Currency Competition Lukas Dippold | TU Berlin 25.06.2018 Abstract: Hayek’s intention behind his idea of competing currencies from 1976, to abolish governmental issued currency, can get reality with cryptocurrencies which emerged evolutionary over the past decade. The decentralization approach makes them a new form of money. The three basic functions of money, namely unit of account, storage of value and mean of exchange can be provided by cryptocurrencies. Due to their technological properties these functions can also be split across various currencies. Seminar: Bitcoin & Co.: The Economics of Crypto Currencies 1 Introduction: From Hayek’s idea to Cryptocurrencies In 1976 Nobel laureate Friedrich August von Hayek proposed the denationalization of money in favor for competing private monies. He was very fascinated by this idea as from his point of view the governmental monopoly for currency issuance is not providing the best money we could have. Furthermore, he had no doubt that the recurrent periods of depression and unemployment have their origin in the old monopoly (Hayek, 1977, preamble). His idea was widely discussed even in mainstream economics, but it has been rejected as impractical or politically undesirable (Thorsten Polleit, 2016). Most economists make the governmental monopoly a standard assumption which they do not question. But recent developments in information technology, especially cryptography, could make Hayek’s vision reality. With the release of Bitcoin in 2009 by a pseudonym called Satoshi Nakamoto a completely new monetary form entered the world, called cryptocurrencies (Nakamoto, 2009). The extraordinary feature of Bitcoin is decentralization. There is not a single entity that can easily change the monetary policy alone. Decisions are made by decentralized consensus. The ingenious concept of Bitcoin challenges the way economists have traditionally thought about money. This seminar thesis will focus on the economics of cryptocurrencies. The main research question is if cryptocurrencies can make Hayek’s vision possible. To answer this question Hayek’s book ‘The denationalization of money’ and the recent paper of Villaverde and Sanches, in which they build an economic model for competing currencies, are analyzed (Fernández-Villaverde and Sanches, 2017). The goal is to elaborate critical properties of a denationalized currency to function as money that is providing the three basic functions of money, namely unit of account, means of payment and storage of value. It is crucial that governments provide a fair market conditions that the competition of the currencies can work undisturbed. The currencies itself need to provide counterfeiting security. Moreover, it should be impossible for any single authority to inflate the currency. The whole competition process should also lead to price stability and provide the economy with the socially optimal amount of money. Cryptocurrencies are not making Hayek’s vision reality in the way he thought about it, because they have another objective compared to the competing currencies he described. Cryptocurrencies stand for decentralization, which is the reason for the complex consensus mechanisms. However, Hayek’s basic intention behind his idea, to abolish the governmental monopoly, could be realized. Cryptocurrencies like Bitcoin represent a new form of money that is decentralized and not controlled by a single authority. This fact makes them hardly comparable with previous forms of money. Right now, we can observe competing currencies within the cryptocurrency market. It is a quite unregulated environment and moreover very new. We can gain first insights how competing cryptocurrencies behave and what possibilities there will be in the future. Cryptocurrencies are not competing for the best monetary policy but rather attract the users with specialized features. Market participants tend not to focus on trade with one specific currency but use various currencies for different transactions. Additionally, transactions will eventually consist of two currencies. The one that the seller wants and the one that is used by purchaser. Within the transaction there is an automatic exchange. Thereby network effects do not play a big role. The seminar thesis is structured as follows. Section 2 studies the historical background, especially Hayek’s proposal. Section 3 presents the model of Villaverde and Sanches. Section 4 discusses the idea of competing currencies and evaluates critical properties based on Hayek’s thoughts and the analysis of Villaverde and Sanches. Section 5 presents cryptocurrencies and how they can fulfil the critical properties. Section 6 concludes. 