A medium of exchange is 'something of value' exchanged for goods and/or services. An important characteristic of a medium of exchange is that it represents a generally accepted standard of social value.
How a Medium of Exchange Works
A medium of exchange is not necessary for commerce. Goods and/or services can be exchanged for like value (see: barter) however, due to the lack of divisibility of goods and services, mediums of exchange are preferential.
A medium of exchange is an intermediary component of most transactions and can be anything (tangible or intangible) that is generally accepted by the parties to the transaction.
6 Characteristics of a Medium of Exchange
For a medium of exchange to exist, it must fulfill these 6 characteristics:
- Durability - Must be made to last
- Portability - Easy to transport
- Acceptability - The parties to the transaction must agree to its use
- Divisibility - It must be easily divided
- Uniformity - It must be of similar size, shape, and unit of measure
- Supply - The supply must either be fixed or otherwise regulated
Money as a Medium of Exchange
Money acts as a unit of account, a medium of exchange and a store of value. Money fulfills the six characteristics of a medium of exchange it is easily divisible (using multiple bank notes and coins), it is durable (banknotes and coins last for many years), it is portable (easy to carry), and it is accepted by society (US dollars), its uniform (all notes and coins are the same shape and size) and the supply is either fixed or regulated.
Cryptocurrency as a Medium of Exchange
Many alternative currencies have entered the market throughout time but none offer the qualities of cryptocurrency.
Cryptocurrency as a medium of exchange fulfills all the six characteristics of a medium of exchange and more. Cryptocurrency is significantly more divisible than traditional fiat currency (Satoshi = 1⁄100000000), generally accepted by society (Bitcoin), uniform, created with a fixed supply, easily portable (internationally accessible) and could be easily argued far more durable than traditional money as it has the potential to last forever.
Stable Coins as a Medium of Exchange
Within the cryptocurrency space, there are over ten thousand different cryptocurrencies and many different classes of cryptocurrencies. One such class is Stable Coins, which are cryptocurrencies where the value of the cryptocurrency is pegged (or tied) to the value of another currency, commodity, or financial instrument. The most popular stable coins are tied to the US dollar.
Cryptocurrency stablecoins offer a new and unique medium of exchange. One of the largest drawbacks to cryptocurrencies is their high price volatility and stable coins offer the market a more "stable" alternative.