Requirements for a future-proof money system

A future-proof money system must first and foremost fulfil the three functions of money (as described in the earlier section What is a trustless money system?):

Critics of digital money (such as Peter Schiff) like to argue that cryptocurrencies fail as both money and a store of value because they lack utility and intrinsic value. Only if they’re backed by something that has either of these properties can they be used as a digital representation of their underlying value. Apart from the fact that ‘intrinsic value’ is not a well-defined term, intrinsic value is not even necessary for a pure monetary good.

Just look at the intrinsic value and real world use case of seashells, wood sticks and paper. Obviously, their values are relatively small, yet despite this they have been used as money in the past. Even gold, if we omit its monetary utility, has a demand in the industrial sector of just over 8%. This indicates that the vast majority of gold’s value does not stem from being a noble metal, but rather from its use as a monetary good. Therefore the majority of gold’s value is ultimately a social construction. Gold is valuable because people agree it has been and will be in the future. And why do people agree on that? Because it’s scarce.

As Satoshi accurately hypothesised, a pure monetary good does not require any attributes other than the assurance of being scarce and easily transactable. Over the past decade, the crypto market has confirmed this notion to be true. Therefore, a pure monetary good is subject to different laws than traditional goods and services in a free market economy.

But what else are the requirements for a future-proof money system?

In addition to the three functions of money, a future-proof money system must possess the following basic characteristics:

digital / intangible (not physical / tangible)
- easy to store (self-custodiability)
- easy to identify (recognizability)
- easy to divide (divisibility)
- easy to transport (portability)
- easy to transact remotely (remote-transactability)
scarce / limited / fixed in supply (not inflationary)
non-replicable / unforgeable (not like common digital files)
fungible / anonymous (no distinction between coins to guarantee anonymity; or at least optional privacy for users, as is the case with fiat currencies (e.g. credit card / bank wire vs. cash))
transparent / open source (not obscure processes and decision-making)
fault tolerant / stable (no single point of failure)
global / borderless (not just regional like fiat currencies)
censorship-resistant (not possible to ban or censor specific users or groups)
neutral / apolitical (not highly politicised as fiat currencies)
durable / immortal (not like fiat currencies that come, collapse and go)
incorruptible / indestructible (no possibility to take over the system with money or power/authority)
decentralised (not controllable by a single person or small group of people)
permissionless (no restriction on who can participate in the operation)

The most crucial aspect is that these characteristics do not change, i.e. that there will never be a monetary policy reform in the DLT system. Under absolutely no circumstances!

If a money system has to be decentralised, how can all system operators agree on the actual state of affairs, such as who owns what, which transactions have occurred, which have not, etc.? To tackle this issue, you need a method or mechanism that enables the majority of network operators to reach a reliable consensus. In DLT systems, this method is appropriately referred to as the ‘consensus mechanism’.

The consensus mechanism can be compared to the rules of the game (as they exist in any team sport), to which all system operators must adhere. Whether it is football, basketball, volleyball, etc, every team sport must have rules and consequences for non-compliance with those rules in order to ensure proper gameplay.

If decentralisation is a prerequisite for a future-proof money system, then we must also identify the characteristics of its consensus mechanism, which are:

secure (impossible to exploit the mechanism in any way)
reliable (no exceptions to the rules of the consensus mechanism)
immutable (the rules of the consensus mechanism must prohibit changes to the agreed state, and the rules must be immutable unless the system is hard forked)
fair (same rules for everybody and rules that don’t only benefit the rich)
scalable (capable of handling all transactions of all human beings simultaneously at any given time)
efficient & sustainable (low operating costs of a node; no need for high energy consumption to achieve consensus)

And the rules of the consensus mechanism of a future-proof money system must enable transactions that are:

near instant (less than 5 seconds for most transactions)
final (immediate transaction finality / final transaction settlement)
consistently cheap (predictable and inexpensive fees, independent of the network load and the market value of the money system)
private (impossible or very hard to trace a user’s transaction history or balance)

A system with these characteristics will serve not only as a long-term store of value, but also as a money system utilised for everyday transactions. We are convinced that if Bitcoin had all these cash-like characteristics in addition to being a superior long-term store of value, Bitcoin’s acceptance as a payment method would be significantly higher today. This would have led to a significant increase in the number of users in the system, which in turn would be reflected in a considerably higher price, even in comparison to what we’ve seen to date.

When reviewing the list of basic characteristics of a future-proof money system, two conditions stand out:

All of these characteristics boost users’ trust in such a system.
Bitcoin possesses all of these characteristics (apart from fungible / anonymous; bitcoins are not completely fungible and are therefore pseudonymous).

Consequently, the initial question regarding the requirements for a future-proof money system may be answered fairly simply: A money system with the highest possible level of trust that is also extremely scalable.

Unfortunately, this is not as simple as it sounds, because scaling a DLT system affects its decentralisation and/or security. But we cannot afford any reduction in either of these areas, as these are the two most important features of a DLT system (and the main drivers of Bitcoin’s success). Consequently, we have no choice but to forgo scalability - precisely the reason as to why Bitcoin is not scalable (also known as the Blockchain Trilemma).

But no matter how trusted a money system is, it does not meet the standards of a future-proof money system if it is not almost infinitely scalable. That is, if it cannot process any number of transactions (or at least all transactions of all individuals on this planet simultaneously).

So the next question we need to ask ourselves: What determines the scalability of a DLT system?