What Makes a Good Money?

Money serves as the foundation of economic activity, yet we rarely examine what qualities make money effective. As digital currencies challenge traditional concepts of money, we need to reassess what characteristics allow money to fulfill its essential functions in modern economies.

History shows that money isn’t merely defined by its technical features but by its ability to evolve through distinct developmental stages. True money must navigate a challenging evolutionary path that most aspiring currencies fail to complete.

The Complete Monetary Lifecycle

For an asset to become functioning money, it must successfully complete four developmental stages:

1. Value Attraction

First, money must attract capital and interest. Whether through precious metals, government backing, or potential appreciation, all successful currencies begin by drawing people to hold them. This initial appeal creates the foundation for everything that follows.

Without this first stage, a currency cannot gather the critical mass needed for broader adoption. Many digital currencies excel at this stage, leveraging speculation and network effects to build initial adoption and liquidity.

2. Scale Development

Second, money must achieve sufficient scale and liquidity to support meaningful economic activity. It needs enough market depth that transactions don’t create excessive volatility, and enough distribution that finding counterparties isn’t prohibitively difficult.

Scale brings credibility, network effects, and the liquidity necessary for broader utility. Major cryptocurrencies like Bitcoin have successfully navigated this stage, reaching market capitalizations in the trillions of dollars.

3. Stability Mechanisms

Third, money must develop stability mechanisms that make it reliable for commerce and contracts. Stability doesn’t mean fixed value, but rather predictability and resilience during market stress. This requires both technical mechanisms and institutional support.

This is where many aspiring currencies fail. True stability requires systems that can function during various market conditions without breaking down or requiring external intervention. It means having built-in responses to both excess demand and insufficient demand.

4. Economic Utility

Finally, money must become actually useful for ordinary economic activities beyond speculation. It must serve as a reliable unit of account, medium of exchange, and store of value across various economic contexts.

True utility means supporting the full range of financial functions that modern economies require: efficient payments, reliable contracts, sensible lending markets, and stable planning horizons. It means becoming boring and practical rather than merely exciting and novel.

The Coordination Problem

What’s rarely acknowledged is that these latter stages require solving fundamental coordination problems that increase in difficulty as systems scale.

Consider essential monetary functions like providing last-resort liquidity, implementing emergency stabilization, or intervening during crises. These functions are essentially public goods. They require an entity to prioritize system stability over immediate self-interest — taking individual risk for collective benefit.

In purely decentralized systems optimizing for individual self-interest, these crucial functions lack structural support. The system may function during normal conditions but break down precisely when stability matters most.

We’ve seen this fragility repeatedly in cryptocurrency markets:

• During the March 2020 meltdown, BitMEX and other exchanges had to halt trading to prevent complete collapse as liquidation cascades threatened the entire ecosystem.
• When MakerDAO became undercollateralized on Black Thursday, it required an emergency governance response and community bailout.
• LUNA initially survived market stress through massive intervention by well-capitalized actors, but collapsed completely when it grew beyond what even these supporters could stabilize.

These examples reveal a profound truth: while cryptocurrency promotes trustless systems in theory, its survival during crises has repeatedly depended on implicitly trusted actors making discretionary interventions.

As systems scale, this coordination problem becomes exponentially more difficult. What might be solvable through informal coordination at smaller scales becomes impossible once a system grows beyond certain thresholds.

The Capital Formation Requirement

Beyond stability, good money must support capital formation — the borrowing and lending processes that drive economic productivity. This is where existing cryptocurrencies face another fundamental limitation.

While crypto assets are increasingly used as collateral, they rarely serve as the denominated asset for debt. Few want to borrow in BTC or ETH because their unpredictability creates unmanageable risk for both borrowers and lenders.

Functioning money must provide a stable unit of account for agreements across time. Whether participants are borrowing to build homes, finance businesses, or develop infrastructure, they need reasonable certainty about the future value of their obligations.

Designing Complete Monetary Systems

The limitations of existing cryptocurrencies aren’t temporary problems but fundamental design constraints. Assets like BTC and ETH were architected primarily for the first two developmental stages — value attraction and scale development.

Their fixed or highly constrained supply models create powerful incentives for early adoption and speculation. This design excels at bootstrapping value and achieving initial scale but becomes a liability when stability and utility become necessary for broader adoption.

Without mechanisms to adapt to changing economic conditions, provide last-resort functions, or stabilize during crises, these systems remain fundamentally incomplete monetary systems. They function well as ownership ledgers but struggle to serve as full-featured currencies.

The Complete Architecture of Good Money

Based on these observations, we can define what architecturally complete money requires:

1. Adaptive Supply Mechanisms: Good money must be able to expand when demand exceeds supply and contract when supply exceeds demand, creating natural stabilizing pressures.
2. Last-Resort Functions: Good money needs built-in mechanisms for providing liquidity, stability, and intervention during market stress without requiring external coordination.
3. Productive Reserve Utilization: Good money should deploy its accumulated value productively rather than letting it sit idle or dissipate, generating sustainable value for the system.
4. Lending Market Foundations: Good money must provide the stability necessary for functional lending markets to develop, allowing capital formation without excessive risk.
5. Transparent Health Metrics: Good money should provide clear indicators of system health, allowing participants to make informed decisions based on fundamental strength rather than just market sentiment.

The historical development of traditional monetary systems wasn’t accidental — these features evolved because they’re necessary for money to function across diverse economic conditions.

Bridging the Gap

This analysis isn’t about dismissing cryptocurrency’s achievements. Bitcoin and others have accomplished something remarkable by navigating the first two developmental stages — demonstrating that bootstrapping a non-sovereign monetary system through market incentives is possible.

Their success provides a crucial playbook for the initial phases of monetary evolution. The core insight is that complete monetary systems need to be designed with their eventual mature state in mind while still capable of navigating the early evolutionary stages.

Monetary technologies need mechanisms that allow for initial growth and speculation while providing a path to stability and utility once sufficient scale is achieved. They need to combine the bootstrapping power that made cryptocurrencies successful with the adaptive mechanisms they currently lack.

Conclusion: The Path to Good Money

The evolution of money isn’t just about technology but about solving coordination problems at increasing scales. Good money must be designed to function across its entire lifecycle — from initial adoption through mature utility — with mechanisms that adapt to changing conditions without requiring constant external intervention.

This doesn’t demand returning to fully centralized systems but rather designing architecturally complete systems with the built-in mechanisms necessary for monetary function. It means creating money that works not just during optimal conditions but across the full spectrum of economic scenarios.

As we continue developing digital currencies, these insights provide a framework for evaluating their potential. Rather than focusing solely on technical features or short-term price appreciation, we should ask whether a currency has the complete architectural elements necessary to function as good money throughout its entire evolutionary journey.

The future of money belongs not to the systems with the most impressive technology or the strongest initial growth, but to those designed with the complete picture of what makes money actually work.