Need help understanding Bitcoin DeFi?
Need help understanding Bitcoin DeFi?
Need help understanding Bitcoin DeFi?
Need help understanding Bitcoin DeFi?
Need help understanding Bitcoin DeFi?

The Evolution of Money: From Bartering to Banknotes to Bitcoin

What is money? Britannica defines money as a commodity accepted by general consent as a medium of economic exchange,” and that concept of “accepted by general consent” is key. Money is a social construct—it doesn’t work unless both parties in the exchange agree on the medium of value.

Deep dive
February 21, 2024
Lead Content Manager
Say hello to the future of money.

Money is a social tool for trade and commerce, and the evolution of trade from a bartering system to a native digital currency in Bitcoin underpins how the concept of money has changed over time. Bitcoin is the next step in the evolution of money and developers should start exploring opportunities to build innovative applications for the future of money in Bitcoin.

Barter System

The Birth of Trade

Bartering is the direct exchange of goods or services without using money (e.g. trading a cooking pot for a pair of shoes). There’s evidence suggesting that the barter system was used as far back as 6,000 BC.

The development of the barter system is the precursor of collaborative commerce, trade, and economics as we know it today. It enabled people to trade with each other, which helped communities become more complex over time by introducing greater collaboration and encouraging individuals to specialize in a trade.

However, the barter system was constrained by the coincidence of wants (or the double coincidence of wants), which refers to the phenomenon of two people each having something the other wants. For instance, if you want to barter some bananas for a sack of beans, and the bean seller doesn’t want bananas, you’re out of luck.

You can offer to accept fewer beans or offer more bananas in the trade, but a successful exchange depends on the other parties’ appetite for what you have to barter with. Making matters more complicated is that those bartered goods are often not durable and can only be traded for a short period.


The Expansion of Trade Beyond Immediate Localities

Eventually, the barter system gave way to the use of commodities such as ax heads and knives as money during the Bronze Age. Other commodities such as cowrie shells, salt, and whale teeth, were also used as money by different communities.

This new evolution of money addressed the limitations of the double coincidence problem in the barter system by assigning a common measure of value to the exchange of goods. It didn’t matter if the bean seller didn’t want bananas; they would accept cowrie shells, knowing that they could then easily use those shells to trade for something else.

Commodities also helped extend the social sphere of trade with people outside of their immediate locales. For one, commodities were more durable and/or easier to transport than bartered goods. Therefore, merchants could embark on longer journeys outside their towns for trade.

Secondly, commodities offered a uniform measure of value. Merchants only needed to remember the price of their wares in a single commodity and wouldn’t have to negotiate an exchange rate for their wares against every other bartered good (how much cheese should one accept for this cut of cloth? How many eggs?). That uniform measurement simplified trading and increased exchange as a result.

However, while an improvement over the bartering system, commodities still had their limitations. They eventually deteriorated and were often difficult to transport in large quantities. Counting a commodity in large numbers was often imprecise, and a sudden windfall or natural disaster could significantly alter the supply dynamics.

Precious Metals

The Active Participation of Governments in Monetary Systems

Precious metals such as gold later emerged as a better form of money than commodities in the 6th century BCE. Commodities such as salt, tobacco, and wheat are perishable, and they tend to lose their value over time. In contrast, gold and silver don’t degrade over time. 

Secondly, despite their near-identical nature, commodities could vary in size and quality. Precious metals introduced standardized monetary values. People knew the expected weight of a gold bar, and they could verify if the gold bar had the expected weight, promoting fairer and more efficient trade.

Another important factor that solidified the use of precious metals as money was the active participation of monarchs in the new monetary system. Rulers started issuing precious metals as money because it provided a uniform way to collect and account for taxes, and it also helped them maintain their wealth and lifestyle. 

The centralization of money ensured that it was easily exchangeable within a ruler’s domain, and often outside of it as well. However, it wasn’t long before some rulers discovered that they could increase their wealth by adding cheaper metals into the mix—leading to the debasement of money. 

Paper Money (Banknotes)

The Emergence of Centralized Monetary Authorities

The next step in the evolution of money was the development of banknotes, with the earliest records dating to the Chinese Thang dynasty around 807 AD. Moving precious metals around is simply inefficient: large quantities are just too heavy. You need people or wagons to transport them in large quantities, which in turn draws attention and makes the traveling convoy a magnet for bandits. 

As a solution, merchants started depositing their gold with notaries. The notaries, in turn, issued paper receipts that the merchants used for trade. Not only did this make trade safer, but it encouraged travel across long distances. As Marco Polo recorded, paper money was used extensively for trade across the Mongol empire stretching from Central Asia to India.

