Two paradoxes that prevent current cryptocurrencies from functioning as daily money

Economics
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I’ve been following/in Ethereum since before launch and BTC for over 13 years. I’m not a developer (my background is in consulting). I’ve spent the last several years obsessing on the goal of: How do we get mainstream adoption? Why has no cryptocurrency achieved what Bitcoin’s white paper originally promised: peer-to-peer electronic cash.

I think the answer reduces to two paradoxes that no one has yet been able to solve.

Paradox 1: First-Mover Advantage

Early participants acquired most of the supply when costs were negligible. Every new entrant pays more for the same unit, not because they contribute more value, but because they arrived later. For most people outside the ecosystem, this pattern is psychologically indistinguishable from a pyramid scheme (whether or not that’s technically fair). A system where most of the value was claimed before most people heard about it faces a hard ceiling on adoption.

Paradox 2: Deflation

The Bitcoin pizza transaction taught the entire ecosystem a lesson: never spend. And rationally so. If you expect the price to rise relative to goods, spending means losing future purchasing power. The result is that BTC, ETH, and derivatives are functioning as speculative assets, not media of exchange. People buy with dollars, hold, sell for dollars.

Stablecoins don’t solve this because they’re just fiat on rails, inheriting all of fiat’s problems while adding counterparty risk.

The design question

If you take both paradoxes seriously, any system that could function as daily money would need to simultaneously have:

  1. Decentralized control. No central authority may manipulate the money supply, interest rates, or transaction rules.
  2. Minimized first-mover advantage. Late adopters must not be structurally disadvantaged relative to early adopters.
  3. Stable purchasing power. Neither inflation nor deflation should erode or artificially increase the value of holdings over time.
  4. Incentive to transact. The system must encourage participants to buy and sell goods and services rather than hold the currency hoping its price will rise relative to fiat.

I have an idea on what a solution could look like, but I’m curious whether this community sees these as the right constraints, or whether I’m missing something? Has anyone here encountered mechanism design work that credibly addresses all four? Is there a formal argument that these four requirements can’t be satisfied simultaneously?

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The theories in this space often ignore what we can actually observe in real economies.

Bitcoin and Ethereum basically suggest that highly supply constrained systems lead to massive volatility. They are a nightmare for actual economic transactions.

I totally agree with your base point that ETH has to follow this monetary logic. It doesn’t even matter if you have stablecoins on top of it. The gas is still deflationary. You still need it to move those stables. Yet, it’s a non-functional monetary layer. Money is oil, not gold. It’s fuel for the economy and it needs to flow. If the fuel is a deflationary asset that everyone wants to hoard, the whole engine eventually stops.

Hodl culture

The issue isn’t just supply, it’s incentives. If the base asset is strongly deflationary, you are basically rewarding people for doing nothing. That’s exactly why “Bad Money” (inflationary fiat) is actually more functional for an economy. People spend the weak money and hold the strong money. If your currency is too good to spend, it stops being a medium of exchange and just becomes a speculative digital collectible.

Debt Deflation Trap

Irving Fisher framework on debt deflation shows the real risk here. In any system where people take out loans or use credit, deflation is a disaster because it increases the real burden of that debt over time. Modern systems prefer a bit of inflation not because it’s good, but because rigidity is destabilizing and kills growth.

Velocity Is King (MV = PQ)

The idea that just growing the money supply (M) causes inflation doesn’t really hold up empirically (check the INET research on this).

MV = PQ

The variable that actually matters is Velocity (V), specifically productive velocity. If all the liquidity is trapped in speculative hoarding instead of circulating through production, you just get asset bubbles without real economic utility.

The real question isn’t "inflation vs. deflation”. It’s how we design a system that maximizes productive circulation instead of just rewarding people for sitting on their hands.

If it doesn’t flow, it’s not money.

So the question this industry has to ask itself:

What do you want to be?
Speculative asset for institutions or functional monetary system?

(speaking of ideas, I am not allowed to post mine any more, so I won’t)

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Nice article, you seem to intuitively understand the problem. I think a fundamental conceptual change in direction that needs to occur is the disconnection of the idea of currency from both of its functions: salability across time and salability across space; i.e, is it a store of value and means of exchange.

The existence of a universal commodity to serve these roles comes from a fundamental physical problem that existed in markets: if I need stable purchasing power to act as a monetary-base for my future purchase of decaying consumption goods, I cannot acquire that from the accumulation of said consumption goods outright, since they will, well, decay; if I subsist off of a set X of different foods every month, I cannot just get paid in X for my own labor since the factors of X will literally expire over time.

A fundamental benefit of Ethereum however is the mass tokenization of economic goods that lets you gain exposure to amortizing forms of value at a continuous rate; this means instead of storing wealth in a commodity that will hopefully buy me as much X now as it will in 30 days, I can store my wealth in an index of futures contracts that give me exposure to the underlying products within X.

The intuition here comes from the realization that the entire state of prices in a market economy is analogous to monetary gas filling an N-dimensional container, where N is the number of goods for sale in the economy; money expands throughout the economy to distribute itself equally based on the relative scarcity (supply) and demand for goods, which creates an equilibrium of prices; since money is the most salable good here, it acts as a kind of universal exposure to the entire container, but isn’t this inefficient? In theory the role of money can be though of as taking place at the ‘top right’ corner of this container, which is the point of equilibrium where you have equal exposure to every economic good equally; really though, it would be more efficient for individual actors to be able to choose some other point of N coordinates that define their unique exposure to a collection of goods in line with their own purchasing habits, this means you can essentially create modular and composable stablecoin systems that don’t rely on a universal catch-all unit like a dollar.

