Money looks physical when we hold a banknote, it looks digital when we check a bank balance, and it looks mathematical when it appears inside a blockchain wallet. Yet none of these forms explains the deepest reason why money actually works.
A dollar has value because millions of people expect other people to accept it. A bank deposit works because institutions, laws, and payment networks make that expectation credible. Bitcoin works differently, but it still depends on expectations, and users must believe the rules will continue to operate, the network will remain useful, and others will continue treating bitcoin as valuable.
This creates an uncomfortable question for decentralized finance: if money is partly a social fiction, what happens when the institutions supporting that fiction are replaced by code? Crypto’s answer has never been to eliminate trust completely, but it has attempted something more complicated. It has moved trust from governments and financial institutions toward algorithms, validators, token holders, developers, markets, and communities.
That makes considering money as social fiction less about whether money is “real” and more about who gets to define reality.
Trust Minimization Versus Trust Redistribution
One of crypto’s most powerful ideas is trust minimization, Bitcoin does not require users to trust a central bank to maintain a fixed monetary supply, and Ethereum does not require users to trust a traditional clearing institution to verify every transaction. DeFi protocols can execute loans, trades, and liquidations through smart contracts instead of relying entirely on banks. The technology therefore appears to replace institutional trust with mathematical certainty, but that description is incomplete.
A Bitcoin user still trusts the software, developers, miners or validators, wallets, exchanges, internet infrastructure, and the broader community maintaining the network, and while a DeFi user trusts that a smart contract has been written correctly, that its oracle provides reliable information, and that governance participants will not change the rules in a harmful way, that trust can still move.
This is trust redistribution, rather than the complete disappearance of trust. The Bank for International Settlements argues that trust is foundational to money because people must accept it for payment without questioning whether others will accept it later. The modern monetary system supports that confidence through institutions that help different forms of money remain redeemable at par. Bitcoin changes the architecture of that confidence, and its monetary promise is embedded in a protocol rather than a central bank balance sheet.
That is one reason protocol-based monetary systems are so philosophically interesting. They ask whether rules encoded in software can substitute for institutions built through law, history, and political authority. The answer so far is more complicated than either crypto supporters or critics often admit.
Can an Algorithm Create Monetary Legitimacy?
This brings us to the hardest question in decentralized money philosophy: Suppose a blockchain has perfect code, the supply is predictable, transactions are transparent, and consensus works exactly as designed. Does that automatically make its native token legitimate money? Well, No.
An algorithm can determine how units are created and transferred, but it cannot by itself determine why people should want those units. The debate between chartalism and metallism becomes useful here. Metallism generally connects monetary value to a commodity or something with value outside its monetary function. Gold is the classic example because its scarcity, physical properties, and historical demand have helped support its monetary role.
Chartalism takes a different approach; associated particularly with Georg Friedrich Knapp’s State Theory of Money, it treats money as a political and institutional arrangement. The state can establish a unit of account and decide which forms of payment it accepts for public obligations. The chartalism vs metallism blockchain debate becomes fascinating because Bitcoin fits neither category neatly. It is not gold, and its scarcity is algorithmic rather than geological.
But it is also not conventional chartalist money, and no central government created Bitcoin as the required unit for paying taxes. Instead, Bitcoin introduced another possibility: money whose rules are enforced through a decentralized protocol and whose social acceptance emerges through voluntary coordination.
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Stablecoins Are Hybrid Social-Technical Fictions
Stablecoins make this problem even clearer because at first glance, a dollar stablecoin appears to solve crypto’s monetary problem. Bitcoin can move dramatically in price, while a stablecoin attempts to maintain a stable relationship with the dollar, but what makes the token worth one dollar? It is not the blockchain.
The blockchain can prove that a wallet owns one token, but it cannot independently prove that the issuer has enough assets to redeem that token for one dollar because that requires another layer of trust.
A stablecoin therefore combines technological and institutional claims: the blockchain provides the transfer mechanism, and the issuer provides the reserve structure. The dollar provides the unit of account and users provide the social belief that the token will remain redeemable. This makes stablecoins perhaps the clearest example of social construction of value in cryptocurrency.
They are not simply imaginary, as their infrastructure is real and their reserves can include cash and government securities. Their transactions can be recorded on public blockchains, but the meaning attached to the token is socially constructed.
The BIS estimates that about 98% of stablecoin value is denominated in US dollars; it also warns that widespread stablecoin adoption could contribute to digital dollarisation, particularly in emerging markets where people already seek dollar exposure because of inflation or currency instability. The blockchain did not create that belief, it simply imported it, and that is why stablecoins are hybrid social-technical monetary instruments. They combine programmable infrastructure with an existing monetary hierarchy.
