Sound money: the six properties, and how a cryptocurrency meets each
"Sound money" is a nineteenth-century phrase for money that its issuer cannot quietly debase. The arguments of the gold-standard era named the properties that make a money sound, and every one of them can be checked on a blockchain today, often more precisely than on a metal.
What are the properties of sound money?
Six. Scarcity: a supply no one can expand at will. Durability: it lasts and keeps working. Fungibility: every unit is interchangeable with, and worth, any other. Portability: it moves cheaply across distance. Divisibility: it splits into units small enough to price anything. Verifiability: anyone can confirm a unit is genuine without trusting someone else.
What makes money sound
Money is sound when its value does not depend on the restraint of whoever issues it. The phrase belongs to the nineteenth-century monetary debates, when "sound money" meant a currency redeemable in gold rather than printed to need. Bitcoin's design starts from the same complaint. Announcing it in February 2009, Satoshi Nakamoto wrote that with conventional money "the central bank must be trusted not to debase the currency", and the system was built so that no such trust is needed.
Six properties make the idea concrete. None is new; what is new is that a blockchain lets each be measured from public data instead of argued. The CoinSpectrum Grade scores them as the first section of its Cryptocurrency Standards, each tagged with the function of money it serves: 1 store of value, 2 medium of exchange, 3 unit of account.
| Property | In short | Function | The grade's line |
|---|---|---|---|
| Scarcity | Limited supply | 1 Store of value | A fixed cap that holds, and a supply near 21 million |
| Durability | Sustainability | 1 Store of value | Five years or more with no halt, freeze or reversal |
| Fungibility | Interchangeability | 3 Unit of account | Every unit identical and worth any other |
| Portability | Scalability | 2 Medium of exchange | Fees of a cent or less, capacity for real demand |
| Divisibility | Flexibility | 3 Unit of account | The smallest unit worth a cent or less |
| Verifiability | Authenticity check | 1 Store of value | Open-source nodes, and checking without a trusted server |
Scarcity: a limited supply
Gold is scarce because mining more of it is slow and expensive. A cryptocurrency can be scarcer than that, by rule: Bitcoin's schedule stops at 21 million coins, and no issuer, key or vote can mint past it without the people running nodes choosing new software, the predetermined supply of the whitepaper's §6. Scarcity is the property a store of value rests on, and the one an issuer most wants to bend.
Scarcity has a ceiling as well as a floor. A money with too few units is awkward to use: if a coin has a few thousand units in all, each is worth a fortune and ordinary prices become strings of zeros. The grade scores 21 million, Bitcoin's cap, highest; a supply ten times smaller loses 2 points, as does each further tenfold; a larger supply loses ground gently up to 21 billion, still scarce enough for a world currency, and quickly beyond it. Half of the scarcity check is that scale, half whether a fixed cap exists and holds.
Durability: it lasts
For a metal, durability means it does not rust or rot. For a chain it means the network keeps running and keeps its history: no operator can halt it, no validator set can freeze balances, no coordinated rollback can undo settled payments: the standard of no authority that can halt the chain or freeze funds, backed by security costly enough that no attacker can rewrite history. A coin is only as durable as its ledger. The grade asks for five full years of history with no halt, freeze or reversal in its record; a younger chain may be sound, but it has not yet shown it.
Fungibility: every unit alike
Fungibility is the property of an asset whose individual units are completely interchangeable and equal in value: one ounce of pure gold is worth any other ounce of pure gold, and one unit of a coin is worth any other unit of it. It is what lets a price be written in the money at all, which is why it serves the unit of account.
Almost every cryptocurrency is fungible by this definition, since its ledger records amounts, not individual pieces; in a UTXO ledger each output is an amount of one unit, not a numbered item. The exception is a chain whose native units are unique items, each with its own name or number, as Hacash's diamonds are: two of them are not interchangeable, and the check fails. Whether payments are traceable is a separate question, which the grade scores under privacy rather than here.
