Rethinking money: liquidity and risk-aversion
With the rise of blockchain-based decentralized finance (DeFi), many core assumptions that inform existing theories of money are actively challenged. In particular, as automated market making (AMM) technologies and asset fractionalization achieve greater adoption in the crypto space, allowing for near-instant and low-friction swaps between different on-chain assets, the line between assets and money is becoming increasingly blurred. In this paper, we detail one attempt at defining what constitutes money on the blockchain by explicitly modeling transaction friction (e.g. slippage, liquidity provider fees), and describing monetary properties with respect to those terms. The objective behind this approach is two-fold: first, we aim to construct a liquidity-based framework that allows for a more fine-grained distinction between money and assets. Secondly, we also want to take into consideration the unique possibility afforded by smart contract-enabled blockchains such as Ethereum and Solana for any user to deploy their own fractionalizable tokens. This culminated in a complex monetary system where multiple tokens, each as viable for use in lending and payment as another, exist in parallel. In fact, some protocols have already begun paying their contributors in their own governance tokens as compensation for labor. Such a scenario is unaccounted for in the monolithic view of money espoused by cash-in-advance and money-in-utility models since it was simply not practical prior to the advent of this technology. Therefore, we identified a gap in the literature that calls for a more nuanced view of money.