Coexistence of several currencies in presence of increasing returns to adoption

TL;DR

This paper models how multiple currencies can coexist due to local transaction cost minimization, demonstrating that initial community divisions can persist indefinitely without convergence to a single currency.

Contribution

It introduces a simple model showing that currency competition can lead to stable coexistence of multiple currencies, especially with initial community divisions.

Findings

Multiple currencies can coexist indefinitely in large systems.

Initial community divisions tend to persist over time.

Competition does not necessarily lead to a single dominant currency.

Abstract

We present a simplistic model of the competition between different currencies. Each individual is free to choose the currency that minimizes his transaction costs, which arise whenever his exchanging relations have chosen a different currency. We show that competition between currencies does not necessarily converge to the emergence of a single currency. For large systems, we prove that two distinct communities using different currencies in the initial state will remain forever in this fractionalized state.