2 Historical Background Friedrich August von Hayek published his idea in a book called ‘The denationalization of currencies’ in 1976. While he admits that Benjamin Klein had the idea of competing currencies already in 1974, he claims that he came up with this idea by himself as the paper of Klein was out of his knowledge. It also relates to the idea of unregulated banking and to the literature on the historical experience with free banking (Lawrence H. White, 1995). The following subsection summarizes Hayek’s idea and his motivation. It shows that he has a critical point of view towards the monetary system at the time of writing the book. 2.1 Hayek’s idea of denationalizing currencies The proposal by Hayek is the full competition between private issuers of currency. Governments should not interfere in the money supply process (Hayek, 1977, p. 1). This should happen by a revolutionary process initialized by international agreements of governments. He argues that private agents can achieve desirable outcomes through markets even in the fields of money and banking and that this would stop the sequence of heavy inflation and deflation. Hayek claims, that the governmental monopoly for money supply does not work well as governments abuse the trust of the people and supply them with bad money that they are inflating (Hayek, 1977, pp. 6–11). In economic literature there is no indication that a governmental monopoly on money should always be seen as something requisite. This monopoly was not always there. Indeed, in the early days of money coins, there were several issuers of coins that were competing against each other. The technical side of the production of these coins was quite complex. Moreover, exchange rates between the various coins were hardly available. In these days the government did a useful job issuing similar and distinguishable coins (Hayek, 1977, p. 6). And after a while the governments realized that by issuing coins they can make profit, if there is no alternative for the people to use. Over time the myth arose that every nation needs an own money within its borders and only governments can supply it. People always accepted it although the government abused them. Hayek proposes the usage of market mechanism in money supply. An issuer must issue a stable currency because otherwise people will switch to another one. According to Hayek the issuer holds the value of his currency stable against a bundle of goods. For him, profit seeking would bring a better money than governmental planning. The people would trust more in a market player which business depends on not abusing the trust of the people compared to a governmental monopoly that profits alone from money issuance. Even worse central banks gave the monopoly out of their hands but are still responsible. Keeping the control would require a 100 percent banking. But today banks profit by creating credit out of thin air without responsibility for the monetary system (Hayek, 1977, p. 118). He makes clear that the Gresham Law is only working when all currency issuers issue the same currency but not when everybody issues his own currency and there is a clear distinction between them. Then worthless money or bad money is driven out of the market by good money and not vice versa (Hayek, 1977, p. 24). Hayek is looking for a better monetary system. Inflation is not a volatile process but an insidious. There are capital investments that are profitable just because of the ongoing inflation. Therefore, production factors are wrongly allocated and this causes unemployment. Within the current system Hayek is agreeing on the common statement, that Inflation is necessary. But he believes that this system will ruin our civilization if we don’t change the political frame. It is leading to heavy economic cycles which can be avoided in that hard form by a better monetary system. (Hayek, 1977, p. 72) Another argument for competing currencies is absurdity of interest policy in the current system. The fixing of interest rates should be left to market forces, the offer and demand for credit. A single planning authority like a central bank can never have all information to determine the best interest rate. (Hayek, 1977, p. 98) The determination of special currency areas like a country is not needed according to Hayek. They are harmful to smooth international relations. Competition will form regions where people tend to use a specific currency without specific national borders. (Hayek, 1977, pp. 106–10) It is important to separate fiscal policy from monetary policy as they conflict with each other. Democracy favors abuse of monetary policy as there are elections. As there are elections governments tend to reach positive short-term effects by the means of an expansive monetary policy and do not worry about a resulting high long-term price. They are selling the future. (Hayek, 1977, pp. 110–5) The free monetary market needs to be protected from government intervention. Hayek calls for a free money movement like the free trade movement in the nineteenth century. For him it is crucial that society finds a better solution for its money than the system at the time of writing his book, because this system would lead in totalitarianism. 