What is money? History, functions & the rise of crypto

Today, money is so deeply woven into our daily lives that most of us never stop to question what it actually is, we take it for granted. We earn it, we spend it, we save it, but what is it really? The paper notes in your wallet? The numbers in your banking app? A social agreement? A technology?

Understanding money, where it came from, how it works, and where it's heading, is not just an academic exercise but the foundation for understanding why cryptocurrencies exist, why they matter, and why millions of people around the world are rethinking the way value is stored and transferred.

This article traces money from its origins to the digital age, exploring its core functions, its many forms across history, and the technological revolution that is reshaping it today.

The origins of money

The myth of barter

Most textbooks begin the story of money with barter: a world where people exchanged goods directly: fish for grain, work for shelter, and so on. It's a neat narrative, but historians and anthropologists have largely debunked barter as the precursor to money. There is little evidence that entire economies were ever organized around pure barter systems.

What actually preceded money in many ancient societies was something closer to a system of social credit, a web of mutual obligations, gifts, and debts tracked within communities. The notion of "I owe you" may be older than coinage itself.

The first forms of money

The earliest objects used as money were commodities that had an intrinsic value or strong social significance. Cattle, grain, shells, and beads were among the first widely accepted mediums of exchange. These commodity monies worked because communities agreed on their value.

The more familiar form of money that are metal coins emerged around 650 BCE in modern-day Turkey, representing a major leap forward. Coins were great because they were portable and resistant, and could be standardized by weight and purity. They spread rapidly across the ancient world, from Greece to China, because they solved real problems of trade at scale.

They allowed goods and services to be assessed and expressed in definite exchange ratios: 1 coins buys 2 apples, etc. This convenience allowed exchange and trade to bloom.

Paper money and the rise of banking

China was the first civilization to introduce paper money, which appeared as early as the 7th century CE during the Tang Dynasty. What began first as merchants' receipts for deposited coins gradually became state-issued currency.

The concept reached Europe much later, through the banking innovations of Renaissance Italy, where goldsmiths issued receipts for gold deposits, which then began to circulate as money in their own right. Increasingly, it was no longer gold coins or silver ingots that changed hands but sheets of paper that were denominated in ounces or bars of precious metals.

Different forms of paper money like bills of exchange or banknotes were invented, and variety as well as complexity increased. All these different instruments had one thing in common though: they were all redeemable for gold or silver that existed in an actual vault somewhere.

This was a profound shift. Money was no longer a physical commodity but a promise: a claim on something of value held elsewhere. The age of representative money had begun.

From gold to fiat: the evolution of modern money

The gold standard

For much of the 19th and early 20th centuries, major currencies were backed by gold, a system called the gold standard. With it, a unit of currency represented a fixed quantity of actual gold stored in a vault somewhere. This system provided monetary discipline and exchange rate stability, but it also constrained governments' ability to respond to economic crises.

With this new layer of abstraction, a new temptation emerged for the person issuing the paper. What if the paper didn't have to be redeemable? Does it really have to correspond to something tangible? While doing this would hamper trust in the issuer and its issued paper, the temptation ultimately was too great and could not be resisted.

The old standard began to unravel during World War I, as governments printed money to finance the war effort. It was formally abandoned by the United States in 1971, when President Nixon ended the convertibility of the dollar into gold, a moment known as the Nixon Shock. Since then, the world has operated on a system of fiat money.

Fiat money and the role of trust

Fiat money has no intrinsic value and is not backed by any physical commodity. It is only valuable because governments declare it legal tender and because people trust that others will accept it. This trust is underpinned by institutions: central banks, legal systems, and the economic strength of the issuing state.

The fiat system became dominant because it offers flexibility for governments to manage their economy, via central banks that can expand or contract the money supply in response to economic conditions. But it also introduces risks: when institutional trust erodes, so does the currency's value. The 2008 financial crisis, chronic inflation in various emerging economies, and growing concerns about sovereign debt have all contributed to a broader questioning of the long-term reliability of fiat money.

