In the first part of this topic we introduced the Theory of Money, how it transitioned from a bartering system to a monetary system, and the difference between commodity money and token money. Part 2 will venture into new territory with an introduction to cryptocurrencies and crypto-tokens. Life-jackets are located under your seat.
Fiat Currencies
A good place to start is to differentiate between Fiat currencies and crypto currencies. You might not have heard about Fiat currencies before, but this is the name for the money you use every day. Dollars, Pounds and Euros (and the currencies of every other country) are all fiat currencies, which means that they only have value because it has been established as money by the issuing government, and nothing more. Fiat currencies are sanctioned by law as a means to pay for taxes and clearing debt, and is therefore also known as legal money.
Since our current usage of money is based on the belief that money needs to be backed by something “solid” like the gold standard, we must remind ourselves that money is a social creation. It is a tool that can be used well or poorly. Money isn’t a thing as much as it is a process [9]. Money is very useful when dealing with people you don’t know [10]. Money allows you to participate in the market in which it is accepted. When it comes to money, we need to consider the following [3]; firstly, for anything to be a medium of exchange, it has to be limited in supply, for no one would give up an article into which effort of productions has been put into, to be exchanged from something like stones, which can be acquired through picking them up off the ground.
Secondly, it has to be durable to store value. Thirdly, it needs to be convenient in the sense that a unit of exchange needs to be sufficiently high enough in value, not to require vast quantities for the settlement of normal transactions.
Cryptocurrencies and crypto-tokens
Cryptocurrencies and crypto-tokens can essentially be viewed in the same way as commodity money and traditional token money. Cryptocurrencies derive their value through similar mechanisms to fiat currencies, with the main difference being that cryptocurrencies are native to the digital world rather than a particular country or region.
Cryptocurrencies can be divided into two subcategories – coins and tokens. A coin operates on its own blockchain (Bitcoin, ETH, EOS, Telos) where all transactions occur.
Tokens
Crypto-tokens can take many forms, just as our everyday token money and utility tokens do (which we discussed in the previous article). Tokens are crypto-digital assets that can achieve low-cost or even zero-cost transactions. Crypto-tokens can be representative of their native cryptocurrencies or fiat money, which lives on a blockchain [24]. There are also asset-backed tokens and utility tokens that are crypto-graphical representations of traditional assets such as equity, gold or shares [24].
A token works on top of an existing blockchain infrastructure, used on specific platforms. The primary use for tokens is a security token offering (STO), which helps projects and startups fund operations through a crowd-scale. Tokens integrate the attributes of equity (value-added, long-term income), property (representing the right to use, goods or services) and currency (circulating within a certain range).
Phew! We hope you’ve kept your wits about amid a very technical journey. This may seem daunting, or tough to navigate, like the ocean, but you can conquer it. Essentially we can agree that cryptocurrencies and crypto-tokens are surprisingly similar to our local money we use every day. Cryptocurrencies gain their value by many of the same means as local currencies do, and crypto-tokens can be used as payment tokens, functional tokens or asset tokens.
Take a look at our infographic below to remind you of all the mechanisms that make cryptocurrencies and tokens possible. All these topics are discussed in our Getting Started series.
** This was Part 2 of a 3-part explanation of money, coins and currencies. The next instalment will focus on NFTs and will be published on medium.com and on our website.
References:
[3] Redka, M., 2021. The Future of Blockchain: Potential Use and Global Impact. [Online] Mlsdev.com. Available at: <https://mlsdev.com/blog/the-future-of-the-blockchain-technology-use-cases-geographical-expansion-potential-risks-and-challenges> [Accessed 22 June 2021].
[9] J. Surowiecki, “A Brief History of Money”, IEEE Spectrum: Technology, Engineering, and Science News, 2012. [Online]. Available: https://spectrum.ieee.org/at-work/innovation/a-brief-history-of-money. [Accessed: 06- Jul- 2021].
[10] L. Fourn, “A Brief History of Ledgers”, Unraveling the Ouroboros, 2018. [Online]. Available: https://medium.com/unraveling-the-ouroboros/a-brief-history-of-ledgers-b6ab84a7ff41. [Accessed: 06- Jul- 2021].
[24] B. J. Drasch, G. Fridgen, T. Manner-Romberg, F. M. Nolting, and S. Radszuwill, “The token’s secret: the two-faced financial incentive of the token economy,” Electronic Markets, vol. 30, no. 3, pp. 557–567, Mar. 2020.
