Show Me The Money [NFTW #50]

What’s good everyone? Hope we’re all doing well. I’m writing the finishing touches to this week’s newsletter in a hotel room just outside of London. One of my brothers is getting married and I’m honoured to be one of his groomsmen. I’m going to have to get back to groomsmen duties in a second but wanted to let you know this week will be taking a look at the function of money. We all know what it is but exactly why do we need it? Let’s take a look.

Show Me The Money (Pt. 1)

I’ve been spending some time catching up on some of the latest trends and ideas taking place in DeFi. As someone whose day to day work is in the world of DeFi — it’s important to understand why this ecosystem and technology is important. In order to understand the values of cryptocurrency, one must first understand money, and to understand money it is imperative to learn the function and history of money.

The three main properties of money are:

1. Medium of Exchange: Money serves as a widely accepted medium of exchange that is used to facilitate the buying and selling of goods and services. It acts as a common measure of value, enabling individuals to compare the worth of different goods and easily exchange them.

1. Unit of Account: Money provides a standard unit of account, which means it is used as a common measure of value for goods, services, and assets. It allows for the consistent pricing and valuation of items, making economic transactions and calculations more efficient.

2. Store of Value: Money serves as a store of value, allowing individuals to save and accumulate wealth over time. It retains its purchasing power over an extended period, enabling people to defer their consumption and hold onto money as an asset. However, it's important to note that inflation and other economic factors can affect the value of money as a store of value.

For the purpose of this week’s notes we’ll be focusing purely on money as a medium of exchange. The simplest way for people to exchange value is to exchange value is to exchange valuable goods with one another. This process of direct exchange is referred to as barter, but is only practical in small circles with only a few goods and services produced.

In a more sophisticated and larger economy, the opportunity arises for individuals and groups of people to specialise in the production of more goods and to exchange them with many more people—people with whom they have no personal relationships, strangers with whom it isn’t viable or feasible to keep a running tally of goods, services, and favours. As an economy grows so does the opportunities for specialisation and exchange, but in tandem the problem of coincidence of wants also increases.

A coincidence of wants takes place when—what you want to acquire that is produced by someone who doesn’t want what you have to sell. The problem goes deeper than just different requirements for different goods, as there are three distinct dimensions to the problem.

1. Lack of coincidence in scales: what you want may not be equal in value to what you have and dividing one of them into smaller units may not be practical. Imagine wanting to sell shoes for a house; you cannot buy the house in small pieces each equivalent in value to a pair of shoes, nor does the homeowner want to own all the shoes whose value is equivalent to that of the house.

2. Lack of coincidence in time-frames: what you want to sell may be perishable but what you want to buy is more durable and valuable, making it hard to accumulate enough of your perishable good to exchange for the durable good at one point in time. It is not easy to accumulate enough apples to be exchanged for a car at once, because they will rot before the deal can be completed.

3. Lack of coincidence in locations: you may want to sell a house in one place to buy a house in another location, and (most) houses aren’t transportable.

It is these three problems that make direct exchange highly impractical and result in society needing to resort to performing more layers of exchange to satisfy their economic needs. The only way around this is through indirect exchange: you try to find some other good that another person would want and find someone who will exchange it with you for what you want to sell. A good that assumes the role of a widely accepted medium of exchange is called money.

I’ll revisit this piece in a few weeks to consider how blockchain technology and the emergence of cryptocurrencies could present interesting use-cases as a potential money in an ever-digitalising (hope that’s a word) world.

The Source of Self Regard

The Works is a new series where I will break down the impact that various pieces of art have had on me. I'll be going through these works and discussing interesting links. I kicked off the series with Toni Morrison’s The Source of Self Regard. Have a watch below and let me know thoughts. Definitely want to hear what you think.

Until next week. Peace.