This paradigm shift from precious metals to paper money also birthed banking as a financial service because notaries discovered they could lend out the deposited gold for interest. Historically, the issuance of paper money was handled by private enterprises, but over time governments took control of the issuance of banknotes to reduce counterfeiting, collateralize the currency with government guarantees, and manage monetary supply.

Before 1933, all the banknotes in circulation were tied to precious metals: they were backed by gold. The gold standard helped keep currency values stable because the exchange rate was always pegged against a fixed amount of gold. However, in 1933, the U.S. went off the gold standard because it was economically unsustainable, limited the actions of the Federal Reserve System, and left the U.S. monetary system at the mercy of other countries with larger gold deposits.

By 1944, more than 40 other countries also left the gold standard through the Bretton Woods Conference, and the U.S. dollar effectively replaced gold as the global reserve currency. Today, the U.S. dollar is backed by faith in the U.S. government, and with so many other currencies pegged against the dollar, the fate of the global economy practically rests on the U.S government.


The Decentralization and Disintermediation of Money

The issue with a “dollar backed by faith” is that faith is a precarious ledge on which to balance the global economy. Faith in the U.S. government is what backs the American dollar, and it’s the U.S. government’s responsibility to regulate the financial system (and the commodities and services within it). The U.S.government’s failure to regulate the financial system, the bankruptcy of the Lehman Brothers, and the credit crisis, among other factors, led to extreme stress in the global economy, resulting in the 2007-2008 global economic meltdown.

Bitcoin was conceptualized in 2008 as a response to the global financial crisis and introduced the concept of decentralized money beyond the control of any government or bank. Bitcoin triggered a paradigm shift in the direction of the future of money because its invention of the “blockchain” solved the double-spend problem for digital currencies and created a secure public ledger that allowed strangers to trade with each other in a space that anyone could join and anyone could verify. 

Bitcoin relies on mathematics and software and has no central authority, and the currency has been consistently resilient to attacks, shocks, and stress for more than a decade. Bitcoin has a fixed maximum supply of 21M BTC, and holders can be confident that no one will suddenly alter the playing field and, for example, change the maximum to 22M, pocketing the new 1M themselves. No government can seize your Bitcoin, nor prevent you from buying it. 

In other words, Bitcoin is natively digital money, and it aligns with the future of finance as the global economy continues to become increasingly digitized. According to the World Economic Forum, about 70% of the new value that will be created in the global economy over the next decade will be generated from digitally-enabled business models. Importantly, because Bitcoin does not need intermediaries or controllers, the lack of intermediaries reduces transaction costs and speeds up transaction times relative to fiat money.


The Stabilization of a Digital Future

One challenge with Bitcoin as a form of money is the volatility of its price. Volatility is challenging because it makes it harder for merchants to have a set price for a particular good, and it makes Bitcoin more attractive as a speculative asset, detracting from an individual’s desire to transact with it. In other words, users hesitate to transact with it because the price may go higher; merchants hesitate to transact with it because the price may go lower.

Stablecoins were designed to solve that issue of volatility by having a stable price, hence the name, while embracing the strengths of decentralization. Most stablecoins achieve this stability by pegging their value on a 1:1 basis to real-world assets like fiat currency, such as the U.S. dollar, or commodities, such as gold or oil. A simple way to think about stablecoins is that 1 stablecoin = $1 (or 1 Euro, 1 Yen, etc).

Now you have a stable digital currency that can be sent to any individual anywhere in the world, nearly instantaneously. No international fees, no several-day delays, no government control. Purely peer-to-peer. Like Bitcoin, but stable. A digital cash for a digital world.

The first stablecoin (BitUSD) hit the market in 2014, and over the years, several design approaches have emerged to keep their price stable, from algorithmic stablecoins to crypto-collateralized stablecoins and more. Today, there are several popular stablecoins, including Tether and USDC, and users can choose which design they prefer to use. In aggregate, stablecoins have nearly $70B of transaction volume every day, and we believe that volume will grow in the coming years as adoption increases.

Bitcoin Is a New Opportunity for the Future of Money

Bitcoin has given people a new evolution of money, but we’ve only just started scratching the surface of how Bitcoin, and stablecoins built on Bitcoin, could become a core part of the global economy. Decentralized Finance (DeFi) on Bitcoin is one of the factors that will help Bitcoin mature into its full potential as the future of money. Bitcoin DeFi will create new ways to earn, spend, invest, and use Bitcoin to create a more connected global economy, one in the hands of its users.

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