A cryptocurrency history: Money from wampums to fiat and beyond

The history of cryptocurrency is, for all intents and purposes, the history of money, and any cryptocurrency history should start at the dawn of human civilization. That is the best way to make sense of why cryptocurrency was invented, why it defied all odds to live on, and why cryptocurrency is a good thing.

Bartering

What does bartering have to do with cryptocurrency history? It is, in a sense, the primitive equivalent of a fair market. Bartering, the direct trade of goods and services, was, in a sense, the perfect trading system: as in any decentralized market, everything was worth whatever someone else was willing to pay for it. There was no intrinsic value of an object other than its market value. Cows were valuable, but not if you owned two cows and wanted to buy fruit from someone who already owned four cows.

Out of the things that were valuable to primitive societies, a few left a mark on language as well: salary comes from the Latin sal (salt) and salarium, meaning the payment in salt given workers. Salt was extremely valuable because it was the most effective method of curing and preserving perishable foods. Another case is the word pecuniary, meaning “pertaining to money”, derived from Romance languages’ pecunia (money), originating in the Latin pecus (cattle). Cattle were valuable for meat, hides, milk etc, as well as for the fact that they could carry themselves and multiply in time.

It wasn’t just immediately useful things that were valued: rare, beautiful objects became means of exchange as well. The most common such cases were cowries and wampum, depending on the region. When metal was discovered, it quickly appreciated on the barter market, primarily because metals were shiny, durable and relatively light. Processed metals quickly became the favorite trading unit.

They also had the remarkable distinction of being just as valuable in most places. As trading developed, this became an important feature. Metal didn’t spoil, was easily recognizable and relatively easily molded into shape. No wonder, then, that it became the herald of the next stage in cryptocurrency history.

Coins

As societies settled and became increasingly focused on trade, the need for easily recognizable and transportable means of payment also increased. Coins stepped up to fulfill that demand.

A precursor of coins was the gold bars, and later gold and silver objects, used in Egypt and Mesopotamia from the third millennium BC on. China also developed a form of coins, first in the shape of miniature objects, then in the familiar round shape, with a square hole in the middle.

However, the first coins that closely resemble what we today we call coins were minted in Ionia and Lydia, western Turkey, around 600 B.C. They were made of a naturally-occurring silver and gold mixture called electrum. Croesus, the king whose name became synonymous with “rich”, was the first to mint coins in pure gold and pure silver.

The new coins enabled trade throughout the region, and soon they moved farther beyond. From Persia to the East to Western Europe, coins slowly became the monetary standard. As states consolidated around the world into the Middle Ages, it also became their task to issue coins and ensure coin purity.

Thus, the Byzantine empire issued its solidus; the dinar was minted by the caliph of Damascus. Other notable coins include the ducat and the florin, both minted in Florence in the late 13th century. These coins started to travel the world.

The dollar, initially thaler, was a derivation of the silver coin Joachimsthaler, minted in the early 16th century near the silver mines at Joachimsthal (Jachymov), in Central Europe.

From the outset, counterfeiting was a crime that drew very severe punishment, sometimes including death. The practice of counterfeiting and shaving was often pointed out in cryptocurrency history as triggers of a perpetual search for money that could not be altered in any way.

Paper

Paper money were first invented in the mother-land of paper, China, as early as 600 B.C. In time, paper money became common — so much so that Marco Polo was confronted with this strange reality in the 13th century and made copious notes on it.

In Europe, the ascent of paper money was nowhere as swift as that, possibly because in Europe there was little incentive to get rid of metals that were widely available. Overseas conquests had brought home massive amounts of valuable metals, and Europe thrived on the false economic security they brought.

Paper money was first born as receipts or proofs of possession, in fact standardized pieces of paper denoting ownership of funds. They were initially released by goldsmiths holding valuable metals, then by banks, then by central authorities. They often took the form of IOUs issued between people or even institutions. As they were handed on from user to user, they acquired value in themselves and gave rise to what we call paper money today.

However, once it was institutionalized in the 17th and 18th centuries, paper money was found to be volatile and unreliable, as the French discovered in 1720, when a government decree drastically decreased the value of circulating paper currency supplies.

The gold standard

With the gold standard, we are moving along in cryptocurrency history, as this is a very dear topic to some cryptocurrency theoreticians. Gold is shiny, extremely durable and highly malleable. It somehow became the metal of choice for coins, and therefore an essential piece of history, beginning as early as the 7th century BC. In time, gold became the supremely desirable possession, and in the Middle Ages it had emerged as the most valuable currency in the world.

