When I was first introduced to the blockchain space, I assumed most of the challenges were technical computer science problems. Over time I’ve realized that it is equally, if not more so, comprised of issues of economics and incentives. Game theory governs the behavior of miners, and financial theory helps us understand how to interpret and classify these new assets. As an economist I’ve spent a lot of time studying and understanding the ideal properties of a currency, gaining valuable knowledge for use in designing the boreal. Currency is a huge part of everybody’s life, and yet most of us don’t know and have never considered what exactly makes a currency work.

Classifying Cryptocurrency

At Aurora, we believe that cryptocurrency is a bit of a misnomer. According to established economic theory, a currency must fulfill three functions:

Unit of account Store of value Medium of exchange

Applying this test to cryptocurrencies reveals that classifying them as a currency is indeed inaccurate.

Bitcoin and other cryptocurrencies do well as a unit of account, fulfilling the first function of a currency. These coins have an extreme level of precision, and each coin is equivalent to another, an attribute known as fungibility (unlike other valuable assets such as art, or jewels). There are relatively liquid markets with widely publicized exchange rates with other popular currencies, allowing those who possess them to assess their current value.

The argument starts to break down when moving to the other two prongs of the test, and most of the problems stem from the price volatility. As a store of value, a currency should allow the holder to purchase the same amount of goods now, or a few weeks from now. Businesses rely on currency for standard practices such as short-term credit or long-term debt. Price volatility interferes with this property, and currency holders start to alter their behavior to compensate. In post WWI Germany, inflation was so high that workers demanded to be paid multiple times a day in order to use their morning wages to buy physical goods during their lunch break.

Hyperinflation in Germany

This price volatility may prevent cryptocurrencies from ever becoming a widespread medium of exchange. As a medium of exchange, markets price various goods and services in the currency, allowing it to serve as a measuring stick for transactions. This helps avoid the coincidence of wants problem and inefficiencies that arise from a barter system. To this day the only true market around cryptocurrencies is the online black market, not because they prefer bitcoin, but simply because this market cannot be serviced by the traditional financial system. There are many examples of users of those sites disliking the volatility of the currency, and there is no doubt that customers would prefer the stability of traditional currencies if it were an option.

How the Boreal and Free Banking Address This

Cryptocurrency in its current form is revolutionary in many ways, but it is not designed to fully address all three requirements. Free Banking on the Ethereum blockchain presents an opportunity to create a new currency, the boreal, that builds upon the base provided by cryptocurrencies but also addresses all of these needs.

As an Ethereum token, the boreal is an ideal unit of account, verifiably countable and impossible to counterfeit. It can be easily divided into smaller units without a loss in value, and like all cryptocurrencies is fungible. Each boreal is backed by a combination of ether reserves, debt from boreal loans, and guaranteed acceptance by retailers, starting with IDEX. By utilizing free banking practices, methods that worked extremely well in the past in many countries, boreals will provide stability on par with and eventually surpassing that of fiat currencies. This stability will allow the boreal to expand beyond the current community, as a stable cryptocurrency has the opportunity to become the foundation of the global economy.

More details are available in our whitepaper. Stay tuned for additional posts on how we maintain boreal stability, and join the discussion on Telegram, sign-up for our newsletter, visit us on Bitcointalk, or follow us on Twitter to learn more about Aurora IDEX and our DVIP membership sale.