unit of account

What Is a Unit of Account?

A unit of account is a standard measure used to evaluate, record, and compare value—much like a “scale” in the economic world. In daily life, goods are usually priced in currencies like the Chinese yuan (RMB) or the US dollar (USD), both of which serve as common units of account.

Within the Web3 ecosystem, a unified unit of account is essential for quoting trading pairs, summarizing portfolio balances, and generating profit and loss reports. USDT, a stablecoin pegged to the US dollar, is frequently used as the unit of account for trade display and settlement. Alternatives like BTC or ETH may also be used for pricing but are more volatile.

Why Does a Unit of Account Matter?

The chosen unit of account directly impacts how you perceive prices, profits, and risks. Different benchmarks can lead to drastically different interpretations of gains and losses—and consequently, your investment decisions.

For example: Imagine you purchase an NFT for 1 ETH. The NFT price then drops by 10%, but ETH appreciates by 20%. If you use ETH as your unit of account, your holdings might be flat or slightly up; however, if you use USD, your portfolio would show a clear loss. This distinction affects whether you decide to cut your losses or rebalance your portfolio.

Additionally, consistent units of account are critical for team finances, portfolio reviews, and performance assessments. Without a unified standard, results become incomparable and strategic decisions may be misinformed.

How Is the Unit of Account Reflected in Web3?

In Web3, the unit of account appears in three key areas: trading interfaces, wallet overviews, and on-chain transaction fees.

In trading environments, most spot trading pairs are quoted in USDT. Prices, order sizes, and profit/loss calculations are all denominated in USDT. On Gate’s contract trading interface, USDT-margined contracts display margin and P&L in USDT, enabling clear risk management.

In wallets, total assets are typically converted to a single benchmark unit—often USD-equivalent or stablecoin-equivalent—to simplify cross-asset comparison.

On public blockchains, transaction fees are paid in the native token. For example, on Ethereum, these fees are called “Gas,” functioning as the “toll” for on-chain computation and storage. Fees are denominated in ETH, which can influence how you perceive the cost of small transactions.

How Does the Unit of Account Relate to Quotation and Settlement Currencies?

The quotation currency is used to display prices; the settlement currency is what you actually pay or receive; the unit of account is the benchmark for long-term measurement and aggregation of asset performance. These can be identical but often differ.

For instance, when trading USDT-margined perpetual contracts on Gate (contracts without expiry dates), prices are quoted in USDT and both margin and P&L are settled in USDT—making USDT serve as quotation, settlement, and unit of account simultaneously.

Alternatively, you might see a token priced in BTC on the secondary market but settle the transaction using a stablecoin. Here, BTC is the quotation currency, the stablecoin is the settlement currency, while your investment report might still use USD as the unit of account for annual summaries and tax filing.

How Does a Unit of Account Work?

Money generally serves three functions: medium of exchange, store of value, and unit of account. For an asset to function effectively as a unit of account, it must be divisible, standardized, and relatively stable in value.

If the unit itself is highly volatile, accounting results become distorted by “unit noise.” Using a volatile token as a unit of account blends price swings with operational performance, making it hard to gauge true business outcomes. Therefore, markets tend to prefer stable and liquid units.

How Are Units of Account Used in Stablecoins?

Stablecoins are crypto assets pegged to fiat currencies with the aim of maintaining price stability for on-chain payments, settlement, and valuation. Popular examples include USDT and USDC, both pegged to the US dollar—facilitating consistent cross-platform pricing and P&L calculations.

In trading and asset management scenarios, stablecoins reduce disruptions caused by volatility in the unit of account. On Gate’s spot and contract trading pages, prices and returns are often shown in USDT terms, making it easier to compare risk and reward across different tokens.

According to DefiLlama data (as of October 2024), the total stablecoin market capitalization is around $160 billion, reflecting their widespread adoption for on-chain payments, market making, and settlement. This underscores their practical status as units of account.

How Are Units of Account Managed in Crypto Accounting and Taxation?

Accounting and tax authorities usually require fiat as the reference point. Fiat currencies are issued by governments and legally recognized (e.g., RMB or USD). Most jurisdictions mandate that costs, revenues, and capital gains be calculated in the domestic or designated fiat currency.

