You can read the original article here: https://medium.com/gerolamo/ada-will-it-become-a-currency-4512bce10c00
With Bitcoin becoming more and more a commodity, instead of a peer-to-peer electronic cash system like it was meant to be, we may ask ourselves the following question: What will it become?
Let’s begin by clarifying what ADA really is.
At its core, ADA is money . You have to see it like cash. But with the only difference that, with ADA, like with Bitcoin for example, you have access to the whole history of that cash .
Now, if we look at ADA, the currency powering the Cardano platform, you have to think about it like fuel.
Consider Cardano your car, and ADA your fuel. If you don’t have fuel, you can’t drive. This also applies to Cardano, meaning, if you don’t have ADA, you can’t interact with Cardano .
Now that you exactly know what ADA is, we can cover my opinion about the currency aspect of it.
To be fully honest with you, ADA has everything to become a currency, it has a large supply, enough inflation, it will have plenty of places where you can use it,…
Though, even if I would (really) like ADA to become a “ real” currency, my personal belief is that it will become a commodity instead of a currency .
What’s a commodity?
A commodity is an asset, where you can’t differentiate one unit from the other one , and, buyers and sellers don’t care about who produced it .
Gold is the perfect example of a commodity . No one cares about who produced it, and, even if there are a few minor differences between certain “types” of gold, at the end of the day, it remains gold.
Your phone is not a commodity , for example.
Why?
Because you can differentiate one phone from another one , and, people care about the company produced it .
Let’s look at the characteristics of a currency.
Some people suggest that ideally a currency should have a static value . The problem is that, in reality, no healthy economic system is ever static . There are trends, downtrends, and uptrends, that’s what characterizes a healthy economic system.
So, what are the “reasons” for an asset to become a currency or a commodity?
- If the value of the currency is slowly depreciating , because of inflation for example, people do want to use the currency as a method of exchange . If today, you can buy with 1$ 2 ADA, and tomorrow, with 1$ you can only buy 1 ADA, you will rush out to get your ADA today.
- If the value of the currency is slowly appreciating , because of deflation for example, people prefer not to use that currency as a method of exchange . If today, with 1$ you can buy 1 ADA, and tomorrow, $1 will buy you two ADAs, you will just wait until tomorrow to get 2 ADAs. But then tomorrow you decide to wait until the next day when you can buy three ADAs with $1.
Because of that, an ideal currency has a slowly decreasing value . Those holding the currency could use it as a store of value but doing that in the long run would be a bad idea.
T he problem, is that, because of how ADA will be used in the Cardano ecosystem, ADA’s value is likely not going to decrease , at least on the long-term.
There are mainly two reasons for that:
- A considerable part of the supply will be locked up in smart contracts . This is what we are already seeing in the Ethereum ecosystem. Already 2.25% of Ether’s supply has been locked up in decentralized finance smart contracts**. This is a lot, because we are still in the (very) early stages of Ethereum. Just imagine this with Cardano which is much more focused on finance than Ethereum is.
- Another part of ADA’s supply , which, will hopefully (but I doubt it will) be bigger than the locked part, will be staked, or pledged . People are incentivized through the staking rewards to stake as much ADA as possible. And pools are incentivized to pledge as much as possible to be seen as trustworthy, and, to guarantee the pool’s profitability.
With that mind, there isn’t any incentive to use ADA as a currency , because with time, if Cardano is successful, the network will be more and more used, which also means that more and more ADA will be locked up in contracts, but also, that more and more ADA will be staked, and pledged.
This is why I have a lot of difficulties with believing in the idea that ADA will become a currency .
But that doesn’t mean that I think ADA will become a commodity, or at least, specifically a commodity.
I think ADA will become a form of what is called “ commodity money ”.
Gold, is an example of commodity money.
Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods.
A key feature of commodity money is that the value is directly perceived by its users, who recognize the utility or beauty of the tokens as goods in themselves**.
Theoretically, you could use gold as a currency, no one does it, but you could.
And it has an intrinsic value, because I don’t think you see gold often, it’s rare.
Important in order to understand commodity money:
Commodity monies have some desirable characteristics. The fact that the money also has a commodity use and is produced as a commodity can help dampen the effects of sudden changes. For example, suppose that the amount of a commodity money suddenly doubles. Ignoring the commodity aspect of the money, the quantity theory says that this change should cut the value of the money by one half (which means that the price level should double).
The reduced value of the money will encourage people to use the item more in its commodity use. For example, if gold serves as money, and its value drops, people will increase their use of gold for jewelry, tableware, and artistic purposes. Their actions will reflect the law of demand: whenever a commodity becomes cheaper, people use more of it. Thus if there is a sudden influx of gold into a country that uses it as money, part of the influx will be diverted to its commodity use, and the effects on the amount of money, and hence on the price level, will be lessened. On the other hand, a sudden decline will also be cushioned, because as the commodity grows more valuable, people will transfer it from its commodity use into a monetary use. If the amount of gold declines and it rises in value, there is an incentive to melt down jewelry, tableware, and artistic objects and use the gold as money. Hence a doubling of gold may not double the amount of money, and cutting the amount of gold by one half may not cut money by one half. — Robert Schenk
ADA has an intrinsic value, because it can be used to create smart contracts, to stake and secure the network, to pledge to a pool,… That’s the commodity use case. But it can also be used to pay for goods and services, that’s the monetary use case.
This is why I think that ADA isn’t going to simply become a commodity, but that it will become a form of commodity money . Though, I think it will be more used than gold as a form of money. But that’s not really difficult.
