Medium of Exchange

What defines a medium of exchange?

A medium of exchange is anything that is widely accepted to buy and sell goods and services.

An ideal medium of exchange must be:

Divisible

Portable

Widely accepted

Easy to transfer

Durable

We already talked about Bitcoin’s durability in the previous chapter with its 99.9% uptime and digital characteristics, so we’ll skip that one.

Let’s see how Bitcoin could make the perfect case for a MoE and how it’s already being adopted by many.

Bitcoin adoption hasn't stopped growing since it was created.

Divisibility

Bitcoin isn’t actually the unit of account in the Bitcoin protocol; Satoshi’s are (in honour of Satoshi Nakamoto).

A Satoshi is the smallest unit available; 1 Bitcoin contains 100 million satoshis, just like 1 dollar contains 100 cents.

The unit of Bitcoin was widely used until its price became too high. Today, for small purchases, most people will use satoshis. For example, a $5 cup of coffee today is roughly 0.00003500 Bitcoins or 3500 Sats.

Imagine having to pay your coffee in such a small fraction of Bitcoin… it wouldn’t be practical.

This divisibility makes Bitcoin the perfect money to be used for all sorts of transactions, from a cup of coffee using the Lightning network for instant settlement and low fees, to buying or selling a home using the base layer, with final settlement on the most secure protocol in an hour.

Portability

Bitcoin is portable because value and ownership are separated from physical objects and can be transferred or proven with information alone.

The information needed to prove ownership is the only thing you need to carry, and those are your private keys.

Those keys can be stored in your mobile wallet for convenience and small amounts.

They can also be stored in a hardware wallet for high security and large amounts, such as savings.

Keep in mind you still need to back up your seed phrase for both of these options; they can be either written down on paper, stamped on high-grade metal, or memorised, depending on your need.

This portability means large amounts of value can be moved without physically transporting anything heavy or valuable. Compared to traditional money or commodities like cash, gold, or bank transfers, Bitcoin is extremely portable: gold is heavy and difficult to secure, cash is bulky and restricted at borders, and bank transfers require intermediaries.

Bitcoin, by contrast, can be moved with nothing more than an internet connection and cryptographic keys.

Accepted

Bitcoin, being a very new form of money with less than 3% of the world population holding it, its wide acceptance is still a work in progress.

Yet, its growth is steady, and every month more people decide to accept Bitcoin for various goods and services.

Source: BTC Map

Not only the growth is steady, but it's also spread out worldwide. Bitcoin has no borders.

Updated map: BTC Map

In recent news, the company Block, Inc. (Square) has rolled out the possibility for its 4 million Square merchants to accept Bitcoin directly from the Point of Sale system. Allowing customers to pay in Bitcoin, merchants to convert it to dollars, or be paid in any percentage of Bitcoin.

This is only available in the United States at the moment.

The benefit of using a Lightning payment channel for merchants is simple: avoid the fees on everyday card payments, which can be anywhere from 0.5% to 1.6% in person, to 2.2% online.

With Lightning, the fee is usually less than $0.01.

Transferrable

Bitcoin on its base layer cannot be a good MoE for small payments; the block size limit of 1MB (or 4 with SegWit) only allows for a limited number of transactions every 10 mins. The maximum number of transactions recorded in a Bitcoin block was 12,239*, which equals about 20 transactions per second (TPS).

Visa and Mastercard, for example, can each reach 20,000 TPS at peak capacity.

Bitcoin block limit shouldn’t be increased drastically because Bitcoin prioritises security and decentralisation.

If the block limit is greatly increased without major technical advancements in computing power and storage, the average person won’t be able to run a full node.

Today I can run a full node on a 2012 Mac mini with 1TB of storage, which cost me only $100.

Bitcoin can be sent across the world in minutes over the internet, without relying on banks, borders, or business hours. Whether you are sending $10 or $10 million worth of Bitcoin, the process and cost are largely the same, but for small payments like a cup of coffee, it doesn’t work well as full settlement takes as long as an hour and a $1 might not be much for a $1000 payment, but for a cup of coffee, it’s a lot.

The solution that has been widely adopted is the Lightning Network, a layer 2 solution that doesn’t impact Bitcoin itself yet allows it to scale.

Why use the Lightning Network?

With the Lightning Network, payments are near instant, very cheap, and private. You can still send money across the globe without having to rely on a middleman, and whenever you’re ready, you can settle on-chain.

The Lightning Network has no fixed TPS and can theoretically process millions of transactions per second because payments occur off-chain in parallel rather than being constrained by block production.

You can learn more about the Lightning Network in the next chapter: The Lightning Network.

Conclusion

Durable: Bitcoin has an incredible uptime record of 99.9%, beating centralised giants like Google or Amazon. Its digital characteristic also makes it immune to rot, corrosion, or degradation.

Divisible: 1 Bitcoin can be divisible into 100 million Satoshis (or Sats).Portable: Bitcoin is digital and always stays in the blockchain; however, you can hold the key that gives you control over your Bitcoin in a hot wallet on your phone or laptop, and for savings, they can also be held on a cold wallet in a hardware device as small as a USB. Widely

Accepted: Bitcoin is only being used by less than 3% of the population, yet its acceptance growth is clear. Every month, more businesses start accepting Bitcoin as they start to see its benefits.

Easy to Transfer: Bitcoin can be easily transferred through its base layer, but the fees and confirmation time don’t make it practical for small everyday payments; that’s where layer 2 solutions like the Lightning network come in. The LN can handle millions of payments per second theoretically as payments happen off-chain, all for a very small fee of only a few sats (~$0.001).

Bitcoin has all the characteristics of a medium of exchange except for widespread acceptance, although, as shown earlier, its adoption is growing steadily. It is highly divisible, durable, easily transferable, portable, and permissionless, allowing value to be exchanged globally without intermediaries. As acceptance continues to expand through merchants, payment networks, and Layer 2 solutions, Bitcoin is the perfect candidate to become a universal medium of exchange.

The Lightning Network