Intro

In a previous post, we saw why there was the case for cryptocurrency’s adoption. Now it is time for us to explore what exactly cryptocurrency really is. Cryptocurrency is the marriage between Crypto, referring to the various encryption security algorithms and Currency, defined as the system of money in general use in a particular country. To understand the relevance of the Crypto part, we need to first look at what we know of as money.

The Concept of Money

How do we use money? Why do we need it?

We use money to pay for physical things like groceries at a supermarket or for services of others like paying after a meal at a restaurant. We also use money as a means to store value that is ours, such as cash in a bank account. Finally, money also serves as a unit of measurement that can be used to assess the size of the amount of value someone can provide (i.e. the salary of a CEO)

There was a time when the concept of money did not exist. Instead, people traded their goods/services with those of others (barter). Can you imagine the level of chaos, fraud, and delay that would have happened? Let’s say I am a blacksmith making swords, and I need to get a slab of beef from my butcher friend. All I can offer him are my swords, but what if he does not need swords? How many swords should I give him in return for a slab of meat? Could I be selling myself short and my butcher friend offering me too little? By functioning as a medium of exchange, a unit of account, and a store of value, money is able to solve all of these problems.

In order for money to provide all of its functions, its uses and value must be agreed upon and enforced by all of its users. This is where instead of 2 humans negotiating on how many slabs of meat = how many swords, they can trade their goods using a common currency issued and enforced by their own government. In the United States and beyond, butchers and blacksmiths from around the world are able to use the U.S dollar to trade their goods and services.

We now have the following understanding of money/currency:

1. 1. It functions as a store of value
   2. It serves as a unit of measurement
   3. It can be used as a medium of exchange
   4. The value of the currency is backed by the authority of a centralized authority, such as government

Is Cryptocurrency a Type of Money?

So is cryptocurrency like the money that we know?

Below is a 6 point definition of how a system qualifies as a cryptocurrency:

1. 1. The system keeps an overview of cryptocurrency units and their ownership.
   2. The system does not require a central authority; its state is maintained through distributed consensus.
   3. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
   4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
   5. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
   6. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

A system allowing transactions to be performed as stated in number 5 suggests that cryptocurrency can be used as a medium of exchange.

By ensuring that ownership can be proved as stated in number 1, 3 and 4, we can also assume that cryptocurrency can serve as a store of value as well.

Numbers 1 and 3 point to the possibility that there is a unit of measurement within a cryptocurrency.

So, it does look like cryptocurrency is like the money that we know.

There is a striking difference though – There seems to be nothing that is GURANTEEING the cryptocurrency’s value. Every single U.S. dollar bill has some sort of signature or print that shows that this is genuine money that is backed by the U.S. government. Put cash aside for a second and let’s look at other things of value. It is not by some cartoonish coincidence that gold and diamonds have value – you can actually trade them for cash at offline stores which will buy them or on an online commodities exchange. Real estate or land has its value insured by amount of business value of the city in which it is located in. Equities or stocks of companies have their value pegged to the value generated by the business enterprise that has issued them. If you buy a bond, you become a credit holder where the company (and if the company goes bankrupt the law) guarantees that you will get your regular payments of debt.

The common denominator of all these aforementioned vehicles of value are that there is some CENTRALIZED entity which is guaranteeing the vehicle’s value.

Conclusion

For the part of this post, we now know the following about the ‘currency’ part of cryptocurrency:

• • Money is money in that it has the following traits: 1) store of value, 2) unit of measurement, and 3) medium of exchange
  • Cryptocurrency in theory is like money in that it is a system where ownership can be ensured and where value can be broken down into units
  • The biggest difference between cryptocurrency and the currencies we know is that crypto is decentralized – there is no central entity that is guaranteeing the cryptocurrency’s value

Without any centralized authority to guarantee the value of a currency, the only thing that can guarantee something of value is the technology itself.

So, can technology create a system that is decentralized that is able to guarantee value?
Believe it or not, the answer is yes, and the it will be explained in the next blog post: What Is Cryptocurrency Part 2 – Technology