for goods and services. Because of this function, money acts as an intermediary instrument and avoids the limitations of barter that requires one to have precisely matched goods or services with what the other has to offer.
2. 2. Measure of value: Money can measure the value of an item and provide the ability to compare things against each other such as goods, services, assets, liabilities, labour, income and expenses. This function of money is also known as a unit of account.
3. 3. Standard of deferred payment: Money is a widely accepted method to value a debt; thereby allowing goods and services to be acquired now and paid for in the future. This is the function that some textbooks incorporate into the previous two.
4. 4. Store of value: Money can be saved, retrieved and exchanged at a later time. More generally, a store of value is anything that retains purchasing power into the future.

12.1.2 Properties

The previous discussion revealed four functions of money. In order to fulfil these functions, money needs to have some specific properties that the following attempts to quickly review.

• ■ Fungibility: It is perhaps the most important property of money. This property implies that individual units must be capable of mutual substitution; hence, it gives money the ability of interchangeability.
• ■ Durability: This property means that money can be used again and again. It is the ability to withstand repeated use. Money, regardless of its form, changes hands and moves from one person or entity to another until the collapse of a system or is officially terminated.
• ■ Portability: It means money must be portable from one place and person to another. This is the ability that allowed money to evolve from its primitive forms.
• ■ Divisible: Money needs to be divisible so that it can be broken into small units. This property gives money the ability to be exchanged precisely.
• ■ Cognisability: This property implies that the value of money must be easily identified. When using as a medium of exchange, both parties must quickly recognise the value without any dispute.
• ■ Stability of value: The value of money needs to be stable so that bearers can use it for the various functions. If the value of money remains highly volatile, it wou...