Money is a social construct. If you go back a couple of hundred years, you will see that money could be anything: Horses, A bag of Rice, a bunch of important stones - what have you. This type of money was hard to work with: how do you standardise the value of a horse. Anytime you needed a vase for home decor, you’d need a few kilograms of tomatoes or 7 pounds of Onions - depending on who you are trading with. If you need Rice, how do you find a person selling rice? Surely this is not optimal. These markets caused problems enough for thought leaders to sit down and consider a uniformly standard form of payment. This standardisation lead to something called commodity money : Any physical good that has universally perceived intrinsic value - alcohol for example (In case you want to pay the author in Alcohol, refer to the final few pages). Indians (from India) used Cowry Shells back in the day. There’s a problem with Cowry Shells and other such items, however. Not all Cowry Shells are alike, we have standardised the commodity, but we have not standardized the value of commodity. To do this, we created Coins.
What you see above is a Karshapana, an ancient coin from India. These coins would weigh (more or less) the same and could be recognised . Now that we have a standardisation of commodity and value, we need to look at standardising rate of production. Finding the right amount of metals for making a Karshapana is another problem, so we can circulate coins for general use, but use paper for negotiable instruments: A document guaranteeing the payment. This was what the people in Tang Dynasty (in present day China) used. This would also mean Merchants travelling would have to carry less load. Flying Cash was never supposed to be used as a form of legal tender, so the supply was limited, but Merchants used it as currency nonetheless. Later, the Song Dynasty developed one of the first large scale paper currencies of the world, but they overproduced the currency leading to a inflation and devaluation. Anyway, with all that in mind, let’s skip over a few important developments and move to modern currency.
In 1983, David Chaum, a Computer Scientist, put forth the idea of “digital cash” in his paper “Blind signatures for untraceable payments”. This is analogous to cash in the sense that a 10 dollar bill would be indistinguishable from another 10 dollar bill in terms of transaction. Money by definition has three fundamental usages: Store of Value, Medium of Exchange and a Unit of Account (A measure of value, such as using USD to measure the vague concept of GDP). We will discuss using Bitcoin as a store of value and a medium of exchange later in this book.