Author: Zeus
Translated by: Block unicorn
Preface
Currency is the foundation of economic activity, but we rarely explore what qualities make currency effective. As digital currencies challenge traditional monetary concepts, we need to re-examine the qualities that enable currency to fulfill its basic functions in the modern economy.
History shows that the definition of currency is not merely about its technical characteristics, but about its ability to evolve through different developmental stages. A true currency must traverse a path filled with challenges, which most emerging currencies are unable to complete.
Complete Monetary Life Cycle
To become a fully functional currency, an asset must successfully complete four developmental stages:
1. Attracting Value
First, currency must attract capital and attention. Whether through precious metals, government endorsement, or potential appreciation, all successful currencies begin by attracting people to hold them. This initial attraction lays the foundation for subsequent development.
Without this stage, currency cannot accumulate the critical mass needed for large-scale adoption. Many digital currencies excel in 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 adequate market depth to avoid transactions causing excessive volatility, and sufficient distribution to ensure finding a counterparty is not overly difficult.
Scale brings credibility, network effects, and the necessary liquidity for broader applications. Major cryptocurrencies like Bitcoin have successfully passed this stage, with market capitalizations reaching trillions of dollars.
3. Stabilization Mechanism
Third, currency must develop mechanisms that make it reliable in commercial and contractual contexts. Stability does not mean fixed value, but 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 response mechanisms to address oversupply and undersupply.
4. Economic Utility
Finally, currency must be truly practical in ordinary economic activities beyond speculation. It must function as a reliable unit of account, medium of exchange, and store of value across various economic environments.
True utility means supporting all financial functions required by the modern economy: efficient payments, reliable contracts, reasonable lending markets, and stable planning cycles. This means the currency becomes mundane and practical, rather than just exciting and novel.
Coordination Challenges
People rarely realize that later stages require solving fundamental coordination problems that become increasingly difficult as the system scales.
Consider the basic functions of currency, such as providing a lender of last resort, implementing emergency stabilization measures, or intervening during crises. These functions are inherently public goods. They require entities to place system stability above immediate self-interest—taking personal risks for collective benefit.
In purely self-interest-driven decentralized systems, these critical functions lack structural support. The system may operate well under normal conditions but collapse when stability is crucial.
We repeatedly see this vulnerability in the cryptocurrency market:
During the March 2020 crash, exchanges like BitMEX had to suspend trading to prevent a liquidation cascade that could threaten the entire ecosystem with complete collapse.
On "Black Thursday," MakerDAO required emergency governance response and community rescue due to insufficient collateralization.
LUNA initially survived market pressure through massive interventions by well-funded participants but completely collapsed when its scale grew beyond these supporters' ability to stabilize.
These examples reveal a profound truth: despite cryptocurrencies' theoretical advocacy for trustless systems, their survival during crises repeatedly depends on discretionary interventions by implicitly trusted participants.
As the system scales, this coordination problem becomes exponentially difficult. Problems that might be solved through informal coordination at smaller scales become impossible once the system grows beyond certain thresholds.
Capital Formation Requirements
Beyond 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 debt valuation assets. Few are willing to borrow in BTC or ETH because their uncertainty creates unmanageable risks for borrowers and lenders.
A fully functional currency must provide a stable unit of account for cross-time agreements. Whether borrowing to build a house, finance a business, or develop infrastructure, they need reasonable certainty about the future value of their debt.
Designing a Complete Monetary 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—attracting value and scale development.
Their fixed or highly restricted supply models created powerful incentives for early adoption and speculation. This design excelled at launching value and achieving initial scale but becomes a burden when stability and utility are needed for broader adoption.
Without mechanisms to adapt to changing economic conditions, provide lender of last resort functions, or stabilize during crises, these systems remain fundamentally incomplete monetary systems. They operate well as ownership ledgers but struggle to become fully functional currencies.
Architecture of a Healthy Currency
Based on these observations, we can define what a complete monetary architecture requires:
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.
Lender of 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 use its accumulated value for productive purposes rather than leaving it idle or dissipating, creating sustainable value for the system.
Lending Market Foundation: A healthy currency must provide the stability necessary for developing functional lending markets, allowing capital formation without excessive risk.
Transparent Health Indicators: A healthy currency should offer clear system health indicators, enabling participants to make informed decisions based on fundamental strength rather than merely market sentiment.
The historical development of traditional monetary systems is not coincidental—these characteristics evolved because they are necessary 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 achieved an extraordinary feat by successfully completing the first two developmental stages—proving that launching a non-sovereign monetary system through market incentives is possible.
Their success provides a crucial strategic approach for the initial stages of monetary evolution. The core insight is that a complete monetary system must be designed with its ultimate mature state in mind while still addressing early evolutionary stages.
Monetary technology needs mechanisms that support initial growth and speculation while providing pathways to achieve stability and utility once sufficient scale is reached. They must combine the launch capabilities that made cryptocurrencies successful with the currently lacking adaptive mechanisms.
Conclusion: The Path to a Healthy Currency
The evolution of currency is not merely a technical issue but about solving coordination problems that increase with scale. A healthy currency must be designed to operate throughout its entire life cycle—from initial adoption to mature application—with mechanisms to adapt to changing conditions without continuous external intervention.
This does not mean returning to a completely centralized system, but rather designing a comprehensive architecture with built-in mechanisms required for monetary operation. This means creating a currency that is effective not only under optimal conditions but also in various economic scenarios.
As we continue to develop digital currencies, these insights provide us with a framework for assessing their potential. We should not focus solely on technical characteristics or short-term price appreciation, but rather consider whether a currency possesses the complete architectural elements needed to perform high-quality monetary functions throughout its entire evolution.
The future of currency belongs not to those with the most advanced technology or the strongest initial growth, but to systems that comprehensively understand the actual operational mechanisms of money at the design stage.
