What Is Money, Really?

What you'll learn

• The Money Illusion
• A Brief History of Money
• The Properties of Sound Money
• The Trust Requirement
• Where Does Value Actually Come From?
• The Three Functions of Money
• For Deeper Reading

Key terms

Fiat money

Currency declared by a government to be legal tender, with value derived from government decree and tax demand rather than from a backing commodity. Every major currency today is fiat.

Commodity money

Money whose value derives from the material it is made of, such as gold or silver coins. Most of human monetary history used some form of commodity money.

Fungibility

The property that individual units of a currency are interchangeable and indistinguishable from each other. One $1 bill is identical to another. Bitcoin is technically fungible but the public ledger creates some practical limitations.

Network effects

The phenomenon where a product or service becomes more valuable as more people use it. Money is the canonical example — each user makes the currency more useful to every other user.

Trustless / trust-minimized

A system where trust is placed in transparent, verifiable code and protocols rather than in opaque institutions. The phrase does not mean "no trust required."

Medium of exchange

The function of money that lets people trade indirectly without needing direct barter. Visa, the dollar, and the Lightning Network all serve this function.

Store of value

The function of money that lets people preserve purchasing power across time. Gold and Bitcoin are designed primarily for this function; stablecoins are not.

Unit of account

The function of money that provides a standardized way to price goods and services. Requires short-term stability, which is why stablecoins serve this function better than volatile cryptocurrencies.

Sound money

A term for money that is hard to debase or counterfeit, scarce, durable, and resistant to political manipulation. Gold and Bitcoin are commonly called sound money by their proponents.

Satoshi

The smallest unit of Bitcoin, equal to 0.00000001 BTC (one one-hundred-millionth). Named after Bitcoin's creator. Bitcoin is more divisible than any traditional currency.

Bretton Woods system

The international monetary system established in 1944 that pegged most major currencies to the U.S. dollar, which was in turn convertible to gold at $35/oz. Ended August 15, 1971 when Nixon closed the gold window.

Reserve currency

A currency held in significant quantities by central banks and used for international trade. The U.S. dollar accounts for about 88% of global FX volume per BIS 2022 data.