Digital money before crypto

Long before Bitcoin, fiat money had already begun its digital transformation since the beginning of the computer age. Bank transfers, credit cards, and online payment systems moved value electronically, but they remained entirely dependent on centralized institutions, banks, payment processors, and governments, to verify and authorize transactions. This form of electronic money is still fiat money, only its mode of transmission has changed.

The nature of money

Now that we got a glimpse of the history of money and learned that money has undergone a real transformation over the centuries, let's talk about what money really is.

With all the different forms of money that have existed and still exist, is there even something like the one and only money?

Many would tend to believe that national currencies like the US dollar, Euro, or Swiss francs are what should be called real money. While these government currencies are surely dominant today, there is no guarantee that they will continue to do so in the future. Telling by the paper money's poor legacy, their prospects seem indeed rather bleak.

What serves as money is always time-specific and context-dependent. There is no such thing as the money for everyone and everything.

Trying to answer what money is, the great Austrian economist Friedrich August von Hayek coined the term "moneyness". As he rightly put it:

“Money is not to be understood as a noun but as an adjective.”

According to Hayek, things in the real world exhibit more or less moneyness, meaning that some things are more money-like than other things in certain contexts.

Continuing on Hayek's thought, we can say that what is money is rather subjective. In today's complex world, there is a hierarchy of money. For some people, some things might function as money while for some others, the very same thing may have no moneyness at all.

For example, the money reserves that central banks give out to commercial banks act as money for the latter, but they have no direct monetary use for ordinary people. At the same time, bank deposits can be perfectly used by bank clients to pay any sort of debts, but they are of no use in the context of a financial relationship between a central and a commercial bank.

Money ultimately is a mean to an end. It can take many different forms, depending on the respective end. As such, money can be seen as an institution to scale human interaction. It is a language to communicate with other peers in the here and now but also in the future.

Money for the present embodies the so-called medium of exchange or means of payment. Money for the future has the function of being a store of value. In this regard, money serves as a vehicle to save time and energy that can be released later on in time.

The functions of money

Economists traditionally define money by what it does rather than what it is. Money serves three fundamental functions, and understanding them reveals why some forms of money succeed, others fail, and why new contenders like Bitcoin are taken seriously by an increasing number of economists and investors.

Medium of exchange

The most visible function of money is to facilitate trade. Without a commonly accepted medium of exchange, every transaction would require a double coincidence of wants: you need exactly what I have, and I need exactly what you have, at the same time. Money eliminates this friction entirely.

For any asset to function as a medium of exchange, it must be widely accepted, easy to transfer, and trusted by both parties. This is why network effects matter enormously in monetary systems: the more people accept a form of money, the more useful it becomes.

Store of value

Money must also be able to hold value over time. A farmer who sells a harvest in autumn needs to know that the money received can still buy seeds the following spring. If money loses its value rapidly through inflation or instability, it fails this function and people seek alternatives.

This is where the history of money becomes a history of trust and failure. Hyperinflation events like Weimar Germany, Zimbabwe and Venezuela, have repeatedly demonstrated what happens when a currency loses its credibility as a store of value. People abandon it, turning instead to foreign currencies, gold, or nowadays, digital assets.

Bitcoin, with its fixed supply of 21 million coins, was deliberately designed to address this vulnerability. Its scarcity is mathematical and immutable, a stark contrast to fiat currencies, whose supply is controlled by central banks and governments.

Unit of account

Money provides a common measure of value, allowing us to compare the worth of entirely different goods and services. Without a unit of account, how would you weigh the value of an hour of legal advice against a kilogram of cheese? Money gives everything a price, making complex economic calculation possible.

This function is often the last to be achieved by new forms of money. Bitcoin, for example, is increasingly used as a store of value and medium of exchange in certain contexts, but it is rarely used as a unit of account in everyday life, partly due to its price volatility. Stablecoins, designed to maintain a fixed value relative to a reference currency, represent an attempt to solve this problem within the crypto ecosystem.