Portability: it moves
Gold is valuable and hard to move; a bar crossing an ocean needs a ship and a guard. A cryptocurrency crosses the world in minutes, which is its largest advantage over metal, but only if the crossing is cheap and the network can carry the traffic. The grade's line is a typical fee of a cent or less and enough capacity for real demand: a chain that can carry at least the median traffic of the ten busiest networks. Both are read from scalability, and the cent is the line of the standard of fees under one cent, drawn from the "small casual transactions" the whitepaper's introduction sets out to allow. High fees and low throughput both fail it, and a coin can be sound in every other way and still be costly to spend.
Divisibility: small units
A money must split into pieces small enough to price a cup of coffee and a house in the same unit. Gold divides poorly in practice, which is one reason coins and then paper took its place in daily use. A blockchain divides by design: a bitcoin splits into a hundred million satoshis, an ether into a billion billion wei, and the whitepaper's §9 builds splitting and combining into every transaction, the design of the UTXO ledger. The grade's line is that the smallest unit the ledger records is worth a cent or less at today's price, so a cheap item still has an exact price in the coin.
Verifiability: anyone can check
Counterfeit gold has been a problem for as long as gold has been money; testing it takes acid, a scale or an assayer. A cryptocurrency can be checked by anyone with a computer, if the node software is open for audit and the ledger can be verified without trusting a server: by a full node that prunes old history, or by a light client that checks block headers, as the whitepaper's §7 and §8 describe (scalability in the Cryptocurrency Standards). Closed software, or a chain whose users must take a company's word for their balance, fails.
Gold, paper money and a cryptocurrency
| Property | Gold | Paper money | A capped cryptocurrency |
|---|---|---|---|
| Scarcity | Natural, slow to mine | None: printed at will | By rule, a fixed cap |
| Durability | Does not corrode | Notes wear, currencies are replaced | As long as the network runs |
| Fungibility | Pure gold is uniform | Uniform | Uniform amounts |
| Portability | Heavy, costly to move | Easy in person, slow abroad | Global, at the chain's fee |
| Divisibility | Poor in practice | To the cent | To the smallest unit, often far below a cent |
| Verifiability | Needs testing | Security features, trust in the issuer | Anyone running the software |
The comparison is the case for a cryptocurrency in one table: it keeps gold's scarcity and uniformity and adds the portability and divisibility gold lacks. Whether a given coin keeps that promise is what the checks are for.
How the CoinSpectrum Grade scores sound money
In the CoinSpectrum Grade the six properties are one criterion, the first section of the Cryptocurrency Standards, worth the same as any other criterion. Each property is a point; scarcity is a partial point, half its supply scale and half its cap. A property not yet measured is left out and the score scaled to those measured, at least four; the asset page shows each line with its basis and the function of money it serves. Several of the checks read facts other criteria also score, such as fees and throughput under scalability or a chain's halts under its record. That overlap is deliberate: the sound money section asks whether a coin can work as money, and the other criteria ask how well.
Questions
Is Bitcoin sound money?
On most of the six properties it is the reference case: a fixed 21 million cap, more than fifteen years of history, uniform units, satoshis small enough to price anything, and open software anyone can verify with. Portability is where it is judged hardest: when the typical fee is above a cent, or capacity below what the busiest networks carry, the check fails.
Why does 21 million score higher than a smaller supply?
Because money has to be used as well as held. A very small supply makes each unit so valuable that ordinary prices become awkward fractions. Bitcoin's cap has shown that 21 million units, each divisible by a hundred million, is enough for a world money while staying scarce; the scale is centred there.
Is fungibility the same as privacy?
No. Fungibility, by its standard definition, is about the units: whether every unit is interchangeable with and worth any other. Privacy is about the payments: whether outsiders can see who paid whom. A transparent ledger can be fully fungible. The grade scores privacy in its own section.
Can a stablecoin be sound money?
Not on these terms. A stablecoin's supply is whatever its issuer mints, its units can be frozen by that issuer, and its value rests on reserves held by a company. It can be a convenient medium of exchange, but scarcity and verifiability, the store-of-value properties, are exactly what it hands to someone else.