The future of currency belongs to systems that fully understand the actual operational mechanisms of currency at the time of design.
Written by: Zeus
Translated by: Block unicorn
Introduction
Currency is the foundation of economic activity, yet we rarely explore the characteristics that make currency effective. As digital currencies challenge traditional concepts of money, we need to reassess which traits enable currency to fulfill its fundamental functions in the modern economy.
History shows that the definition of currency lies not only in its technical characteristics but also in its ability to evolve through different stages of development. True currency must undergo a challenging evolutionary path that most emerging currencies cannot complete.
Complete Currency Lifecycle
To become a fully functional currency, an asset must successfully complete four developmental stages:
1. Value Attraction
First, currency must attract capital and attention. Whether through precious metals, government backing, or potential appreciation, all successful currencies begin by enticing people to hold them. This initial attraction lays the groundwork for subsequent development.
Without this stage, currency cannot gather the critical mass needed for widespread adoption. Many digital currencies excel at this stage, leveraging speculation and network effects to establish initial adoption and liquidity.
2. Scale Development
Second, currency must achieve sufficient scale and liquidity to support meaningful economic activity. It needs enough market depth to avoid excessive volatility from trades; it also requires sufficient distribution to ensure finding counterparties is not overly difficult.
Scale brings credibility, network effects, and the necessary liquidity for broader application. Major cryptocurrencies like Bitcoin have successfully navigated this stage, reaching market capitalizations in the trillions.
3. Stability Mechanism
Third, currency must develop a stability mechanism that makes it reliable in commerce and contracts. Stability does not mean fixed value; rather, it refers to predictability and resilience under market pressure. This requires technical mechanisms and institutional support.
Many emerging currencies fail at this stage. True stability requires a system that can operate normally under various market conditions without collapsing or needing external intervention. This means the currency must have inherent coping mechanisms to address both excess demand and insufficient demand.
4. Economic Utility
Finally, currency must be genuinely practical in ordinary economic activities beyond speculation. It must serve as a reliable unit of account, medium of exchange, and store of value across various economic environments.
True practicality means supporting all financial functions necessary for the modern economy: efficient payments, reliable contracts, reasonable lending markets, and stable planning cycles. This means currency becomes commonplace and practical, rather than merely exciting and novel.
Coordination Issues
People rarely realize that later stages require addressing fundamental coordination problems that become more challenging as the system scales.
Consider the basic functions of currency, such as providing a last resort function, implementing emergency stabilization measures, or intervening during crises. These functions are essentially public goods. They require entities to prioritize system stability over their immediate self-interests—taking personal risks for the collective good.
In purely self-interest-driven decentralized systems, these critical functions lack structural support. The system may operate well under normal conditions but can collapse when stability is crucial.
We repeatedly see this vulnerability in the cryptocurrency market:
During the crash in March 2020, exchanges like BitMEX had to suspend trading to prevent a cascading liquidation that threatened the entire ecosystem with a complete collapse.
On "Black Thursday," MakerDAO required an emergency governance response and community rescue due to under-collateralization.
LUNA initially weathered market pressure through large-scale interventions from well-capitalized participants, but it ultimately collapsed when its scale grew beyond what even these supporters could stabilize.
These examples reveal a profound truth: although cryptocurrencies theoretically advocate for trustless systems, their survival in crises repeatedly relies on discretionary interventions from participants who possess implicit trust.
As the system scales, this coordination problem becomes exponentially more difficult. Issues that could be resolved through informal coordination at smaller scales become impossible once the system grows beyond certain thresholds.
Capital Formation Requirements
In addition to stability, a healthy currency must support capital formation—the lending process that drives economic productivity. This is another fundamental limitation faced by existing cryptocurrencies.
The use of crypto assets as collateral is increasing, but they are rarely used as pricing assets for debt. Few are willing to borrow against Bitcoin (BTC) or Ethereum (ETH) due to the uncertainty they pose, creating unmanageable risks for both borrowers and lenders.
A fully functional currency must provide a stable unit of account for agreements across time. Whether borrowers are building homes, financing businesses, or developing infrastructure, they need reasonable certainty about the future value of their debt.
Designing a Complete Currency System
The limitations of existing cryptocurrencies are not temporary issues but fundamental design constraints. Assets like Bitcoin and Ethereum are primarily designed for the first two developmental stages—value attraction and scale development.
Their fixed or highly constrained supply models create strong incentives for early adoption and speculation. This design excels at initiating value and achieving initial scale but becomes a burden when stability and practicality are needed for broader adoption.
Without mechanisms to adapt to changing economic conditions, provide last resort functions, or stabilize during crises, these systems remain fundamentally incomplete as currencies. They operate well as ownership ledgers but struggle to become fully functional currencies.
Complete Framework for Healthy Currency
Based on these observations, we can define what is needed for a well-structured currency:
Adaptive Supply Mechanism: A healthy currency must be able to expand when demand exceeds supply and contract when supply exceeds demand, creating natural stabilizing pressure.
Last Resort Function: A healthy currency needs built-in mechanisms to provide liquidity, stability, and intervention under market pressure without external coordination.
Productive Reserve Utilization: A healthy currency should utilize its accumulated value for productive purposes rather than letting it sit idle or dissipate, creating sustainable value for the system.
Lending Market Foundation: A healthy currency must provide the stability necessary for the development of functional lending markets, allowing for capital formation without excessive risk.
Transparent Health Indicators: A healthy currency should provide clear indicators of system health, enabling participants to make informed decisions based on fundamental strength rather than merely market sentiment.
The historical development of traditional currency systems is not coincidental—these characteristics evolved because they are essential for currency to operate under diverse economic conditions.
Bridging the Gap
This analysis does not deny the achievements of cryptocurrencies. Bitcoin and other cryptocurrencies have made extraordinary strides by successfully completing the first two developmental stages—demonstrating that it is possible to initiate a non-sovereign currency system through market incentives.
Their success has provided crucial strategies for the initial stages of currency evolution. The core insight is that a complete currency system must consider its ultimate mature state at the time of design while still being able to navigate the early evolutionary stages.
Currency technology needs to balance mechanisms for initial growth and speculation while providing a pathway to achieve stability and practicality once sufficient scale is reached. They need to combine the launch capabilities that have made cryptocurrencies successful with the adaptive mechanisms that are currently lacking.
Conclusion: The Path to Healthy Currency
The evolution of currency is not merely a technical issue but a matter of addressing the coordination problems that increase with scale. A healthy currency must be designed to operate throughout its entire lifecycle—from initial adoption to mature application—equipped with mechanisms to adapt to changing conditions without ongoing external intervention.
This does not mean reverting to fully centralized systems but rather designing a well-structured system that incorporates the mechanisms necessary for currency operation. This means creating currency that is effective not only under optimal conditions but also across various economic scenarios.
As we continue to develop digital currencies, these insights provide us with a framework to assess their potential. We should not focus solely on technical characteristics or short-term price appreciation but consider whether a currency possesses the complete structural elements necessary to perform high-quality currency functions throughout its entire evolution.
The future of currency does not belong to those with the most advanced technology or the strongest initial growth but to those systems that fully understand the actual operational mechanisms of currency at the time of design.
免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。
