@NickSzabo has an interesting essay on the origin of money – “Shelling Out: The Origins of Money”. He uses some of the ideas of Richard Dawkins that “Money is a formal token of delayed reciprocal altruism.”
In his essay, Szabo states that money is a form of value measurement, which helps humans. Other value measurement forms include systems of exchange like reciprocation of favors, barter, credit, employment, or purchases. Reciprocal altruism and economics exist throughout nature because of the way how the incentives of organisms are structured. Humans throughout history have always collected and used some forms of money, even without the purpose of engaging in trade. They were collecting all kinds of collectibles (necklaces, jewelry, sea shells, stones) before the first primitive forms of money. Money improves the barter model because it is possible to make a lot of trades with money.
Money is a form of social contract, a behavior. Money is not a thing that is consumed. Money helps humans to exchange goods and services. Money should be hard to falsify, should be secure, and immune from creating fake supply. For example, gold has all those qualities and is valuable anywhere in the world. Bitcoin, similar to gold, also has these features, but it exists entirely online, which allows for anyone to transact without needing to store the gold and carry it around.
Bitcoin as Money
Bitcoin (upper-case “b”) is the name of the decentralized network, which clears transactions, secures balances and produces new money, and ‘bitcoin’ (lower case “b”) is the name of the unit of account on the network. Those functions of Bitcoin make it a legitimate candidate for a medium of exchange.
For Bitcoin to become money, it will need to be a convenient medium of exchange, a durable store of value and a stable unit of account. To become all that it will need huge liquidity, and if that happens, it will create the ideal version of money superior to fiat and gold because of its rigid rules for money supply.
One of the areas where Bitcoin has a comparative advantage over fiat currencies or other media of exchange is that it is an uncensorable medium of exchange, allowing for low transaction costs. These characteristics alone can bring the needed network effect, which will increase the adoption of Bitcoin and consequently will bring more liquidity and predispose Bitcoin to become money. It all depends on the level of sustainability of the protocol and on the coming regulations.
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