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Analyzing the essence of currency: The stability challenges and future prospects of decentralized digital money.
Reasons Why Decentralized Coins Struggle to Achieve True Stability
Money, as the foundation of economic activity, has essential characteristics that deserve in-depth exploration. With the rise of digital currencies, we need to reassess the core functions of money in the modern economy. History shows that the definition of money lies not only in its technological characteristics but also in its adaptive evolutionary capabilities. True money must undergo a challenging evolutionary path, which most emerging currencies find difficult to achieve.
The Complete Lifecycle of a Coin
To become a fully functional currency, an asset must successfully complete four developmental stages:
Attracting Value: A currency needs to first attract capital and attention, laying the foundation for subsequent development. Many digital coins have performed excellently in this stage, establishing initial adoption through speculation and network effects.
Scale Development: The currency must achieve sufficient scale and liquidity to support meaningful economic activities. Scale brings credibility, network effects, and the liquidity needed for broader applications.
Stability Mechanism: Currency must develop a stable mechanism that makes it reliable in commerce and contracts. This requires an intrinsic response mechanism that operates normally under various market conditions.
Economic utility: Currency must be truly practical in ordinary economic activities, supporting all financial functions required by the modern economy.
Coordination Issues
The later stage needs to address the fundamental coordination issues that arise from the increasing difficulty as the system scales. Purely decentralized systems lack structural support to provide a last resort function, implement emergency stabilization measures, or intervene in crises.
The cryptocurrency market has repeatedly exposed this vulnerability:
This reveals a profound truth: although cryptocurrencies theoretically advocate for trustless systems, their survival in crises repeatedly relies on the discretionary interventions of implicit trust participants.
Capital Formation Requirements
In addition to stability, a sound currency must also support capital formation. However, existing cryptocurrencies are rarely used as a pricing asset for debt, as their uncertainty poses management risks for both parties in lending. A fully functional currency must provide a stable unit of account for agreements over time.
Design a Complete Currency System
The limitations of existing cryptocurrencies stem from fundamental design constraints. Their fixed or highly restricted supply models favor early adoption and speculation but become burdensome when stability and practicality are needed. The lack of the ability to adapt to economic conditions, provide a last resort function, or stabilize mechanisms makes it difficult for these systems to become fully functional currencies.
The Complete Architecture of Sound Currency
A well-structured coin requires:
These characteristics evolved in traditional monetary systems because they are necessary for currency to operate under diverse economic conditions.
Future Outlook
Monetary technology needs to balance initial growth and speculative mechanisms, while providing a pathway to achieve stability and practicality once sufficient scale is reached. A healthy currency must be designed to operate throughout its entire lifecycle, equipped with mechanisms to adapt to changing conditions without the need for continuous external intervention.
The future belongs to systems that have a comprehensive understanding of the actual operational mechanisms of currency at the design stage. We should focus on whether a currency possesses the complete architectural elements necessary to perform high-quality currency functions throughout its entire evolution, rather than just its technical characteristics or short-term price appreciation.