I have been trying to find a way of understanding crypto that makes since to me. Decentralized cryptos are not meant to be controlled by top down policy. So instead a protocol and set of rules is created to manage the economic policy of the crypto. If people don’t like the rules, a fork is often the result. But is there underlying fundamentals to money that are inescapable in the long run?
Aristotle's definition of money is still cited today. Money has to be divisible, portable, durable and have “intrinsic value”. Today the “intrinsic value” has been replaced with “store of value”. Most people take this at face value as meaning that the money maintains its purchasing power. The “store of value” aspect is to me the interesting and the most overlooked. Nobody seems to ask why does something maintain its purchasing power?
While trying to figure this out I remembered how the Diablo 2 economy was left to its own devices for creating money since Blizzard turned its back on D2 and left the chips to fall where they may. For a long time Stones of Jordon became the currency while 40/15 jewels became the store of value. Stones of Jordon had no use in and of itself, but still became the default currency. I still don’t fully understand why. Was there no other candidates? Every SOJ was exactly the same. But surely there must have been another item that was also exactly the same, was mildly scarce and only took up one slot in inventory? If there was another candidate, then SOJ’s won out because of its network effect. If there wasn’t another candidate then SOJs won out of merit.
40/15 jewels would have won out but they were just too scarce to facilitate trade for average players. The richest players did trade 40/15 jewels for extremely valuable items. Therefore for the D2 elite, 40/15’s were the superior money. For high level trades, SOJ’s were not portable enough since a godly item might have cost more SOJ’s than could have fit into a trade screen or even in one characters total inventory.
My hypothesis is 40/15’s maintained their scarcity was because they were simultaneously a commodity. Unlike SOJ’s, 40/15’s could be used to enhance player items. And once they were used, they could not be retrieved, creating a supply sink that ensured its long term store of value. SOJ’s had no supply sink so they were probably inflationary over the long run. I remember people hoarding SOJ’s so they must have not been so inflationary as to disincentivize hoarding.
When runes came out, they became the economies default currency. I believe this is because people actually wanted runes to use and not just to trade, making SOJ’s obsolete. When runes were used, they could not be recovered, once again creating a supply sink that helped them maintain their store of value. What is also interesting is that the different runes had an exchange rate between each other. “Ist” runes were a common rune used for everyday trading but several Ist runes could be traded up for Jah, Ber and Zod runes which were the rarest and most coveted for their use to create and enhance items. Eventually D2jsp derailed this fascinating economic microcosm. But that’s a story for another day.
I have been casually studying economics for several years. But I have never heard of any economist talk about how a supply sink affects the purchasing power of a commodity based money. Gold has long term inflation rate of 1.5% but when gold is used to make something, it takes energy to recycle that gold and bring it back into the circulating supply of gold. The English Pound Sterling used to be on an oil standard. And of course once oil is used it can never be brought back to its original state again.
Now take an individual D2 player holding a Jah rune. He has to make a cost benefit analysis of whether to hold on to it to trade later or to use it to make an Enigma. If he notices that the value of Jah runes are going up. He might decide to buy a good enigma instead of risking making a bad one. If other people start seeing this too, less Jahs will be used, giving the supply of Jahs a chance to increase in the economy, lowering their value back down. When the player notices the falling value, he realizes that a Jah can only buy him a low or medium quality Enigma. He then decides to risk his Jah in making a new Enigma. If a lot of other players notice falling Jah values and do the same thing, Jah runes will be removed from supply and their value will go back up, providing an equalizing effect.
If my hypothesis is correct and this is an important function of the economy then that would make me a Bitcoin bear. Bitcoin has no commodity use and therefore no mechanism to tamper price volatility. Therefore the price will always be excruciatingly volatile like collectibles such as fine art or out of production cars.
There are other cryptocurrencies that do have a commodity use case. These are the utility protocols such as Hashgraph, Ethereum and Eos. In the future, the coins can be used to initiate smart contracts or purchase any other service built on their network. But I still struggle with these also because there is no supply sink. When the coins are spent they just changes hands in the networks economy and there is nothing to slow down the velocity. Ethereum and Eos have a staking option but there requires practically no effort to take the coins out of stake. This is in contrast to gold where recovering gold from electronics for example can be energy intensive and a cost/benefit analysis has to be done to see if it is worth it.
And that is pretty much where I am at right now in this thought experiment. Looking for any and all input, especially about the idea of supply of a commodity being equalized based on use. Also if my history of D2 money is wrong please say something.
Thank you!!!!