Sep 21, 2021
The difference between a hashrate standard currency and a gold standard currency
by Maryna Trifonova, Head of Content at Jax.Network
In order to understand how money functions, we will need to take a quick look at the history of money and its development over the centuries. We will also analyze two kinds of currencies, a gold standard currency and a hashrate standard currency, and provide a comprehensive comparative table at the end of the article.
A very brief history of money
It goes without saying that people used money as a medium of exchange since Paleolithic times. Certainly, they didn’t have paper money as we do now; instead, they used natural objects such as shells, whale’s teeth, beads, and even meteorites. To put it simply, almost everything that occurred rarely in nature and had a limited supply once was used as a medium of exchange.
With the development of trades, shells and other natural objects lost their dominance, as their flaws became obvious. They were hard to divide, not portable, and not durable. These characteristics will later become the main features of money.
So, metal coins made of copper, lead, silver, and gold were introduced as a medium of exchange. The first known kind of currency was the Mesopotamian shekel. It was created approximately 5,000 years ago. With the rise of metal money, governments were tempted into slimming down the coins and adding cheaper metals into the mix to create debased currency worth less than face value.
Metal coins seemed like a great store of value but they were too heavy for carrying around, especially for a long distance. It was China, who invented paper IOU certificates as an alternative to metal coins. These papers had no intrinsic value, however, they could always be exchanged for the number of metal coins they said they were worth.
Until the 1970s, the world tried to follow the gold standard, which pegged currencies to a fixed gold rate. Now, the value of each banknote is backed by trust solely, while world banks keep printing trillions of digital money every day.
A gold standard currency
Some of our readers may wonder what’s the gold standard. It’s a monetary system that links the value of a currency to that of gold. So, if a country that follows the gold standard wants to print more fiat, it needs to increase its gold reserves correspondingly. Nowadays, no countries peg their currency to gold, however, a lot of them used to follow the Bretton Woods system until 1971.
This system was introduced in 1944 as an agreement between the United States, Canada, Western European countries, Australia, and Japan to adopt a monetary policy that maintained its external exchange rates within 1 percent by tying its currency to gold.
The benefits of a currency tied to gold are obvious. First of all, its supply is limited and controlled, as there can be printed only as many papers as there are gold reserves. Secondly, it stabilizes prices and takes a hold of inflation rates. Even more importantly, it limits the power of central banks and governments preventing them from printing currencies in excessive amounts and causing price inflation. And last but not least, it incentivizes international trade by providing a fixed pattern of the exchange rate.
As it turned out later in history, gold-standard currencies have some issues too. They lack sufficient flexibility in the supply of money because the supply of newly mined gold is not closely related to the growing needs of the world economy. In addition, a country may not be able to isolate its economy from depression or inflation in the rest of the world. And finally, the process of adjustment for a country with a payments deficit can be long and painful whenever an increase in unemployment or a decline in the rate of economic expansion occurs.
A hashrate standard currency
A hashrate standard coin works similar to a currency pegged to the gold standard, which we described above. We at Jax.Network created a hashrate-pegged stablecoin called JAX. It means that its value is pegged not to gold, fiat, or any other cryptocurrency, but rather to the cost of 1 unit of computing power.
We argue that JAX possesses all characteristics to be considered as a new unit of exchange: it’s durable, divisible, transportable, and hard to counterfeit. JAX is a digital currency, so there should be no worries about its durability and portability — it can withstand thousands of years and be easily transportable within no time.
1 JAX = 1 unit of hash rate of the Bitcoin network. That is a universal exchange rate that guarantees all JAX coins are mathematically equal around the world. The coins are printed by miners only when there is a demand for them, ensuring price stability and authenticity. Thus, the cost of mining has a natural lower bound, ensuring a minimal price for JAX. And to avoid depreciation in price due to rig efficiency gains, we have set a K-coefficient to enforce that the minimum price of production is always at least equivalent to 2⁻⁶⁴of BTC hashes. So, JAX coins can retain their purchasing power.
However, contrary to gold, the hashrate allocation to the Bitcoin network can increase more easily than digging new gold. It mostly depends on energy efficiency gains and innovation. If JAX gets mass-adopted, it should push people to invest in renewable and cheap energy so as to increase the hashrate at a cheaper cost to print more JAX coins.
Comparative table
Now let’s compare a gold-backed currency with a hashrate-backed currency. As you see from the table below, these two currencies have the same properties and both can be considered as money, even though there is a large time difference between them. Perhaps it’s time to move to a new type of currency?
Conclusion
We can clearly see that a floating currency like USD or even USDT, which is pegged to the USD, can’t serve as a currency for day-to-day payments and international transactions. And despite all its advantages, the gold standard is a product of the past. Its basic principles won’t work as well as they did in the last centuries. However, a hashrate-based currency such as JAX has all qualities to become a new world currency.
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