Practically speaking, you can use USD-equivalent values as your unit of account for bookkeeping—recording transaction timestamps and price sources while retaining exchange rates or on-chain transaction screenshots. During annual reporting, convert profits into your local fiat per regulatory requirements to ensure consistent reporting standards.

If your team settles transactions on-chain but reports taxes off-chain, it’s advisable to use daily closing prices for stablecoins versus local currency from a fixed source for auditability.

What Are the Risks of Units of Account Regarding Inflation and Volatility?

If your unit of account is eroded by inflation over time, long-term comparisons become distorted by “inflation noise,” requiring regular adjustments or use of real purchasing power measures. If you use a highly volatile asset as your unit of account, price fluctuations can be mistaken for operational performance swings—leading to poor decision-making.

Stablecoins also carry risks such as depegging, issuer credit risk, and smart contract vulnerabilities. Algorithmic stablecoins depend heavily on market confidence and require extra caution. Using platforms for trading or asset management also introduces platform and account security risks—multi-factor authentication and diversified storage are recommended to avoid concentrating funds in a single channel.

How Should You Choose Your Unit of Account?

Select a unit of account that aligns with your use case and risk tolerance. For most individual users, using a stablecoin or local fiat as a benchmark makes cross-asset comparison and regulatory compliance easier.

Step 1: Identify the fiat currency you use for daily life and tax purposes; set this as your annual summary benchmark.

Step 2: Choose an operational reference for trading activities. To manage volatility exposure, prioritize USDT or other stablecoins as your order placement and P&L display currency for contracts and spot trades.

Step 3: Standardize views across tools. Configure your wallet and trading platform asset displays to use the same unit of account for seamless monthly and yearly reconciliations. On Gate’s trading interface, you can select USDT or similar units to view prices and returns more intuitively.

Step 4: Set up hedging strategies. If you use USD-equivalent units long-term, consider using stablecoins or corresponding financial instruments to hedge against exchange rate fluctuations—maintaining report stability.

Step 5: Review periodically. At least quarterly, assess whether your choice of unit impacts strategic decision-making; adjust weights or benchmarks as necessary.

Key Takeaways About Units of Account

A unit of account acts as a “ruler” for measuring value—affecting price presentation, profit/loss calculation, and tax reporting standards. In Web3 contexts, stablecoins often fill this role to reduce volatility disturbances; it’s important to distinguish between quotation currency, settlement currency, and unit of account during trading and settlement activities. When choosing your unit, prioritize stability, liquidity, and compliance needs—and ensure consistency across platforms and tools. All capital operations carry market and counterparty risk: keep comprehensive records and implement robust security measures.

FAQ

What’s the difference between a unit of account and an accounting currency?

The unit of account is the benchmark you use to measure assets and liabilities; the accounting currency is what’s actually used for transactions and settlements. In simple terms: the unit of account is “the measure on your books,” while the accounting currency is “the money in your wallet.” For example: if you hold USDT but use USD as your accounting benchmark for records, USDT is your accounting currency; USD is your unit of account.

Why should crypto investors choose a consistent unit of account?

Crypto asset prices are highly volatile; using multiple currencies for accounting can make your books confusing. Selecting a stable unit enables you to clearly track real gains and losses. For instance: if you hold BTC, ETH, and USDT but use USDT as your accounting benchmark, all asset values can be consolidated—making reconciliation and tax filing much simpler.

What happens if you frequently change your unit of account?

Frequent changes lead to accounting confusion and foreign exchange losses. Each switch requires recalculating all asset values—complicating records and increasing error risk. Tax authorities may also question inconsistencies in your records. It’s best to choose one main unit (like USDT or USD) early in your investment journey to maintain continuity and auditability.

Can you change your unit of account at any time?

While it’s theoretically possible to change at any time, frequent changes should be avoided in practice. Changing units requires adjusting all historical transaction exchange rates—which can introduce accounting errors. If you must make adjustments, do so at year-end or quarter-end—and keep detailed records explaining all changes for future audits or tax reviews.

How do you set your unit of account when trading multiple cryptocurrencies on Gate?

Gate supports multi-currency trading—you can select your primary quote currency (such as USDT, USD, or CNY) in your account settings. The platform will automatically convert other assets at real-time rates. It’s best to choose the most liquid and stable currency as your unit of account for easy monitoring of total portfolio value. When exporting transaction records, always note your chosen unit to streamline reconciliation and tax processing later on.