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What is a crypto coin? - TheTechOasis

Date: 2022-08-30

What really is a cryptocurrency and important misconceptions

What is a cryptocurrency?

Photo by Kanchanara on Unsplash

Let me tell you this:

99% of society doesn’t understand what a crypto coin is.

But I know what you’re thinking.

“But I do, I invest in x, y, and z, so I know a big deal about cryptocurrencies.”

Well, let me tell you this:

99% of people who think they understand cryptocurrencies, don’t.

Now, you could be arguing that my statement is, to the very least, bold. But I am convinced it’s the truth. Therefore, if you’ll excuse me, I am going to answer the following questions:

What really is a crypto coin, also known as a cryptocurrency? And what are the main misconceptions regarding them?

Our world is based on one word, trust

There is a strong difference between a standard, fiduciary currency like the dollar, the yuan, or the euro, and a cryptocurrency… which is that the latter is decentralized.

I can already hear you reading this like, ‘mm, duh’. But the truth is that this main difference brings another important one, utility.

Standard currencies are backed by central banks. As our economic systems are trust-based, people use these currencies not because they have intrinsic value, we simply use them because we trust the value of that currency.

We, as I society, accept these currencies as payments because we trust that others, when the moment to pay them comes, will also accept them as payment. Again, fiduciary currencies are used because we, as a society, let them work by means of trusting that they, indeed, have actual value.

But let me tell you something, these currencies’ value isn’t backed by shit. To be more specific, and using Jeremy Irons’ quote as John Tuld, a Wall Street investment bank CEO in Margin Call:

“It’s just money, it’s made up. Pieces of paper with pictures on it so we don't have to kill each other just to get something to eat.”

Long were the days when the dollar was backed by gold; now it’s backed by absolutely nothing.

However, it must be said that, in the case of the dollar, the U.S., when they de-pegged the value of dollars from gold, decided to enforce oil payments around the world in dollars, which is the same as saying “you want oil? Give me dollars then.”

This created a sort of ‘soft back’ of oil to the dollar which, unsurprisingly, has been extremely profitable for the U.S. and has sedimented the dollar as the reserve currency for the past 50+ years.

The dollar became the opium of countries; everybody wanted dollars because everybody needed oil - this is now a problem, as oil is becoming less valuable, but that is a story for another day.

Despite the dollar’s unique case, standard currencies aren’t backed by anything of value, they work simply because we trust them to do so, it is all based on trust.

Cryptocurrencies are the same animal, but a totally different beast

The vast majority of society, even those invested in cryptocurrencies, think of them as digital versions of the tangible ones describe before. But they are actually very different.

As described before, cryptocurrencies have a particular feature that differentiates them from ordinary currencies; they provide utility, and they have intrinsic value.

But what utility do they provide? And here, my friends, is where even crypto investors get lost.

Please understand this. The answer to “what is a cryptocurrency”, is:

Cryptocurrencies are an economic incentive to use a blockchain.

Economic. Incentive.

Because, regarding blockchains, there is a very important question to answer:

How do we incentivize usage? How do we encourage people around the world to switch their supercomputers 24/7, paying amazingly high electric bills (especially now), just to have those computers validate transactions all day long?

That is what cryptocurrencies do, create the economic incentive for people/entities to become validators (miners in the case of Bitcoin).

Cryptocurrencies are born from the need to eliminate the “middleman”, they are the economic incentive that allows the distributed network, the system that eliminates it, to exist, by rewarding nodes for their participation.

Consequently, cryptocurrencies present a unique distinction with regard to ordinary currencies, they aren’t arbitrarily valued by a centralized entity, they are explicitly valued for their actual worth, the capacity of the underlying blockchain to attract developers and consumers and the price is strictly determined by the economic principles of supply and demand.

That proves an objectively clear advantage to the holder of the cryptocurrency, he/she can be certain that the value of their asset is not arbitrarily defined by a central entity or, ultimately, deeply manipulated by people with interests and knowledge that far exceeds what any ordinary citizen can know or leverage.

