Why is it difficult to achieve a truly stable decentralized coin?

Currency is the foundation of economic activity, but we often overlook the characteristics that enable currency to function effectively. With the rise of digital currency challenging traditional concepts of currency, we need to reassess the key characteristics required for currency to fulfill its fundamental functions in the modern economy.

History shows that the definition of currency depends not only on its technical characteristics but also on its ability to evolve over time. True currency must undergo a challenging evolutionary path, which is a task that most emerging currencies find difficult to accomplish.

The Complete Lifecycle of a Coin

To become a fully functional currency, an asset must successfully complete four developmental stages:

1. Attract Value

First, the currency must attract capital and attention. Whether through precious metals, government endorsement, or potential appreciation, all successful currencies begin by attracting people to hold them. This initial appeal lays the foundation for subsequent development.

If this stage is lacking, the currency will not be able to gather enough adoption. Many digital coins perform excellently in this stage, leveraging speculation and network effects to establish initial adoption and liquidity.

2. Scale Development

Secondly, the currency must achieve sufficient scale and liquidity to support meaningful economic activity. It needs enough market depth to avoid excessive volatility from trades; it also requires sufficient distribution to ensure that finding counterparties is not too difficult.

Scale brings credibility, network effects, and the liquidity needed for broader adoption. Some major cryptocurrencies have successfully passed this stage, reaching a market capitalization of trillions of dollars.

3. Stabilization Mechanism

Thirdly, the currency must develop a stable mechanism that makes it reliable in commercial and contractual contexts. Stability does not mean fixed value, but refers to predictability and resilience under market pressures. This requires technological mechanisms and institutional support.

Many emerging coins fail at this stage. True stability requires a system that can operate normally under various market conditions, without collapsing or needing external intervention. This means that the coin must have intrinsic coping mechanisms to deal with both excess and insufficient demand.

4. Economic Utility

Ultimately, currency must be truly practical in ordinary economic activities that go beyond speculation. It must serve as a reliable unit of account, medium of exchange, and store of value in various economic environments.

True practicality means supporting all the financial functions required by the modern economy: efficient payments, reliable contracts, reasonable lending markets, and stable planning cycles. This means that currency becomes ordinary and practical, rather than just exciting and novel.

The Challenge of Coordination

People rarely realize that later stages need to address the fundamental coordination issues that become more difficult as the system scales.

Consider the basic functions of currency, such as providing a last resort function, implementing emergency stabilization measures, or intervening in a crisis. These functions are essentially public goods. They require entities to prioritize the stability of the system over their own immediate self-interest—taking on personal risks for the collective benefit.

In a purely self-interest driven Decentralization system, these key functions lack structural support. The system may operate well under normal circumstances, but it can collapse when stability is crucial.

We repeatedly see this vulnerability in the cryptocurrency market:

• In March 2020, during the crash, some exchanges had to suspend trading to prevent a cascading liquidation that threatened to completely collapse the entire ecosystem.
• On "Black Thursday", a stablecoin system required emergency governance response and community assistance due to insufficient collateral.
• A certain algorithmic stablecoin initially weathered market pressure through massive intervention by well-funded participants, but when its scale grew to the point where even these supporters could not stabilize it, it completely collapsed.

These examples reveal a profound truth: although cryptocurrencies theoretically advocate for trustless systems, their survival in crises repeatedly relies on the discretionary intervention of implicit trust participants.

As the system scales up, this coordination problem becomes exponentially more difficult. Issues that could be resolved through informal coordination at a smaller scale become impossible once the system grows beyond certain thresholds.

Demand for Capital Formation

Apart from stability, a sound currency must support capital formation - facilitating the lending process that drives economic productivity. This is yet another fundamental limitation faced by existing cryptocurrencies.

The use of crypto assets as collateral is increasing, but they are rarely used as a valuation asset for debt. Few people are willing to borrow against mainstream cryptocurrencies, as their uncertainty poses unmanageable risks for both borrowers and lenders.

A well-functioning currency must provide a stable unit of account for cross-temporal agreements. Whether it is borrowers building houses, financing businesses, or developing infrastructure, they all need reasonable certainty about the future value of their debts.

Design a Complete Currency System

The limitations of existing cryptocurrencies are not a temporary problem, but rather a fundamental design constraint. Mainstream cryptocurrencies are primarily designed for the first two stages of development - attracting value and scaling.

Their fixed or highly constrained supply models create strong incentives for early adoption and speculation. This design performs excellently in terms of launching value and achieving initial scale, but becomes a burden when stability and practicality are needed for broader adoption.

If there is no mechanism to adapt to the changing economic conditions, provide a last resort function, or stabilize the mechanism in times of crisis, these systems are fundamentally incomplete monetary systems. They operate well as ownership ledgers but struggle to become fully functional currencies.

The Complete Architecture of a Healthy Coin

Based on these observations, we can define what is needed for a complete architecture of a coin:

1. Adaptive Supply Mechanism: A healthy coin must be able to expand when demand exceeds supply and contract when supply exceeds demand, creating natural stabilizing pressure.

2. Last resort function: A healthy coin needs built-in mechanisms to provide liquidity, stability, and intervention under market pressure, without external coordination.

3. Utilization of productive reserves: A sound currency should use its accumulated value for productive purposes, rather than letting it sit idle or dissipate, creating sustainable value for the system.

4. Basics of the lending market: A sound currency must provide the stability needed for the development of a functional lending market, allowing for capital formation without incurring excessive risk.

5. Transparent health indicators: A healthy coin should provide clear indicators of system health, enabling participants to make informed decisions based on fundamental strengths rather than merely on market sentiment.

The historical development of traditional monetary systems is not accidental—these characteristics evolved because they are necessary for currency to operate under diverse economic conditions.

Bridging the Gap

This analysis does not deny the achievements of cryptocurrencies. Mainstream cryptocurrencies have made extraordinary achievements by successfully completing the first two stages of development - proving that it is possible to initiate a non-sovereign currency system through market incentives.

Their success provides crucial strategies for the initial stages of currency evolution. The core insight is that a complete monetary system needs to consider its ultimate mature state during design while still being able to cope with the early evolutionary stages.

Monetary technology needs to balance the mechanisms of initial growth and speculation, while also providing a pathway to stability and practicality once sufficient scale is achieved. They need to combine the launching capabilities that make cryptocurrencies successful with the currently lacking adaptability mechanisms.

Conclusion: The Path to Healthy Currency

The evolution of currency is not just a technical issue, but also a solution to the coordination problems that increase with scale. A sound currency must be designed to operate throughout its entire lifecycle—from initial adoption to mature application—possessing mechanisms to adapt to changing conditions without the need for continuous external intervention.

This does not mean returning to a completely centralized system, but rather designing a system with a complete architecture and incorporating the mechanisms necessary for the operation of currency. This means that the created coin is effective not only under optimal conditions but also in various economic scenarios.

As we continue to develop digital currencies, these insights provide us with a framework to assess their potential. We should not only focus on technical characteristics or short-term price appreciation but should consider whether a coin possesses the complete structural elements necessary to perform quality currency functions throughout its entire evolution.

The future of currency does not belong to those with the most advanced technology or the systems with the strongest initial growth, but to those systems that fully understand the actual operating mechanisms of currency from the design stage.