Bitcoin wants to be perfect digital money, so it begs the question: “What is money, anyway?”
Money is commonly defined as a “medium of exchange.” Let’s break these words down a little further, starting with “exchange.”
Humans have been around for about 300,000 years. For the majority of that time, we weren’t so different from any other animal. We sought food for energy, shelter for safety, and mates for reproduction.
But humans are social animals. We rely on the help of our network to survive.
You hunt, I gather, and with any luck, we will eat something tonight.
For most of our existence, our networks were small, mostly family. Knowing who to trust was easy.
70,000 years ago, we started doing something new. We started sharing stories.
Some stories held important lessons, letting us pass knowledge to the next generation. Others were more fictional and helped us explain our place in the universe.
Those who believed our stories were easier to trust. As a result, we found ourselves cooperating within larger networks, across bloodlines. The larger the network, the harder it is to trust everyone implicitly.
We tried to trade goods directly with one another, but things got tricky. From Investopedia:
Early forms of bartering, however, do not provide the transferability and divisibility that makes trading efficient. For instance, if someone has cows but needs bananas, they must find someone who not only has bananas but also the desire for meat. What if that individual finds someone who has the need for meat but no bananas and can only offer potatoes? To get meat, that person must find someone who has bananas and wants potatoes, and so on.
We needed a valuable, scarce good that anyone would easily accept. Around the world, we used many different mediums to trade. Today we call it money.
Money is an IOU for work that you did in the past to get something you need in the future.
Money itself is the biggest network. We freely exchange it with anyone who likes the money we like. We refer to these networks as “markets.”
Throughout history, a lot of things tried to be money. Some forms of money worked better than others. But why? What specific qualities make gold better as money than cows, tulips, shells, beads, or stones?