Gresham’s law states that ‘bad money drives out good’, which is opposite to what one may intuitively suppose to be the case. The phenomenon happens when someone holds two forms of money, and he has to decide which one to use – causing the other one (the ‘good money’) to be hoarded, thereby losing its status as a medium of exchange.
Thus,‘bad money’ refers to a currency that the person won’t want to hold as a store of value, and therefore uses it to make purchases. Whereas the ‘good money’ is a better store of value, and so never sees the light of day as it gets stored under the mattress.
We have observed the operation of Gresham’s law in gold, where the superior and more valuable commodity has disappeared from circulation and is today used only as an investment hedge. The law can be observed in bitcoin too as people value their bitcoins more than the dollar, and usually prefer to pay in their national currency and hold their bitcoins as a store of value.
Qualities of good money
What is good money anyway? Certain qualities and characteristics can be given to the ideal form of money:
- Portability – ease of using it
- Storability – money should be easy to save and store
- Divisibility- we should be able to divide it to smaller units
- Durability – money should pass the test of time
- Fungibility – each unit of money is the same as any other
- Store of value – the money supply should grow with a predictable rate or not at all
Bitcoin has the potential to become the ultimate form of money. Sending and receiving bitcoins is fast, there are no borders or limitations, and it can be subdivided to eight decimal places.
A national currency is the ideal medium of exchange for the average guy. Even if he owns some bitcoins he will still prefer to spend fiat. This is the situation, so how can we turn bitcoin into the world reserve currency?
We need a liquid currency market
We must ease the transition from paper money to cryptocurrencies by building a bridge between the two.
Let’s make it so that everyone can easily and instantly transfer between these two forms of money. Then, everyone can always receive the shinier thing in an exchange, no matter what the preferred payment method is for the other party. For example, if a shopkeeper decides to keep his money in bitcoins, the fiat payments could then be automatically converted into bitcoins. As a result the shopkeeper would only have bitcoins, and he would be spending those whenever he wanted to buy something.
In other words, the different forms of currencies are so tightly integrated together that their user can flexibly use any of them and Gresham’s law would no longer apply.
With the right blockchain based financial infrastructure in place we can make it so that this vision comes to fruition.
Obviously we cannot send bitcoins to our bank account, so we must, in effect, send our particular national currency to the blockchain. Once we integrate a national currency into the blockchain infrastructure we can make it easily & trustlessly exchangeable through a decentralized exchange.
The very first step, however, is to build a cryptocurrency that holds a peg. The new pegged asset should also have superior characteristics to the normal fiat, so it gains adoption. Here are the further qualities we need:
- Secure – people should trust it to be more secure than their bank
- Private – it should be more private than cash
- Independent – it needs to have its own blockchain, and not be dependent on a parent chain
- Bitcoin compatible – it should be easy to integrate into the existing blockchain infrastructure
- Scalable – people will use it to make everyday payments, even more than with bitcoin, so we need a plan to scale it up once adoption grows
Once we have such a currency, developers can integrate it into their DAPPS, merchants can accept it just like they accept bitcoin, and different platforms can use it as a cheap payment mechanism.
People want to use their particular national fiat currencies because of their relatively stable value and long history of acceptance. They will want to use the new blockchain based Komodo Currencies because of their superior characteristics of speed, privacy and security.
Ultimately, however, all people will want to use real money that has limited supply and retains its value. Thus eventually cryptocurrencies such as Bitcoin and Komodo will win the long race as the old financial world slowly fades away.
Read the whitepaper about our Komodo currencies.