Crypto Is (and Isn’t) Money

There is an overemphasis on crypto's use as a store-of-value, Cosmos co-founder Ethan Buchman argues.

AccessTimeIconMar 11, 2024 at 8:43 p.m. UTC
Updated Mar 11, 2024 at 8:46 p.m. UTC
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None of your coins are money and you all have brain damage. "Money" is a sloppy word, but generally it’s used to refer to things that are a general unit of account (like the U.S. dollar) and/or a generally accepted medium of exchange (like a bank deposit).

Ethan Buchman is a co-founder of Cosmos, the CEO of Informal Systems and creator of Cycles.

Money almost never means something that's just a strong store of value, or that is expected to go up in value generally over time. Of course, storing value is an important function of money, but it's the only of the three functions that is more widely shared with other things.

There's way more things that function as a "store of value" than things that function as a "generally accepted unit of account" or a "generally accepted medium of exchange." That makes being a unit of account or medium of exchange much more specific to money.

Of course there can still be lots of things used as a medium of exchange, giving rise to a notion of "moneyness" based on the general willingness of people to accept a thing for settlement.

So when we're talking about money, the things that really make it money are its use for exchanging and accounting for value. However, when crypto people talk about money, for some reason they only seem to care about being a store of value — a la bitcoin’s branding as “digital gold.” Ultra-sound deflationary assets and all that nonsense.

At least be honest with yourselves: You're not talking about money, you're talking about capital assets. In some cases you invoke a discounted cash flow stream. In some cases you invoke the scarcity or preciousness of cryptographic digital assets. In some cases both.

But you're usually not talking about money as money is actually used.

To be honest, I'm not sure any of us really know what money is in the 21st century. In crypto, the definition of money has been polluted by people hyper fixating on store of value assets, which is selling our collective future short. Money is about accounting and exchange, not just storing value.

You could argue all day about whether ETH (ETH) or SOL (SOL) or ATOM (ATOM) is a better store of value without me sneering about money (though I might sneer about other things). But if you really want to talk about money, you need to talk about how crypto can be used as a unit of account and medium of exchange — like how the original idea for bitcoin was as “peer-to-peer digital currency.”

A unit of account is something you denominate debts in (this includes what we call “prices”). A medium of exchange is something you use to settle debts when they're due. You can read more about these definitions for the functions of money here.

It should be pretty clear to everyone that our crypto assets are hardly at all used for these purposes.

Is that really true? Well, not exactly.

Spending money

The one place crypto is certainly used, and where we could certainly consider tokens money, is in the context of their own block space. ETH blockspace is priced and settled in ETH, so ETH is money in the context of the economy centered around its own blockspace.

This is true for nearly every layer 1. In this sense, Chris Burniske was right that SOL is as much money as ETH.

You could also argue that ETH (or SOL or ATOM or any token) is used as a medium of exchange or unit of account in certain other crypto focused circuits, including base pairs on exchange or to buy NFTs.

To the extent certain things are priced directly in ETH or SOL or ATOM, or to the extent debts are denominated in those units, then they are acting as a unit of account. To the extent payments are settled using those tokens, they are operating as a means of exchange.

One challenge is it doesn't make good sense to use volatile assets as a unit of account. Even gas prices seem to adjust more to an inherent accounting in dollars than in native tokens.

However it does seem that certain NFTs have been priced more in their native token than in dollars. There is also the case of protocol owned liquidity, where debts are denominated in a native token, like how ATOM lent by Cosmos Hub to Osmosis and to Neutron is debt denominated in ATOM.

The liquid staking revolution is relevant here as well, in that these native tokens being locked up as value storing capital assets can also be used as a medium of exchange (to the extent people want to settle their debts in liquid staked assets).

All this to say, arguing over which is the better money right now isn’t helpful since hardly anyone is really using tokens as money. Unless you're pricing or settling a meaningful fraction of your payments in crypto, in which case you have all my respect.

Rather than arguing, I’d encourage the whole industry to read more deeply on the subject. And no, I don’t just mean Graeber’s “Debt” and Fergusson’s “Ascent of Money.” The most important book for understanding the monetary context of cryptocurrencies is the “Private Money and Public Currencies, the 16th Century Challenge.” The book outlines the context for the rise of central banks, and hence the motivation for crypto.

I also recommend a five book crash course on the history of money, some of which covers an important focus that is absent from too much of the discourse on money: the payment graph. The essential thing in building a stable and sustainable money is to balance the payments graph, the ledger of account that shows who owes money to whom. This is a key insight behind Cycles, a new project which is reimagining payments and credit.

A cosmos of money

It’s worth noting that Cosmos has far and away the most advanced understanding of all this, both implicitly and explicitly. Jae Kwon and I, the two co-founders of Cosmos, have always insisted that ATOM is not money. More recently I've taken to calling it Interchain Capital.

The Cosmos philosophy of sovereign interoperability is fundamentally a monetary philosophy, but one that recognizes inherently that we don't really know what money is in the 21st century and we're going to need to experiment to figure it out. Cosmos remains the leading place for that experimentation, and the Cosmos Hub blockchain is itself an anchor for it.

By refusing to fall prey to the "ultra-sound money" memetics, and by focusing on fostering a larger culture of innovation through sovereign interoperability, ATOM and the Cosmos Hub become homes for a new kind of experimentation in what money is.

Of all the "monies" in the crypto space, ATOM is the one with the most decentralized governance over what it means. While ETH fixates on deflation and SOL on cheap global compute, ATOM fixates on the political problems at the heart of money itself.

This is part of what makes ATOM so much more complicated and hated. But therein lies its uniqueness. Not to mention ATOM secures one of the leading liquid staking venues and is poised to become a leading place to launch new chains and access interchain capital with the upcoming Atom Wars and Partial Set Security.

For my part, my studies in monetary theory and history these last few years have made the next thing we need to build to figure out money in the 21st century pretty obvious: Cycles. CoinDesk got a sneak peak at the precursor to Cycles at Consensus last year. The Cycles white paper is coming soon — stay tuned.

Edited by Daniel Kuhn.


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