Part 2: Barter & The Double Coincidence of Wants.

To dive deeper into the fundamentals of economics and blockchain, we first need to understand the economic history behind why the barter transaction model was eventually washed away by time.

To make it easier to understand, just imagine this: let's say you live in the barter era. You have apples and you need chicken meat, but the person with the chicken wants flour, not apples. Both parties fail to meet each other's conditions—and right here is the root of the problem.

In a cashless economic system (barter), a transaction only happens if these two conditions are met:

  1. I have the item you want.

  2. You have the item I want.

In the problem mentioned above, both conditions are not met, and ultimately, the transaction gets stuck.

Let's break this down with a couple of scenarios:

Scenario A (Success): I meet a shoemaker because I need shoes, and the shoemaker happens to be hungry and wants to eat apples.
I get the shoes, the shoemaker gets the apples. The transaction happens.

Scenario B (Stuck): I need shoes, and the shoemaker has the exact shoes I need. However, he already ate apples yesterday, and today he needs a chicken.
The transaction is stuck (not entirely failed, but delayed).

And this is exactly how the condition known as the "Double Coincidence of Wants" occurs in a barter economy.

So, why is this a limitation? One of the factors, as I explained in the previous post, is about humans constantly having to make choices amidst limited options.

Bringing the focus back to the main issue: why exactly is this so limiting?

  1. A complicated exchange chain: For me to get those shoes, I first have to trade my apples with a chicken farmer, and then bring that chicken to the shoemaker (this is a massive hassle).

  2. Storage issues: While spending time searching for the right person to trade apples for a chicken, my apples could rot.

  3. High search costs: I need to spend hours or even days just looking for someone who has shoes AND wants apples. Modern humans who just scan QR codes everywhere literally can't relate to this struggle T_T.

Back to the topic. It is exactly this problem that gave birth to the concept of a "medium of exchange" or "money." Money solves the Double Coincidence problem by acting as an intermediary that is recognized and accepted by everyone.

Scenario Example: I sell my apples, and I get money. Then, I bring that money to the shoemaker to get a pair of shoes. The shoemaker doesn't care whether he likes apples or not; what's clear is that he likes money.

"Money becomes a tremendously powerful middle-ground solution for the Double Coincidence problem."

In the blockchain world, the most relevant manifestation of the Double Coincidence of Wants exists in traditional market maker systems. For example, if you want to sell $BTC at $70,000 using the old way (an Order Book), you have to find someone who wants to buy at that exact same $70,000 asking price. If there isn't anyone, you are forced to wait (the transaction gets stuck).

So, what's the solution?

The modern way is through a Liquidity Pool / Automated Market Maker (AMM) like the ones found in Uniswap, PancakeSwap, and other AMMs. You don't need to wait for a "counterparty" to trade against. You trade directly against a Smart Contract (the Pool).

This automatically eliminates the barrier of the Double Coincidence of Wants in the crypto world (this will be explained further in one of our upcoming discussions about DeFi).

Now you know why the barter system was left behind by time and why money played such a crucial role in replacing it.

Thank you.