This removes the need currency entirely, and has some interesting effects.

The assumption I’m making is that is provided a set of market prices that can be used to assemble the container; this is by no means required to be centralized but it’s a challenge nonetheless. However this is arguably the most neutral form of money that could ever be fundamentally possible.

This problem fundamentally doesn’t exist since there is no single currency unit that can be acquired at a early price.

This is theoretically the most stable form of money as you’re directly gaining exposure to what you expect to be buying at a future date.

This is another problem that doesn’t exist, since there is no unit of currency to be speculated upon.

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*is it a store of value or means of exchange.

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Really appreciate this response, you’re clearly thinking about this at the right level of abstraction. The N-dimensional container metaphor is a clean way to frame it, and the intuition that money sitting at the “equal exposure to everything” point is inefficient is genuinely compelling.

I think where it gets tricky is on the medium-of-exchange side. You’ve elegantly dissolved the store-of-value paradoxes, but if everyone is holding personalized baskets of tokenized futures, what happens at the point of transaction? If my basket is weighted toward food and energy and yours is weighted toward housing and transportation, paying you for a service requires some kind of conversion layer between our two baskets. That conversion layer either reintroduces a universal unit (bringing back the original problems) or requires real-time arbitrage across every pairwise basket combination, which is a coordination problem that scales combinatorially with the number of participants.

There’s also a practical bootstrapping question: your system needs liquid futures markets for consumption goods, plus decentralized price oracles for all of them, before it can function. That’s a massive infrastructure dependency that doesn’t exist yet for most of what people actually spend money on (haircuts, childcare, local services).

The approach I’ve been working on takes the opposite architectural choice: instead of eliminating the universal unit, redesign it so the paradoxes don’t emerge in the first place. Everyone gets 1,440 points per day (one per minute of human attention). Unspent points expire each day, so the person who joins on day one and the person who joins on day 10,000 wake up with the same allocation, eliminating first-mover advantage. Points you earn from others through transactions are saveable, but subject to daily rebasing: a hardcoded formula adjusts everyone’s absolute balance by the same multiplier so that your share of the total pool stays constant as new people join. If you hold 1% of the Earned pool before the rebase, you hold 1% after. The number in your account changes, but your purchasing power doesn’t, which removes the “number go up” incentive to hold instead of spend and kills the deflation paradox. The critical infrastructure challenge shifts from “tokenize every consumption good” to “verify that each account is a real human with a single account,” which the system handles through a proof-of-human layer where miners (verifying humans, not solving math) assign each account a percent-human score from 0 to 100 that acts as a purchasing power multiplier. Still hard, but arguably more tractable.

Would be curious whether you see the medium-of-exchange gap as solvable within your framework, or whether it’s a fundamental tradeoff of eliminating the universal unit. Happy to share more on my design if you’re interested.

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This is really well put, especially “money is oil, not gold.” That’s the cleanest version of the argument I’ve seen.

The Gresham’s Law dynamic you’re describing is exactly what I think kills the “Bitcoin as daily currency” thesis. It doesn’t matter how elegant the protocol is if the incentive structure rewards sitting on it. You end up with a speculative collectible that people buy with dollars, hold, and sell for dollars. The on-ramp and off-ramp are both fiat, and the crypto in the middle never actually functions as money.

The MV=PQ framing is the part I think this space doesn’t take seriously enough. Everyone obsesses over supply mechanics (halvings, burns, caps) and almost nobody talks about velocity. But velocity is the whole game if you actually want a functioning economy and not just a price chart. Your point about the INET research is well taken, the “more supply = more inflation” story is way too simplistic. What matters is whether the liquidity is circulating through productive activity or pooling in speculative holding patterns.

The Fisher debt-deflation point is also underappreciated. Any system where people borrow and lend (which is any real economy) becomes structurally fragile under deflation because the real burden of debt keeps growing. A little inflation isn’t a feature because inflation is good, it’s a feature because rigidity kills growth. The question is whether you can get the circulation benefits without the central-bank manipulation that comes with inflationary fiat.

I’ve been working on a system that tries to answer your closing question (“speculative asset or functional monetary system?”) by making speculation structurally irrational. Everyone gets 1,440 points per day (one per minute of human attention). Unspent points expire each day, which forces velocity by design, you literally can’t hoard the daily allocation. Points you earn from others through transactions are saveable, but subject to daily rebasing: a hardcoded formula adjusts everyone’s absolute balance by the same multiplier so your share of the total pool stays constant as new people join. If you hold 1% of the Earned pool before the rebase, you hold 1% after. The number in your account changes, but your purchasing power doesn’t, which removes the “number go up” incentive to hold instead of spend. And because every person gets the same daily allocation regardless of when they join, there’s no first-mover advantage. Verification is handled through a proof-of-human layer where miner assign each account a percent-human score from 0 to 100 that acts as a purchasing power multiplier.

The design goal is exactly what you’re describing: maximize productive circulation, make speculation irrational, keep it decentralized. Would be curious to get your take, especially given your MV=PQ framing, on whether expiring daily allocations plus rebasing actually solves the velocity problem or just moves it somewhere else

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Apparently this has been a topic before and is worked on. Worth checking out, I guess.
In a way it’s a continuation of the Bitcoin paper + Ethereum paper. It’s fascinating.
Why I dread the Merge, and why you should too - The Merge - Ethereum Research

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