What is the Future of Money?

Exploring the adoption of Cryptocurrencies as a Medium of Exchange.

Dhinil Patel

Published in

Coinmonks

7 min readApr 23, 2021

Crypto is coming for the world of retail transactions like a tidal wave.

There is an inefficiency in the financial systems that facilitate payments. Since 2008, traditional intermediaries are shrouded in mistrust and transactions through them are expensive.

In the short run, companies like Jack Dorsey’s Square have already taken advantage and created a far more competitive transaction fee offering in response to the inflated fees imposed by banks.

But blockchain technology offers a seismic leap forward. The possibility of Peer to Peer, transparent and entirely secure transactions, without the need for centralised intermediaries.

Even within my e-commerce business, we are brainstorming how to accept a variety of crypto assets as payment for our goods.

The question isn’t so much as to whether cryptocurrencies will evolve into a reasonable medium of exchange in the future. That much is inevitable.

But will Bitcoin be the answer?

On the surface, it seems probable.

It is the first and largest cryptocurrency. As of Q1 2021, BTC has a Trillion Dollar market cap, over half the entire cryptocurrency market. With its growing size, it has become by far the most liquid of all blockchain related assets, a trend that will only be accelerated by the public listing of the biggest Crypto exchange in the world — Coinbase, last week. Reliable liquidity is an important feature for a medium of exchange.

After, liquidity, there is the question of widespread adoption, which is also an important feature for an effective method of exchange.

For something to be useful as a form of payment, each of us has to collectively believe that it is. After all, fiat money is simply printed paper, and since the ending of the gold standard, it isn’t backed by anything tangible. Its collective value lies in the fact that each of us trust that it is a reliable store of wealth and in turn, can be used for payments.

Bitcoin’s description in the initial white paper by Satoshi Nakamoto left no doubt that it was created to act a digital currency;

“(is to be a)…peer to peer version of electronic cash [that] would allow online payments to be sent directly from one party to another without going through a financial institution”.

Since then, it has always had somewhat of a track record as a payment vehicle.
In the past, due to its uniquely de-centralised nature, it has been used for criminal activity to avoid detection in the past. Today, its use is reaching further.

On 24 March 2021, Tesla made announced its plans to begin accepting Bitcoin as payment for its vehicles. They are not alone, many other companies have followed suit in different capacities, from Microsoft, Starbucks and Coca — Cola.

We can see that momentum is being built behind Bitcoin as a method to purchase goods and services. The question is how much of this is an endorsement of Bitcoin specifically as acceptable tender, versus a signal that the Crypto space in general is ready for the mainstream.

To my mind, mainstream adoption will still not really make sense until the price of these crypto assets stabilise.

With this idea, there is the infamous anecdote of the programmer Laszlo Hanyecz who become well known in crypto circles after trading 10,000 bitcoins for two Papa John’s pizzas in the summer of 2010.

Those bitcoins today would be worth around $600 Million.

For an asset to be a successful medium of exchange there needs to be some stability overvalue over time, otherwise in real terms the value of goods would swing wildly each day. Even now, sizeable daily shocks of 15–20% are not uncommon.

Due to this volatility which over time has been dramatically upwards, although the bitcoin was initially envisioned as a method of payment, over the past few years people have increasingly bought the crypto asset as a store of value.

People are buying it with the hope that it will appreciate in value.

That is not a good sign for asset that is hoping to become a medium of exchange in the retail marketplace. Imagine people acquiring the dollar in the anticipation that the value of the currency will appreciate 100% over the next year.

Nothing would be spent — the economy would grind to a halt.

It is for this reason that over time, Bitcoin has come to be known as a store of value over a medium of exchange.

Digital gold rather than Digital money.

Lastly, for an asset to be an effective medium of exchange, it needs to be scalable. It needs to be able to handle a large volume of transactions.

Cash is an immediate medium of exchange.
Card companies like Visa are able to process 25000 payments a second.
Bitcoin can only process 7 transactions a second.

The reason for Bitcoin’s slow transactions and poor scalability is that records of transactions on the bitcoin blockchain, known as blocks, are limited in size and frequency. The average time for creation of a new block is 10 minutes and the maximum size of each block is one megabyte.

Imagine the awkwardness, paying for your dinner in Bitcoin, only to have to wait an hour for your payment to go through.

One potential solution could be the Lightening Network, a secondary layer that is to stand on top of the Bitcoin Blockchain that facilitates faster payments. But this technology is still nascent and unproven.

So for an asset to be a suitable medium of exchange, it needs to have 4 features things at minimum:

1. Liquidity of Supply
2. Widespread Adoption
3. Stability of Price
4. Scalability of Use

As of today, Bitcoin doesn’t meet these criteria.

However, that doesn’t mean that Crypto as a whole will not disrupt the world of e-commerce.

One potential solution is the promise of the Stablecoin. These are Crypto assets that have been pegged to the value of a non — crypto asset.

An example is USDC, which is pegged to the value of the Dollar 1:1
Another is Facebook’s Libra, which is to be pegged to a basket of fiat currencies and some more assets.

In the last week, Both the People’s Bank of China and the Bank of England Kingdom have proposed a Stablecoin backed by each countries respective Central bank.

With the backing of such large institutions and the pegging to stable assets, Crypto Stablecoins could be a solution to our initial question.

They could provide all the benefits inherent in a decentralised system, without having to solve the issues that surround Bitcoin specifically as a medium of exchange.

They would be liquid, stable and potentially widely adopted with the backing of authorities like central banks. This isn’t hard to imagine, after all we place out trust in B of E and Federal Reserve backed fiat currency today.

Further, they could be designed to be scalable, allowing the management of an increasing number of transactions by increasing the block size and speed of creation within their own respective blockchains.

These stable coins could be the future of e-commerce and retail transactions.
They could prove to be Crypto’s answer to digital payments.

So maybe thats how it will go, Bitcoin will be Digital Gold, the decentralised store of value. And on the other hand Stablecoins created by Central Banks and Technology companies may be the future of E-Commerce and Retail Transactions.

If you found the article interesting, please sign-up to my blog on the application of Blockchain Technology to the world of Commerce at:

https://dhinil.substack.com/

Join Coinmonks Telegram group and learn about crypto trading and investing

What is the Future of Money?

Exploring the adoption of Cryptocurrencies as a Medium of Exchange.

Also, Read

Written by Dhinil Patel