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.
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:
So is cryptocurrency like the money that we know?
Below is a 6 point definition of how a system qualifies as a cryptocurrency:
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.
For the part of this post, we now know the following about the ‘currency’ part of cryptocurrency:
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
Hit the subscribe button to join the Crypto In Play weekly newsletter
for a review and insights on cryptocurrency and life.
© 2022 Crypto In Play All Rights Reserved
Disclaimer: Any information available on this website is ‘general’ in nature and for informational purposes only