Standard of deferred payment

Some economists add a fourth function: money as a standard of deferred payment. In other words, the ability to denominate debts and future obligations. When you take out a mortgage or sign a contract for future delivery, you are relying on money to express obligations that will be settled later. This function reinforces the importance of monetary stability: a currency that loses value unpredictably makes long-term contracts unreliable and economic planning extremely difficult.

Evaluating the quality of a money

The hardness of money

How does money come into being? Today's fiat money is created by different institutions. Following the aforementioned hierarchy of money, fiat's base money is created by central banks, while on top of this base money, money surrogates and derivatives are issued by commercial banks and other bank-like entities.

Our ancestors were bringing money into existence through force and energy: minting money out of resources crafted or mined from the real world. Native Americans' Wampum or Micronesian's rai stones were examples of hard, crafted money.

Gold and silver are the typical example of mined and minted money. These kinds of money are usually referred to as commodity money, since they were made out of a commodity.

The costlier it is to produce a commodity money, the harder we say that money is. Precious metals are considered to be among the hardest of all monies, since they exhibit rising marginal costs in production. This means that production costs rise with every additional unit of gold that is being produced, making it ever more costly to produce an additional unit of gold. This is the defining characteristic that makes gold a hard money.

Centralized vs decentralized money

Apart from hardness, another important feature defining the nature of money revolves around its degree of centralization or decentralization. While there is no money that is either entirely centralized or completely decentralized, different monies can be categorized according to a spectrum of “more” or “less”.

If the issuance of a money is done by an institution or a committee, the degree of centralization is pretty high. This is the case for today's fiat money system. The issuance of fiat base money is carried out by a respective central bank, which is a committee made of a few people. This board of technocrats conducts monetary policy in response to how they interpret the current economic situation in their country.

As said, no monetary system (nor money) is completely centralized. Looking at today's fiat system, while the base money is centrally issued and governed, the expansion (and contraction) of money surrogates and money-like instruments is happening in a decentralized fashion: each individual bank contributes to it. Nonetheless, the issuance of these respective money surrogates is still done centrally by different intermediaries.

How does today's paper money rank?

If we judge by looking at the factors of hardness and decentralization, fiat money does rather poorly. Fiat currencies are neither hard nor are they decentralized. Because of today's ultra-expansionary monetary policies all around the globe, fiat money is subject to constant devaluation. Although US dollars, Euros or Swiss francs seem to be price-stable vis-a-vis everyday goods like bananas, milk or a kilo of rice and consumer price inflation is according to official statements close to zero, these fiat currencies are consistently losing value over the years.

Fiat money's race to the bottom becomes particularly obvious when asset price inflation is factored in: a given amount of fiat money buys you less and less of a given harder asset, like real estate, gold or even stocks, over time.

What about gold?

While gold is the hardest of all these traditional assets and has always been perceived as the best store of value, the precious yellow metal is not really decentralized either. It is true that gold's mining process is not centrally orchestrated and is conducted by many dispersed actors, but because of its heavy weight and high transaction costs, gold has experienced a natural course of ever-increasing centralization.

Used as a means of settlement only, gold started to get concentrated in vaults, leading to ever greater centralization. While gold is still spread out in the hands of people in the form of coins, bars, and jewellery, a great amount of gold today resides in the vaults of central banks.

Introducing censorship resistance

Compared to gold, fiat money is more centralized. While this dichotomy of decentralization and centralization is used quite often, the term “censorship resistance” is a better way to describe what people usually mean when they refer to the former.

What do we mean by censorship resistance? Today, we finance stuff by using fiat money as the main medium of exchange in a world made of intermediaries, who intermediate between different parties willing to carry out transactions.

Intermediaries authorize or decline transactions, according to the financial regulations they are subject to. As a result, the level of decentralization or censorship resistance of today's fiat system is weak. Transactions can be blocked based on predetermined factors.

A very shocking but telling illustration happened in late 2010 as several financial companies were ordered by the US government to suspend donations for Wikileaks, a non-profit organization, information and news leak service. Not only did US companies like Visa, Mastercard, or Paypal block payments to the Wikileaks' website, but even the Swiss post office's financial arm PostFinance froze Wikileaks' founder Julian Assange's bank accounts.

