For most of history, humans have used commodity currency. Fiat currency is a more recent development, first used around 1000 years ago, and today it is the dominant form of money. But this may not be the end of monetary history. Cryptocurrency is neither commodity money nor fiat money – it is a new, experimental kind of money. The cryptocurrency experiment may or may not ultimately succeed, but it offers a new mix of technical and monetary characteristics that raise different economic questions than other kinds of currency.
This article explains what cryptocurrency is and begins to answer the new questions that it raises. To understand why cryptocurrency has the characteristics it has, it is important to understand the problem that is being solved. For this reason, we start with the problems that have plagued digital cash in the past and the technical advance that makes cryptocurrency possible. Once this foundation is laid, we discuss the unique economic questions that the solution raises.
KeywordsAnonymity Bitcoin Byzantine Generals Problem Censorship resistance Cryptocurrency Cryptography Double spending problem Exchange rate indeterminacy Mining pools Money New monetary economics Open source Peer-to-peer networking Proof of work Pseudonymity Trust Volatility
JEL ClassificationsE40 L31 F31 O30
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