However, it took major developments on an international scale to make it a standard of any kind. States were formed and acquired centralized authority; various new industries produced increasing amounts of goods; improving transportation brought countries closer; and trading increased, in-country and internationally.

All this favored a unitary means of exchange. Rather than just one coin, this meant just one way of valuing coins. In the early 18th century, first a British colony, then Britain itself adopted the gold standard (with essential input from Sir Isaac Newton), linking banknotes to a certain value backed by gold reserves. The gold standard was made official in 1816, and in the following decades Germany, several Canadian provinces and the United States followed. By the beginning of the 20th century, most developed nations had adopted the gold standard.

It was arguably a useful method of limiting inflation and stimulating economy, but within a few decades, World War I had started a snowball that would crush the relatively young gold standard. A series of fallacious decisions made by the central banks and government agencies contributed to rampant economic problems in the decades following WWI and throughout WWII.

Fiat

The UK went off the gold standard in 1931, and in 1933 the US followed with a complex system that partly kept its dollar pegged to gold, though it gradually remained the only currency to do so. In 1971, this mutant system was abandoned altogether, and the US dollar was formally recognized as what it had informally become after the 1944 Bretton Woods Agreement: the international standard.

The gold standard had many supporters — still does — and even more detractors. Whenever a return to it was suggested by this or that central financial authority, economists shot it down. Instead, fiat, while also imperfect, absolutely rules the world: no government officially pegs its coin to gold anymore, though most are attempting to amass large quantities.

To this day, cryptocurrency history is tied to fiat. Fiat (Latin for “let it become so”) became the generic name for currencies issued through government decree. In effect, each nation now simply issues its own legal tender, and the only thing that gives any value to a piece of paper with a $20 sign on it is that the government says it holds legal status to represent that amount of money.

Consequently, fiat is — as crypto buffs will point out — worthless in itself. And, some say, the lack of intrinsic reliability in fiat is what stimulated the appearance of digital money.

Digital money

By now you must have noticed that cryptocurrency history is, in fact, a history of the failures of all other currencies.

Coins were not particularly secure. Sure, they were lighter than a cow, but they were also easier to counterfeit or shave. They also came to be worthless in themselves: at first pure, gold and silver coins in time came to be alloys in which central authorities decreed permissible mixture percentages. Soon enough, even these alloys were dropped, and coins became mere symbols of value.

The shift from “as good as gold” to “at face value” is often pointed out in cryptocurrency history as the debasing of money: throughout history, the trend has been toward subtracting value from money. At first, “as good as gold” signaled the intrinsic value of a good coin. In the end, “at face value” refers to the “face value” of a coin: not how much the coin is worth in itself, but how much the inscription on its face says it is worth.

Paper money was also, and still is, a massive counterfeiting industry, and getting more expensive to print by the day. Whenever there is talk of how much energy digital money consumes, remember that secure paper money is being constantly printed, in virtually unlimited supplies, all over the world.

Two kinds of digital money

When we talk of digital money, that could refer to either digital operations conducted on fiat money, or to “digital cash” in the sense Satoshi Nakamoto meant in his 2008 white paper.

In the first sense, there is little difference between fiat and digital money. In most countries around the world, money is now digital, zeros and ones stored in bank accounts that are invisible to the naked eye. However, it is subject to the same principles as fiat, to the same danger of inflation or deflation, to which is added the danger of hacking.

In the other sense, however, digital cash — or cryptocurrencies — are a revolutionary type of asset. A cryptocurrency is a decentralized coin, produced on a blockchain where coin genesis and transactions are transparent, immutable and pseudonymous.

In cryptocurrency history, the year 2009 is Year One. It isn’t that nothing had happened before — there is a long line of cryptographers who laid the foundation of cryptocurrency before January 2009. However, that is when Bitcoin went live — and Bitcoin was the first viable cryptocurrency product.

Cryptocurrency history is a history of repeated failures and attempts at fixing the same economic problems that had plagued human civilization from its dawn on: how to deal with scarcity. There are numerous posts and papers on cryptoeconomics (not many books, though; it’s such a fast-moving field that you risk changes happening between reading the beginning and reading the end of a book) that explain the viability of the crypto model.

The proof is in the pudding, though.

Almost ten years later, what are the landmarks of cryptocurrency history? To name just the few major accomplishments, check out these simple facts:

- the cryptocurrency market capitalization stands now at $210+ billion

- there are over 500 cryptocurrency exchanges

- there are around 2,000 crypto coins

- and, finally, one U.S. dollar, the currency to which all other fiat currencies are tied, is worth 0.00016 Bitcoin.

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