While Wikileaks' actions are up for debate, this example shows that today's fiat money system can censor and block anyone at will. Be it for political, religious, or other reasons, the fact that this is possible should be a warning sign to anyone in favour of a free society.

The rise of cryptocurrencies

What does all of the above have to do with cryptocurrencies? Let's summarize briefly the state of our everyday money:

• It lost its hardness, it's just paper and lines in Excel sheets
• It is highly centralized, very few people control it
• It can be easily censored and taken away from you

See the problem? These issues have increasingly worried people and economists alike in the last decades, and the 2007-2008 financial crisis was a point of no-return for many.

Bitcoin: a new experiment

In 2008, an anonymous online pseudo called Satoshi Nakamoto circulated via an obscure email list going out to cryptographers, libertarians, and crypto-anarchists a white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System. The unique selling point? A new form of online money running all by itself, without any central authority overseeing it and that could be easily implemented. Transactions would be verified by a decentralized network of computers, recorded on a public ledger called the blockchain, and secured by cryptographic proof rather than institutional trust.

In his early email conversation with people, he mentioned why a central authority supervising money has historically always been a bad choice:

“The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micropayments impossible.”

Bitcoin launched in January 2009, in the immediate aftermath of the global financial crisis, a timing that was almost certainly deliberate. Embedded in the very first block of the Bitcoin blockchain is a headline from The Times: "Chancellor on brink of second bailout for banks." It was a statement of intent: Bitcoin was designed as an alternative to a financial system many had come to distrust.

Because traditional money and finance depend on a great level of trust towards them and because that trust has repeatedly been broken, Nakamoto proposed an alternative system called Bitcoin. This system should be a new system where fewer intermediaries are needed, where trust can be dispersed among a greater number of incentivized actors, and where things are mostly governed and executed by programming code.

Bitcoin is designed to be a system of rules without rulers. It is anarchic, but not chaotic. It is a financial system that belongs to everyone and no one at the same time. Its purpose is to be a money of the people, by the people for the people.

Beyond Bitcoin: an expanding ecosystem

Bitcoin opened the door to thousands of subsequent cryptocurrencies, each exploring different aspects of what digital money could be. Ethereum introduced programmable smart contracts, enabling decentralized applications and financial instruments that operate without intermediaries. Stablecoins like USDC and DAI attempted to combine crypto's transparency with the price stability needed for everyday transactions. Central banks began exploring their own digital currencies (CBDCs), acknowledging that the future of money would inevitably be digital.

This proliferation reflects a fundamental truth: money is not a fixed invention but an evolving technology. Each era produces the monetary tools it needs, and today's digital age is no exception.

Crypto as a monetary innovation

It is tempting to view cryptocurrencies purely through the lens of speculation: prices rising and falling dramatically, fortunes made and lost.

But beneath the volatility lies a genuine monetary experiment. For the first time in history, it is possible to transfer value across borders, without intermediaries, at any time, to anyone with an internet connection, and to do so using a currency whose supply rules are transparent, immutable, and not subject to political interference.

Whether cryptocurrencies will ultimately fulfill all three classical functions of money - medium of exchange, store of value, unit of account - remains an open question. But they have already forced economists, central bankers, and ordinary citizens to reconsider assumptions about money that had gone unquestioned for decades.

Money is a technology, and it's still evolving

From cattle and cowrie shells to gold coins, paper notes, and digital tokens, money has never been a static thing. It is a social technology, a shared agreement about how to represent and transfer value. And like all technologies, it evolves in response to the problems of its time.

The fiat system that dominates the world today was itself a radical innovation when it emerged. It replaced gold-backed certainty with institutional trust, a trade-off that brought flexibility but also new vulnerabilities.

Cryptocurrencies represent the next iteration of this evolution: replacing institutional trust with mathematical certainty, and centralized control with transparent, decentralized protocols.

This does not mean crypto will replace fiat money tomorrow, or ever entirely. But it does mean that the question "what is money?" is not purely academic. It is one of the most consequential questions of our time with real answers taking shape online on blockchains, right now.