From Two Cents to Two Sats: Understanding Cryptocurrency Denominations
The first known Government to enstate a centralized currency was the Lydian Empire. Historically money was in the form of gold pieces and was valued by weight or quantity. Precious metals were a way to mediate the exchange for goods and services between individuals because of their limited supply.
As fiscal ecosystems evolved, Government issued currency has become more reliant on trust, and completely standardized. The standardization of a Government’s legal tender (fiat) is a metrical promissory note system. In the United States, the base value promissory note is the U.S. Dollar (USD). The U.S. has a monetary metric system of promissory notes that serve as an increment or multiple of USD’s value: these notes are denominations. The U.S. Dollar does not have a supply limitation; therefore, there is little need for denomination remodeling. However, cryptocurrency works differently. Both fiat and cryptocurrency have a denomination system. The difference is that cryptocurrencies are programmed to have a limited supply.
There can never be more than twenty-one million Bitcoin in circulation. Because of this limitation, Bitcoin’s denomination metrics are designed to compensate for value shifts. Similar to one USD cent ($0.01), Bitcoin’s lowest denomination is one Satoshi or sat (1 sat = 0.00000001 Bitcoin): named after Satoshi Nakamoto, Bitcoin’s creator.
The digital nature of cryptocurrency allows for the transaction of any value of a currency over its baseline quantity. The base denomination is the smallest quantity that can be owned and varies between cryptocurrencies.
The Ethereum blockchain uses a cryptocurrency called Ether (ETH) which is used to fuel its system. Unlike Bitcoin, there is currently no total cap on Ether production; however, no more than 18 million Ether will be issued in one year. A Wei is the baseline denomination of ether and is named after Wei Dai (created the concept of b-money). One wei is equivalent to 1.00E-18 Ether. To compare this to Bitcoin:
- 1 Bitcoin = 100,000,000 sats
- 1 Ether = 1,000,000,000,000,000,000 wei
Some denominations, besides sat or wei, have a secondary name to honor an individual associated with technology: Finney, Szabo, Shannon, Babbage, and even Einstein.
The creators of cryptocurrency recognize the necessity of having a denomination system that allows scalability for use. As the adoption of cryptocurrency increases so will the need for having smaller denominations. One hundred millionth of a Bitcoin may seem worthless now but if Bitcoin were to become a global currency, one sat will be much more valuable and necessary.
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