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#2411·Benjamin Davies, 5 days agoThe reason to back a currency with gold or some other commodity is that the commodity has other utility aside from being used as money. This sets a floor on the price, making it a store of value.
Bitcoin and Zcash have no utility beyond their transferability. The only way either would ever be money is if a government made it their legal tender, forcing transactions to be done with it exclusively.
To use US Dollar as an example again, the only reason it is money is that it has the alternative utility function of being the only thing the government will accept for tax payments. In that sense it is the only currency that keeps you out jail if you use it in its designated geographical area (!). If that weren’t the case then people would quickly swap to using something else—something that isn’t being manipulated by the government.
(To prevent any confusion, please understand that I believe governments should be completely agnostic to how people carry out their transactions, including allowing them to use any currency and even old-school barter if they wish.)
TL;DR The only way for the US Dollar, or Bitcoin, or Zcash (or any other unbacked currencies) to be useful as money is if a government makes them legal tender, and prohibits anything else being used in transactions.
The reason to back a currency with gold or some other commodity is that the commodity has other utility aside from being used as money. This sets a floor on the price, making it a store of value.
- Utility is not a necessary aspect of money. Only 5-10% of gold's value is tied to its industrial use (per chatgpt). This floor is not so reassuring then if the asset would plummet 90-95%. Other commodities, such as silver, have a greater industrial utility. That makes it less suitable as money since its value becomes tied to commodity cycles.
The reason to back a currency with gold or some other commodity is mainly due to its scarcity, which puts a limit on money creation (done through fractional reserve bankning).