2.2 Private Monies in history The economic history provides several experiences with denationalized money. But they must be distinguished from Hayek’s proposal, because in most historical cases the banks were subject to numerous regulations. A lot of very good banking was done in lightly regulated banking systems. Examples include Scotland, New York under the system that prevailed in the United States before the Civil War, Canada, Sweden, Switzerland, and Chile in the nineteenth century, and many less well studied cases. (Briones and Rockoff, 2005) One of the most discussed examples is the free banking period in Britain (1716-1844), which refers to a monetary system without a central bank, in which private banks would be allowed to issue currency and bank deposits without restriction. It is considered as a success by economic historians but it is rather called lightly regulated banking than free banking (Briones and Rockoff, 2005). This version of free banking is based on banknotes being redeemable in gold and silver coin. The competition between the banks was tough. A bank collected the notes of a competitor over a long period of time and then immediately demands its redemption with the goal of driving the competitor into insolvency and thereby conquering market shares. Basically the banks still relied on the English government. (Lawrence H. White, 1995) This is also a hint to the practical problem that governments do not want big banks or money issuers to fail, because they are widely connected within the country and the collapse of one issuer could lead to enormous instabilities. 3 The model of Villaverde and Sanches The time when Hayek thought about this idea is very different from today. But new technology makes old ideas interesting again. The current development of crypto currencies is the reason why Villaverde and Sanches take a serious look at Hayek’s idea. The following two subsections are based on the paper of Jesús Fernández-Villaverde and Daniel Sanches (Fernández-Villaverde and Sanches, 2017). 3.1 Construction of the model They start with a purely private monetary system where entrepreneurs issue intrinsically worthless tokens as a medium of exchange that attain a strictly positive value. The total amount of each currency can be verified by all agents as the trading history of the entrepreneur is publicly observable. Into the Lagos-Wright environment they include entrepreneurs who can issue their own fiat currencies to maximize their utility and a predetermined algorithm that follows a protocol like Bitcoin. In this framework, competition is perfect. All private currencies have the same ability to settle payments, and each entrepreneur behaves parametrically with respect to prices. 3.2 Main results The results of the paper show that in general a monetary equilibrium with private monies will not deliver price stability. Profit-maximizing entrepreneurs will try to maximize the real value of seigniorage. A purely private system fails to implement an efficient allocation. Depending on the technology it is also shown that for privately-issued currencies a monetary equilibrium with price stability can be achieved, if the cost function of minting additional units is linear around the origin. In this case agents do not expect monetary conditions to vary over time so that the real value of private currencies, as well as their expected return remains constant. But even when the cost function of minting money is such that there exists an equilibrium in which price stability is consistent with competing private monies there exists a continuum of equilibrium trajectories with the property that the value of private currencies monotonically converges to zero. Villaverde and Sanches argue that private monies are also subject to self-fulfilling inflationary episodes like government issued currency. Selffulfilling inflationary episodes are a consequence of using money with no intrinsic value. There are two ways to overcome self-fulfilling inflationary episodes. The first way is the usage of asset or service tokens. Thereby every unit of the currency gets an intrinsic value, namely the service that can only be paid in that token or the asset, that represents a real economic value. For such a currency the convergence to zero is impossible. If there is a demand for is real economic value, there will also be a demand for the tokens. It is possible to obtain an allocation that is arbitrary close to the efficient unique one which vindicates Hayek’s proposal. The second way is a decentralized token issuance handled by an immutable protocol. Then there is no single entrepreneur or a small group of them that can maximize profit by minting additional units of the currency. It is also shown in the paper that the existence of an upper bound on the available supply of each brand, make privately-issued money consistent with price stability in a competitive environment, given that the government does not intervene. In that case it is also difficult for a government to implement a monetary policy through a money-growth rule. Villaverde and Sanches also take network effects into account. From their analysis they conclude that they can be relevant for the welfare properties of equilibrium allocations a competitive environment. The better the exchange systems are, the less relevant get network effects. In the end the results cast serious doubts on Hayek’s proposal of currency competition. But they also make clear that the threat of private monies imposes market discipline on any government which issues money. The worse a government behave as money issuer the harder it will be to allocate the currency. That can be seen in Venezuela nowadays where the inflation rates are so high that people completely lost the trust in their government (Venezuela inflation rates). If people can switch quickly to alternative currencies, central banks are forced to provide a tolerable monetary policy. 