Some people spend their entire lives chasing money.

Yet, coins and bills actually don’t have any intrinsic value – they’re symbols.

Money is merely a social construct, and the only reason that it has value is that society has agreed for it to have value. With that in mind, one could ask, what is $5? 

What is money?

It’s simple. Money is just a tool that is used to:

  • communicate the value of a product or a service (e.g. how good is it really?)
  • exchange value with others (e.g. how much is my time or product worth?)
  • store value (e.g. how much value have I created?)

Now an interesting way to think about it is if money is just a way to measure how valuable something is, how many pies would be worth an electrician installing lights?

Kind of strange to think of pies as a form of payment isn’t it? But, this was how society functioned before the concept of money came about.

The History of Money

Think back to 9000 BC. Before cash, there was bartering.

The concept of bartering came about because if Bob has something that Alice wants, Alice would need to exchange something of equal value with Bob.

But, scaling this method is extremely difficult… 

The ancient Chinese recognized this problem and started using Cowrie shells as “money”. Meanwhile, in the west, people started using gold. But, gold was too heavy to keep on you, so coins were created in 200 A.D. This is where the concept of modern-day cash was derived from.

Fiat Currencies

In our world today, each country has its currency called Fiat currency. 

Fiat money is government-issued currency controlled by central banks, which allows them to have power over the economy by deciding how much money is printed.

An Innovation: Bitcoin

In comparison, cryptocurrencies like Bitcoin are completely decentralized. This means that they are not controlled by any central authority (unlike fiat currencies). Cryptocurrencies offer an abundance of advantages such as being able to decentralize power, cutting out intermediaries, and being tamperproof.

But, the advantage that we will be focusing specifically on is inflation.

Inflation? What’s that?

Inflation refers to when the purchasing power (the financial ability to buy products and services) declines, as the value of the currency declines.

When a country is in debt, and the country needs more money, the government tends to start printing more currency. When this happens, this decreases the value of the currency as the existing dollars held become ‘diluted’. This is because when something is rare its value is higher, but when it becomes more abundant (there’s more money printed), it ends up decreasing the value of the money in circulation.

Over time, this also decreases the purchasing power of the consumer as well. If I have $1 in one year, maybe the next year my $1 will only be able to purchase 98¢ worth of product.

There is no way to determine how much money a government decides to print. With fiat currencies, it is never known how much one’s purchasing power may decrease due to inflation.

What sets cryptocurrencies apart from fiat currencies is their set inflation rate.

On the network, no participant can selfishly change the software to personally benefit themselves. Instead, people can propose changes to the community which will only gain adoption if enough members of the network believe it to be most beneficial. This allows for a predictable inflation schedule, and at any given time, everyone is aware of the amount of Bitcoin in circulation. This aids in mitigating the risk of inflation for consumers.

On the other hand, the currency run by a central bank has no transparency into the future. 

The Future of Money

Currently, many individuals are speculating that cryptocurrencies have the potential to replace our current centralized financial system. With cryptocurrencies, each individual has complete power over their data while mitigating the high fees required in banks.

Right here, right now — this is the rise of Decentralized Finance.