LeoGlossary: Coin

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Also known as coinage.

This is the specie of a country's money supply. It is the physical currency that is usually produced by the mint. This is a department of the government which is in control of the coin distribution. These are typically made from precious metals.

Traditionally, coinage was a sign of sound money since it had intrinsic value due to the metal content. Two popular metals are gold and silver although periods in history saw other bullion utilized.

Coins issued by governments are legal tender and serve as a medium of exchange. This means they can serve as payments on debts and for taxes. It has recently been accompanied by banknotes as part of the money supply.

Problems With Coin Money

While many defend commodity backed money, there were many problems associated with it. They are:

  • Inconsistent weights due to clipping
  • Lack of standard unit of account
  • Danger posed by thieves - personal safety
  • Insufficient amount due to bullion shortage or underestimating the need by the government

These issues often pushed vendors and merchants into using ledger based money. Business cannot allow currency issues to stand in the way. Through the issuance of credit, merchants were able to keep trading even when there was a shortage of coinage.

Gresham's Law

One of the problems with coin money became known as Gresham's Law. This is a theory that states bad money will drive out good. It is based upon two factors that were present during coinage periods.

Clipping is the practice of individuals cutting a sliver of the coins off. Since they were made out of precious metals, there was value in addition to the face value of the coin. Even if reduced by a sliver, the weight wasn't a consideration as the face value determined the purchasing power.

When given a choice between remitting a coin with greater metallic value versus one with less, the consumer will pay using the latter coin.

This is one way coinage was debased.

The other way that Gresham's Law was implemented is by the mint itself. Whoever was behind the creation of the currency, alloys were utilized as compared to precious metals. Like with clipping, this pushed more "bad" money onto the market while the "good" money was hoarded.

Once again, the metallic value of the coins meant they would be worth more in the future.

Cryptocurrency

Within cryptocurrency, coins are those which are tied to the base layer of a blockchain.

Examples of this are:

This is in contrast to cryptocurrency created at a second layer, which are termed tokens.

Coins on a network like this are accessed via a wallet system utilizing private keys If the system is truly decentralized, there is no corporation or entity in control of the money.

If there is nobody in control of the transfer of money, this means that cryptocurrency is taking on similar characteristics to cash. There are a couple factors tied to this concept:

  • with cash there is privacy while that is not necessarily the case on a blockchain
  • cash has instant settlement whereas blockchains can take hours

The industry is trying to address this in a couple different ways. The first is through privacy coins. These are designed to make transactions anonymous. Another is through coin mixers which, when utilized, make following the transactions near impossible.

Litecoin started a process whereby the miners had to decide whether to accept Mimblewimble, an upgrade to the system which allowed for private transactions.

Stablecoins

Many feel that stablecoins will end up fulfilling the medium of exchange role. These are cryptocurrencies that are pegged to another asset. The most common is USDC and Tether, which are supposedly backed by $1 worth of cash and US Treasuries. Here we see the reserve providing the value for the coins.

These are often called coins even though most stablecoins are created through a smart contract and are actually tokens. They are a base layer coin like ETH or BTC.

Related:

General:

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