4 Discussion of competing currencies In this section the idea of competing currencies is discussed against the background of the introduced literature. The goal is to evaluate critical properties of competing currencies and compare them to the functionalities and characteristics of cryptocurrencies afterwards. 4.1 Review of Hayek and Villaverde and Sanches Hayek’s idea of denationalized currencies is very interesting and makes sense following his arguments on the first view. The competition as a discovery process would leads to a stable non-inflationary outcome. In contrast, most economists would argue that free competition with respect to money could guarantee neither a stable nor an efficient outcome. Issing argues that a competitive monetary system has problems in providing the unit of account function, which is considered as the most basic monetary function. Money used as a unit of account has characteristics of a public good. (Otmar Issing, 27.05.1999) Polleit argues that Hayek underestimated the costs and inefficiencies of competing currencies. The simplest and most efficient way to do accounting, taxation and processing of transactions is when there is only one single currency. (Thorsten Polleit, 2016) Hayek also left a lot of open questions regarding the discovery process and how it would work in practice. If an issuer abuses his position and inflates his currency, he is driven out of the market. But during that process the inflating has already happened. Another problem is how to handle a monopoly or oligopoly situation that evolves out of the discovery process. However, Hayek states clearly in his monography that his idea is quite far away from praxis but economists need to think beyond (Hayek, 1977, pp. 126–30). His idea needs to be transferred in today’s world and economy. A lot of general conditions under which Hayek was arguing have changed during the last forty years. In the European Union a big change happened with the Monetary Union. In favor for the Euro, a supranational currency, the countries gave up their own monopoly. On the one hand, this shows that it is possible that governments give up their monopoly and sign international agreements on monetary policy. On the other hand, this process is leading to even less competition of currencies in the Eurozone. Hayek expected that the Euro would never become reality, but, nevertheless, his own scheme seemed to him more preferable and more practical. (Otmar Issing, 27.05.1999) Villaverde and Sanches implemented Hayek’s idea in a modern model. This is quite a difficult process, as Hayek was not a big fan of mathematical methods in economics and never tried to build mathematical models in his work. Villaverde and Sanches need to from the model with their own assumptions and adjustments. Critical properties need to be evaluated for a system of competing currencies by taking both views into account. 4.2 Evaluating critical properties of a denationalized monetary system There are basic functionalities a currency must provide to grant value (Dwyer, 2015). It must not be possible to spend the currency more than once. This is also called double spending problem. Additionally, the currency must be counterfeiting secure. The three basic functions of money are still valid for every monetary system, whether it is competition or monopoly. Money fulfils three functions, namely that of unit of account, a means of payment and a store of value. As we see nowadays, the governmental system is not able to provide a store of value in the long term. Hayek makes this point very clear in his monography. High inflation rates show that this function is not fulfilled. Villaverde and Sanches claim with their model that this is also happening in a competing environment and it leads to convergence to zero of the currencies. Productive capital holds the chance to avoid this by including it as equivalent to the money. As already elaborated, the other way to overcome this problem is an immutable protocol that handles the issuance. This makes the inflating of the currency by a single entity impossible from beginning. The money should be like a tool for all market participants and not the business itself. The free banking period teaches that the different issuers of money fight against each other for market shares. If an institution promises redemption in anything specific, like gold, it is hard to keep that promise when its attacked by a competitor and there is no 100 percent reserve. A promise for redemption bears instabilities and should not be inherent of competing currencies. In the model of Villaverde and Sanches the governmental money drives out private money by deflation financed by taxes. As this is ruining fair market, another critical property is to avoid this as well. For not a single player it should be possible to make use of unfair techniques. In a competition model, it is always possible for one player to become the sole issuer of money and we end up in a monopoly. Therefore, it is very important that it is always possible for competitive players to re-enter the market and provide good solutions if the monopolist makes unfair use of his position. All that means that we need fair market conditions. Good exchange markets are needed to provide this functionality. Villaverde and Sanches state that good exchange systems also make network effects less relevant. We end up in a setting, where