2 min read

Crypto debts

Is crypto money? Continuing this discussion, today we're looking at crypto's ability to serve as "a standard of deferred payment." To recap, the four functions of money are:

  1. A medium of exchange
  2. A measure of value
  3. A standard of deferred payment
  4. A store of value

Standard of deferred payment

This is just fancy economist talk for debt. If you take out a loan, you have to pay it back. But how does the person loaning you the money know that this is a good deal? Usually the interest rate is high enough that the lender comes out ahead, but for long term loans, this gets a lot trickier for the lender.

It wasn't that long ago here in the USA that you could get a 30 year, fixed rate mortgage at something below 3% interest. Now, inflation is over double that rate. This means lenders are actually losing money.

To use a simple example, if I loan you $100 and tell you that next year you will owe me $103, I'll be making 3% on my money. But when inflation is 7%, that means it would take $107 to buy the same amount of goods that $100 could have bought the year before. Now, I have $4 less value than if I'd just spent the money last year instead of loaning it to you.

For money to serve as a good standard of deferred payment, you want it to hold its value. Crypto's value is highly unpredictable, so you really don't want to use it as a a standard for short term debts. Long term debts are even worse if you believe that the value of cryptocurrency is higher than the market has realized today--you'd borrow 1 BTC (worth roughly $25k) today and have to pay it back in 30 years when it's potentially worth much more.

Stablecoins are a necessary piece of crypto's economic infrastructure for this reason. In order to enable blockchain-powered credit systems that can scale without a central authority, stablecoins are massively important. The problem is that most stablecoins have their value pegged to USD or another centralized currency. Blockchain needs to integrate with the world to be useful, but integrating with gold or a similar commodity instead of USD is a better choice because it can't be tampered with in the same way.


P.S. One solution for loans losing out to inflation is to set the interest rate equal to inflation plus some additional percentage.