Christine Lagarde made a similar distinction in 2026, arguing that discussions about stablecoins often mix their monetary function with their technological function. The technology may improve payments, but the monetary function depends on the broader financial system supporting the asset.
The Historical Parallel: Private Money and Free Banking
Crypto’s monetary experiment is not completely new, and long before Bitcoin, societies experimented with privately issued forms of money. During periods of free banking, commercial banks issued their own notes and different currencies circulated alongside one another, with their credibility depending on convertibility, reputation, redemption, and market acceptance.
This history complicates the assumption that governments have always been the only possible source of money. Historical research shows that private currencies and redeemable banknotes played important roles before modern central-bank monopolies became dominant. The comparison with crypto becomes even stronger with Friedrich Hayek.
In the 1970s, Hayek proposed denationalizing money and allowing competing private currencies to operate alongside government currencies. He argued that competition could encourage issuers to produce more stable forms of money. Bitcoin arrived decades later with a technologically different version of that ambition, and instead of competing banknotes issued by private institutions, Bitcoin created a digital monetary network with predetermined issuance rules. Hayek’s competing currencies were still managed by identifiable issuers, and Bitcoin attempted to make the protocol itself the monetary institution.
Historians have explicitly connected Hayek’s denationalization ideas with the intellectual roots of cryptocurrency, and the historical parallel exposes an important weakness in the phrase “trustless money.”
What Makes Money Valuable in DeFi?
This brings us to the practical question: what makes money valuable in DeFi? A token can be scarce and worthless. A token can have sophisticated technology and almost no users. A token can have deep liquidity temporarily and collapse when confidence disappears. Money only becomes powerful when people coordinate around it.
That coordination creates network effects, and the more people accept an asset, the more useful it becomes. The more useful it becomes, the stronger the incentive for additional participants to adopt it. Bitcoin’s history illustrates this process; research on Bitcoin’s value construction has emphasized the importance of narratives and valuation conventions in building an “asset circle” around the cryptocurrency.
This is why the social construction of value in cryptocurrency is not simply about marketing, as narratives can become economic infrastructure. Bitcoin’s “digital gold” narrative encourages people to treat its scarcity as meaningful, and Ethereum’s “world computer” narrative supports expectations about its utility, with stablecoins’ dollar narrative allowing users to import the dollar’s purchasing power and credibility into blockchain environments.
The Algorithm Has Limits
There is a temptation to believe that enough code can remove politics from money, but that is unlikely because even Bitcoin’s famous monetary limit of 21 million coins is ultimately a rule that the network’s participants collectively continue to recognize.
This is the deeper lesson behind protocol-based monetary systems. Protocols can make rules more transparent and predictable. They can reduce individual institutions’ ability to arbitrarily change certain rules, but predictability is not the same as legitimacy.
Narrative Is Part of the Monetary Infrastructure
Language is a social construction, but contracts written in language can transfer billions of dollars. A corporation is a legal fiction, but it can employ thousands of people. A national border is socially constructed, yet crossing one can have enormous consequences.
Money works similarly. The fiction becomes powerful because people coordinate around it and crypto communities understand this intuitively. Bitcoin is simultaneously software, an asset, a payment network, and a political statement. Ethereum is simultaneously infrastructure, a token economy, and a community of developers and users. The stories surrounding these networks help determine how people interpret their economic role, and that is why crypto markets can react so strongly to changes in narrative. Narrative shapes expectations, expectations shape participation, and participation shapes liquidity and utility.
Decentralization Changes the Fiction, Not the Need for One
The biggest mistake would therefore be to conclude that crypto has discovered a form of money that requires no collective belief. It has created new mechanisms for producing collective belief, but Bitcoin asks users to believe in a scarce digital asset governed by transparent rules.
That may be the most important insight from money as social fiction, because traditional money concentrates monetary legitimacy in governments, central banks, and legal institutions. Decentralized systems distribute legitimacy across code, markets, developers, validators, liquidity providers, and users.
That is the real philosophical challenge facing decentralized money. The future of decentralized money will therefore not be decided simply by who writes the best algorithm. It will be decided by which systems can create durable coordination, credible rules, useful liquidity, and legitimate governance.
The question will not be whether money is fiction and will now be who gets to write the fiction, who gets to enforce it, and why everyone else should continue believing it.
Disclaimer: This article is intended solely for informational purposes and should not be considered trading or investment advice. Nothing herein should be construed as financial, legal, or tax advice. Trading or investing in cryptocurrencies carries a considerable risk of financial loss. Always conduct due diligence.
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