free market conditions must be given. The government should not interfere unnecessary, but provide a fair framework that the market can produce the best outcome for everybody, the socially optimum. This relates to the optimum quantity of money (Sanches, 2012). It is meant to fit the demand in the economy to be socially optimal. That is the justification of governments today to do monetary policy, but a central bank can just regulate the amount of outside money with a time delay. A monetary system with competing currencies holds the chance to provide this better because the issuers can focus on the specific money demand in various sectors and regions. In Hayek’s argumentation it is given if the institutions issuing money keep the value constant by regulating the circulating amount (Hayek, 1977, pp. 126–30). However, Villaverde and Sanches found that the competition does not provide the socially optimal amount of money in their specific setting because they assume profit maximizing entrepreneurs. This is a problem of opposite assumptions and it could be avoided if the amount of money is fixed in advance. 5 Cryptocurrencies as money Electronic money can be divided into two types– currency and deposits (Dwyer, 2015). While electronic currency is an asset which can change hands from one person to another, deposits can be defined as money that is a liability of the accounting institution like a bank. Electronic deposits are very established in the current monetary system. They are the inside money in the definition of Issing which consist mostly of bank deposits supplied competitively by banks (Otmar Issing, 27.05.1999). The outside money, in contrast, is the supply of currency and bank reserves exclusively supplied by governments. As governments have always permitted and indeed increasingly encouraged competition in the production of inside money, the fraction of outside money is quite small in relation to inside money. But there is a symbiotic relation between the two, because issuers of inside money are legally bound to redeem it in outside money. Furthermore, outside money provides the unit of account for the whole system. Inside money is not necessarily brought to markets by banks. It can also be issued by payment providers like Paypal. For such an important system like money, a decentralized system is offering a lot of chances. Cryptocurrencies aim exactly this and it is showed that the critical properties can be fulfilled by them. 5.1 Forms of crypto currencies Advances in cryptography and computer science made cryptocurrencies robust to over-issuing, the double-spending problem and counterfeiting (Narayanan et al., 2016). The critical elements of a cryptocurrency can be formalized as follows: the blockchain to keep a history of transactions, the distributed updating of information and consensus through competition for such updating (Chiu and Koeppl, 2017). Thereby cryptocurrencies get decentral with millions of nodes spread all over the world. As far as the last node is running, the network is still existing. That makes it practically impossible to switch it off. From the historical free banking periods and from the current monetary system we can clearly differentiate cryptocurrencies by their goal of decentralization and not being controllable by a single entity. That is the core idea, but it is also often misguided because there is right now a hype and many entrepreneurs want to make money with buzzwords like blockchain and cryptocurrency. In the ecosystem there are also approaches like Ripple that are quite centralized (Ripple Website). Their goal is not to become a currency itself but to provide a way to transfer funds in the current banking system more efficiently. That type of projects is not part of the considerations in this work. Furthermore, the notes issued by the institutions during the free banking periods usually represented claims against deposits in gold or other assets. Cryptocurrencies can also represent an asset but the biggest cryptocurrency today, Bitcoin, is fully fiduciary. Additionally, Crypto coins are issued by computer networks and are not related to credit. (Fernández-Villaverde, 2017) Important features are the programmability, velocity and scalability. They are constantly improving. Exchange – rates between the various cryptocurrencies are instantly available from various exchanges. (Narayanan et al., 2016) Talking about cryptocurrencies makes it necessary to differentiate between the various forms in terms of their basic functionalities, because it is crucial for the economic evaluation. As cryptocurrencies are at the core computer code, almost any design one can think of is possible. In general, the supply of the units of a cryptocurrency is fixed by a protocol and every participant in the network behaves according to that protocol. If not, he is automatically no longer part of the network. The more people take part in the network, the more decentralized it gets. The authority taking care that everybody behaves honestly are the rules held in the protocol. The distribution process is much wider and dispersed compared to all currencies before (Narayanan et al., 2016). The first type being discussed here are fully fiduciary cryptocurrencies like Bitcoin. They are comparable to gold as they have a small economic