The value of your asset is determined by its utility to the system, and its objective input to society.

Cryptocurrencies and standard currency are the same animals, but totally different beast.

Despite their potential, cryptocurrencies have still a long way to go, all while clarifying some important misconceptions regarding them.

It is not what you think it is…

  • All tokens are the same: There are actually different types of tokens; you have governance tokens, used to make decisions in a DAO, Platform tokens support dapps built on the blockchain (this includes stablecoins and normal coins), Security tokens represent legal ownership of a physical or digital asset (normally taking the form of an NFT), Transactional tokens serve as units of account and are exchanged for goods and services, and Utility tokens are integrated into an existing protocol and used to access the services of that protocol. It is important to understand the differences because, especially if you are investing in them, depending on their categorization, their price action may differ a lot. For instance, people wouldn’t normally invest in a governance token in expectation of a huge price increase, they buy the coin to have a say in the direction of the underlying DAO.
  • All blockchains need cryptocurrencies to work: Cryptocurrencies are only needed for public blockchains, because, as I described earlier, they are the incentive to participate in the blockchain in the first place. In private blockchains, as a central entity or group controls it, there is no need for a cryptocurrency as participants already have the incentive to participate (private blockchains could be used as a voting system inside a conglomerate of companies). Needless to say, the use cases for private blockchains are sparse.
  • All cryptocurrencies are scarce like Bitcoin: Actually…it’s quite the opposite. The majority of cryptocurrencies are inflationary, as token emissions (to pay yields, for instance) are an easy and bootstrapped way to gain traction and new users. Of course, inflationary tokens won’t normally be considered good investments, as their value will naturally decrease unit-wise. For that matter, important inflationary crypto projects like Ethereum intend to make their cryptocurrency ETH, deflationary in the short to mid-term.
  • All cryptocurrencies have a sound purpose: This is outrageous but totally true. Many cryptocurrencies are useless. In fact, some very solid projects have really poor tokenomics (the economics behind the token, distribution, utility, etc.). This is one of the most important reasons why doing your research is important in crypto, you must go far beyond the price action of the coin and understand the potential behind it based on the tokenomics that, in the end, determine the value of the cryptocurrency.
  • CBDCs aren’t the same thing as cryptocurrencies: Yes, CBDCs are digital currencies and, yes, CBDCs could be potentially deployed on distributed networks like blockchain. However, they are far from being the same. As discussed earlier, CBDCs are simply digitalized versions of centrally-managed ordinary currencies, and they will have the same issues as the latter; inflationary, easily manipulated, and based on pure speculative trust. Basically, the only thing they will have in common is that both will be digital, and highly traceable (if they both happen to be in a blockchain).
  • Cryptocurrencies can’t be manipulated: This one hits deep. The truth is that the majority of crypto projects aren’t decentralized (not even many DAOs, which is crazy if you think about it, they have ‘decentralized’ on their name). Therefore, in the end, the same issues arise with normal currencies, a few selected individuals and whales get to decide the fate of the cryptocurrency and manipulate it to their pleasing. This is why I am so adamant about my views on decentralization, you simply don’t want to own the cryptocurrency of a centralized crypto project, period.
  • NFTs vs Cryptocurrencies: This one is fairly obvious but you should be surprised how poorly understood this is. NFTs are just another crypto token, with the sole difference with cryptocurrencies in that NFTs are non-fungible, which in simple terms means that they are unique, which is why people always refer to them as ‘digital art’. But NFTs have other great use cases like the security tokens described earlier, or Soul-bound tokens, which are NFTs that aren’t interchangeable. Needless to say, NFTs are pointless as long as crypto projects don’t become truly decentralized (the whole use case of NFTs is proof-of-ownership, due to the fact that blockchains are hard to hack, but this is intrinsically related to a blockchain being decentralized). Broadly speaking, a centralized blockchain can be hacked and mutated, which renders the NFTs living on-chain efing useless.

These sum up some strikingly common misconceptions regarding cryptocurrencies, subtle nuances that can completely change your approach to crypto and your investing game.

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