Money has certainly evolved from what many of us used to know and now think about it. Some of the major stages through which money has changed include barter exchange, commodity money, metallic money, paper money, credit money, plastic money and now internet or digital money.
Digital currencies are the latest in the evolutionary process and are only possible because of technology. They are designed to work as a medium of exchange which uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency.
In a recent blog, Luno, one of the biggest virtual currency companies in Africa identified three factors that are responsible for the transformation in money. These include the collective mindset, consumer demand for money, and technology support. The factors can also help better understand the future of cryptocurrencies.
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The collective mindset
This relates to the notion that money is money simply because people accept to use it as money. This is true for all forms of money that has existed including digital currencies. The value of a dollar or naira or gold or bitcoin is the value it derives from the public’s acceptance and use of it. In many cases, these currency forms may not work as we imagine they do but our willingness to trust in the system or its process is what gives validation.
The total value of a cryptocurrency is the value of trust between its users and its network. This is responsible for the high volatility of the market. Being largely unregulated, the market only functions according to the whims and caprices of people who buy and sell cryptocurrencies – the same story of demand and supply. Hence, when the users decide to buy more, supply is affected and price could go up but should they decide otherwise – probably in response to negative market forces, the price drops.
Like cryptocurrencies, fiat currency also does not have an intrinsic value in itself.
Unlike cryptocurrencies however, government create scarcity by limiting the amount of fiat currency they print. If they print more banknotes, their real-world value (the amount of items people can buy with them) drops. In that regard, the value of fiat currency is entirely based on perception. Because banks agree to accept it, people see who use the banks see it as having value and because other people accept it as payment, hence the value.
Consumer demand
Digital technology has redefined today’s consumers’ needs. It has also changed their location and how they want to buy things. Thus, conditioned by their new environment – online – the consumers demand speed, convenience and affordability. It is the same with the way they want to use money while online.
Technology support
Every stage of evolution in money has been powered by people’s desire to search for ways to make transactions easier. From the use of precious of metals, paper money to digital money, technology has always acted as a catalyst in all the processes. Watermarking technology for instance paved the way for the transition from heavy coins to issuing paper money. Technology has constantly evolved to satisfy new consumer demand.
“The efficiencies people demand typically require huge economies of scale, which forms the backbone of the progress of human civilization, and where technology typically plays a key role,” Luno researchers noted in a blog post. “In the world of money, this would equate to some single, open and completely interoperable currency or payment system. A decade ago the thought of this would be incomprehensible. Now we have global, open and interoperable cryptocurrencies like bitcoin.”
What then will digital currencies evolve to? The new technologies of the future will give us a better clue.