usability besides being medium of exchange, but its scarcity combined with demand gives them a value. The second form are cryptocurrencies as tokens in an ecosystem. In this case there is productive capital behind the currency, the service or the products that can be bought within the ecosystem only by that currency. They are the only possible way of payment because they provide special functionalities that other currencies do not have. The number of tokens is mostly also restricted by a protocol. The second largest cryptocurrency at the moment, Ethereum, is an example for this from. (Buterin, 2013) Cryptocurrencies as assets can be considered as the third form. In this case, one unit of the currency represents an asset for example like gold (Digix Global Website). The discussable point here is that there is the need for a single authority that brings the real-world values in the digital ecosystem and everyone must trust this authority. It basically the same as the well-known gold-standard. Then there is the legitimate question if there is really the need of making a cryptocurrency, but this discussion is not the topic here right now. As the technology is quite new and rapidly evolving, there will be maybe found a solution to implement this in a way which justifies a blockchain. But for the economic considerations it is useful to include cryptocurrencies with an underlying asset. 5.2 Application of the critical properties on cryptocurrencies Hayek’s vision of denationalized currencies can get reality with cryptocurrencies but probably not in the way he thought about it. Even if banks or single entrepreneurs issue a cryptocurrency, the problems shown by Villaverde and Sanches or Polleit are not solved. The self-fulfilling inflationary process remains with cryptocurrencies issued by a single authority, because there is a chance for this authority to change monetary policy by a self-sufficient decision. The important aspect, that must be considered here, is decentralization which is also completely new in economic history. It was never possible to have a medium of exchange that is issued by a distributed protocol in the past. Cryptocurrencies make it possible to realize a wide distribution to anyone who is wanting to participate in the network. The process is also not an outcome of planned policy change but a result of many individual decisions (Fernández-Villaverde, 2017). There are different options how cryptocurrencies can regulate the amount of money. The inelasticity of supply of a single currency like bitcoin is viewed as an advantage by some economists and a disadvantage by others (Dwyer, 2015). An inelastic supply is roughly in line with Friedman’s solution for the optimal quantity of money if the income elasticity of the demand for the money is one and the loss of coins is unimportant. Thereby, cryptocurrencies avoid the inflationary trajectories that drive the value of the competing currencies to zero. Cryptocurrencies can also regulate the quantity of money with their value because their tokens are divisible in very small units and the amount is fixed. If the value of a currency is increasing and the total supply of the currency is inelastic, there is no monetary lack when the amount is dividable in infinitesimal small fractions. It is also plausible that the regulation of the amount of money could be automatically fulfilled as there will always be various issuers of money when there is demand. If there is more offer than demand, players will be driven out of the market. As cryptocurrencies can be quickly issued there is the legitimate assumption that they can provide this property. Even if for example Bitcoin with its fixed supply will eventually remain as only single currency there is still the possibility of fractional reserve banking like it is happening today. Thereby, the amount of money can also be adjusted. Banks would then extend loans denominated in Bitcoins, thereby offering Bitcoin substitutes (Thorsten Polleit, 2016). In counterfeiting security cryptocurrencies are previous monetary forms very superior. Strong cryptography makes it impossible to counterfeit digital coins. Of course, there are security threats to cryptocurrencies like Bitcoin, for example a 51-percent-attack. But in the case of bitcoin, it is very unlikely and since its inception there was not a single successful attack like this. (Antonopoulos, 2015) Cryptocurrencies are also highly exchangeable. Services like Shapeshift already show how easy it is to change currency today (Shapeshift Website). With APIs the exchange rates can easily be implemented in every service developers want to build. Of course, the three basic functions of money need to be discussed. The mean of exchange is the feature where cryptocurrencies have obvious strengths. They provide a safe and secure method for exchanging value around the whole world at low cost. With the current capabilities, cryptocurrencies cannot handle all transactions within an economy like Europe. But they are quickly evolving and new second layer solutions like Lightning Network are very promising (Poon and Dryja, 2016). The unit of account is the most basic monetary function according to Issing (Otmar Issing, 27.05.1999). To have a common money language, a unique leading currency seems to be without