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In the year 2000, Blizzard Entertainment released Diablo II. Within just three weeks, it sold over a million copies, setting a new record for computer game sales. It boasted an addictive single-player experience, and its online gameplay was also engaging, allowing players to adventure in groups and trade with one another.
When trading, many players initially relied on bartering or using gold, the game’s primary currency. Unfortunately, gold had some downsides. When players died, they permanently lost a percentage of their gold, making it challenging to keep massive amounts. Each character could only own around 3.4 million gold, even if many rare items were worth 10 million or more. Players had to find a way around this problem.
Bartering was an option, but it was difficult. Matching the values of rare items was difficult, and players also had different character types. For example, a sorceress would have little use for blades, so you were out of luck if you wanted to sell them a rare sword. Players sought out a universally accepted trading medium, and they eventually found it in a small item called the Stone of Jordan (SoJ).
The SoJ was small, taking little space in your character’s inventory. It had universally valuable effects, making it desirable for all character types. SoJs were rare, and the limited supply kept them coveted by all players, with the community pricing a single SoJ at around 500,000 to two million gold. Lastly, since items were recoverable even if your player died, it was safer to keep them than gold, which disappeared permanently when your character died. As a result, players began using SoJs as a de facto currency for high-value trades.
SoJs were the ideal currency. They were fungible (i.e., one SoJ was exactly the same as any other SoJ), durable, convenient, and commonly recognized. If you look at any currency that has lasted throughout history, whether silver, gold, or most fiat currencies, you’ll find they hold these same qualities.
These also happen to be qualities of cryptocurrencies like Ethereum and Bitcoin. That’s why enthusiasts think cryptocurrencies will one day be as commonly used as pesos and dollars. They are fungible—all Bitcoins are exactly the same. They are practically indestructible, living in a decentralized ledger that is almost impossible to tamper with given current technology. They are as convenient as it gets—all you need is an internet connection; no carrying paper bills or heavy metals. And for the most part, cryptocurrencies have been gaining recognition, with more and more people hearing about them online and giving them a shot.
Still, cryptocurrencies do have some attributes that make widespread adoption difficult.
While cryptocurrencies are well-known for secure decentralization, where no third-party authority—like, let’s say, a bank—is required to complete a transaction, this also means that cryptocurrency transactions have no one policing them to reverse any mistakes. Getting hacked online would have the same irreversible effect as someone stealing the paper bills in your wallet. Most people would find this alright for physical items you can lock in a safe, but it's a whole different story for assets exposed to cyberattacks on the internet.
Some cryptocurrencies also have a lot of frictional costs. Because of the massive computing power some cryptocurrencies require, they can be slow and expensive. As I write this, the average Bitcoin transaction costs around $1 in fees and takes more than 10 minutes to confirm.
Cryptocurrencies also have a PR problem with events like the collapse of FTX. Despite once being the second-largest crypto exchange, FTX was found guilty of defrauding its customers out of $8 billion, giving the public an image of cryptocurrencies as unsafe and filled with fraudsters.
Cryptocurrencies have promising characteristics. They are fungible, durable, convenient, and generally recognizable. However, they also have some drawbacks that prevent mass adoption, like security, transactional, and public perception issues.
Can Bitcoin, Ethereum, or other cryptocurrencies follow the path of Diablo II’s SoJ and become an organic, community-driven, widely accepted medium of exchange? While they may have their pros and cons, anything we say about the future is only speculation, and only time will tell whether or not cryptocurrencies become a common, everyday medium of exchange!
Keith Lim writes about personal finance and making money through the stock market. He blogs at www.keithblim.com
