Problem Description

Many cryptocurrencies, including Bitcoin Cash, aim to be a medium of exchange. A desirable medium of exchange must at a minimum have the following traits independent of its network effects:

1. The medium must be able to transfer value with less friction than other assets for a given use case.
2. The medium must inspire confidence that it will hold value over a reasonable amount of time, such that transacting parties find it desirable to use and hold it for speculation-free exchange.

Throughout the history of cryptocurrency development, many properties have emerged to address (1) under various scenarios. Privacy, censorship-resistance, low cost of transaction and fast settlement all provide advantages over fiat in this regard. However, cryptocurrencies that solve (1) in various forms typically do not address (2). Compared to competently managed fiat currencies that have a fine tuned inflation target, the value of cryptocurrencies can swing wildly. As a result, cryptocurrency pricing of goods and services must be updated too often and becomes unreliable for users and merchants. Commerce is further hampered by frequent mismatches of expected future value. A pessimistic merchant can be reluctant to accept the cryptocurrency while an optimistic customer can be reluctant to spend.

Merchants are likely to immediately exchange received cryptocurrencies for more stable assets to avoid speculation. On the spending side, customers may “spend and replace” to compensate for optimistic sentiment. However, these measures effectively negate the low friction advantage of cryptocurrencies.