alternatives. But cryptocurrencies are highly connected and can be exchanged in real-time. Highly available exchange rates between various cryptocurrencies make it possible to get the price instantly in the currency or value, in which the market participant is accounting. Nevertheless, with a second layer like Lightning Network, that in theory can handle an unlimited amount of transactions, it is also possible for a currency like Bitcoin to become the single and stable unit of account, comparable to gold. As cryptocurrencies fluctuate strongly in value (Coinmarketcap Website) they do also not work as a storage of value at the moment. But as they are quickly exchangeable at low cost, it is possible to store the value within a cryptocurrency with an underlying asset. If a cryptocurrency becomes a widespread used currency, the value tends to increase as the money supply is fixed by the protocol. This would make it quite a good storage of value. This shows, that cryptocurrencies can divide the three basic functions of money among each other, where every brand serves the functionality that it does best. A currency with an underlying asset or productive capital is providing a storage of value. Fast exchange systems and APIs are providing the unit of account function and the mean of exchange is provided by any currency that the participant wants to use for the transaction, probably the one with the lowest transactions fees and a fast execution. This is a new approach made possible by technology. 5.3 Cryptocurrency competition in today’s crypto market As this thesis is about competing currencies, it is worth to look at today’s cryptocurrency market which is a highly unregulated market. Coinmarketcap provides a good overview over the whole crypto economy (Coinmarketcap Website). At the time of writing there are around 1600 different cryptocurrencies. Bitcoin, the first cryptocurrency, is dominating the market with 40 Percent of the total market capitalization in US Dollar. The market is highly speculative and fluctuating. It shows parallelism to stock-markets where people speculate on small startups that might have a bright future. Moreover, not all cryptocurrency projects listed on Coinmarketcap meet the critical properties worked out in this thesis, mostly because are not created with the goal of becoming a currency used as a medium of exchange. However, it provides valuable insights about the market mechanisms. It can clearly be observed that there are not many cryptocurrencies that want to dominate the market just by monetary policy. Cryptocurrency creators try to differentiate the currency by special features and functionalities. A use-case that is only medium of exchange is quite rare, but the inventory spirit for additionally features nearly has no boundaries. Another interesting observation is that market participants tend to accept more than one currency. It is very easy for them to change the currency afterwards in the wished currency at low costs. Projects like COMIT will eventually make it possible for two counterparts of a transaction that everybody can use his preferred currency (COMIT network Website). The exchange is done automatically in the background during the transaction. This shows that network effects are passed. Thus, for different use-cases market participants tend to use the specific currency that fits best in the situation. Moreover, the process of introducing cryptocurrencies is more like an evolution than like a revolution. In 2009, when Bitcoin was initially proposed by a person or a group of people using the pseudonym Nakamoto, there was not paid much attention. But it evolved over time and the network started to grow steadily. It gained quite a lot of prominence for example by becoming the currency usable on the Silk Road, a website where drugs and some legal good were traded anonymously (Dwyer, 2015). The underlying software of Bitcoin is still continuously improved. Taking this way, cryptocurrencies chose the exact opposite proposed by Hayek who thought about the introduction of competing currencies as a revolution initialized by governments. 6 Conclusion In this seminar thesis it is shown that cryptocurrencies do not make Hayek’s idea of denationalized currencies reality in the way he thought about it. The process of inception is evolutionary and does not have the revolutionary inception envisioned by Hayek. The concept of private entrepreneurs or banks that issue the currency while competing against each other is not exactly what cryptocurrencies implement. The distribution of coins is realized by a decentralized protocol what represents a new attempt in monetary history. The three basic functions of money, namely unit of account, storage of value and mean of exchange can be provided by cryptocurrencies. They have the technological requirements to split these functions across various currencies. Especially as mean of exchange cryptocurrencies are superior to every form of money ever used in history. Counterfeiting security is also a strength of cryptocurrencies. As they are programmable money, the number of additional features seem endless. The technology is also quite new and quickly developing. Moreover, single cryptocurrencies like Bitcoin are constantly evolving. 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