I often hear people outside of the blockchain industry say, “I don’t believe in cryptocurrency, but I believe in blockchain.” With Facebook recently unveiling the proposal for Libra, it’s a phrase that’s becoming more common by the day — and more frustrating.
While “blockchain, not crypto” may sound like a reasonable point of view at first blush, the reality is that it misses the point of blockchain and crypto entirely. That’s because cryptocurrency is nothing more than units of value within a blockchain network. The two are different, but they work hand in hand.
This can be a difficult concept to grasp for many people today — partly because it’s new for the economics of a technology to be embedded into the technology itself. But once you begin to understand how cryptocurrency works and what becomes possible in this new world, the unique (and powerful) relationship between blockchain and cryptocurrency becomes clear.
Here’s what made it crystal clear for me when I joined my company, a leading cryptocurrency exchange and custodian, nearly three years ago: It helps to think of blockchain as a special type of computer — one that makes it possible to transfer information without the need of a central intermediary making sure that everything runs smoothly. In the case of finance, for instance, blockchain computers (or networks) give people a way to send and receive money over the internet without banks or credit card companies.
At the highest level, cryptocurrency is the digital representation of the value being transferred between users of a blockchain network. With bitcoin, for instance, which is often referred to as digital gold, the “currency” of the network is bitcoin, which represents money. By building monetary value into the core of the technology, cryptocurrency turns blockchain computers into digital economies unto themselves, creating a way to completely sidestep the legacy financial system.
In other words, it’s finance designed for the internet — programmable money that anyone with an internet connection can send and receive just like email.
For the billions of people around the world who cannot access a bank account or obtain a government-issued ID, the rise of blockchain and cryptocurrency means they can now participate in the digital economy. These new computer networks are giving people unprecedented access to credit, financial products and spending powerfor both physical and digital goods in a borderless and permissionless fashion.
Not all cryptocurrencies are the same. While they all share certain fundamentals, the specifics of how each cryptocurrency works depend on the purpose and design of the blockchain computer it’s associated with — and they can vary wildly. In fact, even the term “cryptocurrency” is a misnomer because not all function like currency.
Generally speaking, there are four main types of cryptocurrency today: non-fungible tokens (NFTs), security tokens, utility tokens (or virtual commodities) and stablecoins. Bitcoin and ether (the native currency of the Ethereum blockchain), for instance, are generally considered utility tokens because they function as commodities or utilities within their networks. Security tokens are somewhat similar in function, except they are typically used more as fundraising vehicles. Some security tokens evolve into utility tokens over time, as the network matures. NFTs are altogether different in nature — today, they are best described as immutable tokenized assets. Stablecoins are, as the name suggests, a type of cryptocurrency that functions like more like traditional currencies.
The value of cryptocurrencies varies based on design. The value of bitcoin, for instance, is determined by the bitcoin network, where each bitcoin is fungible. There can never be more than 21 million bitcoin in existence, and its issuance model is governed solely by algorithms. This is very different from a stablecoin design, such as Libra, where the value is pegged to real-world assets such as fiat currency or gold.
Stablecoins make it possible for a U.S. dollar value of any amount to be sent to anyone with an internet connection. What’s more, stablecoin transactions happen almost instantaneously, with little to no cost, and zero risk of chargebacks. Today, one of the most common use cases for stablecoins is transferring money between cryptocurrency exchanges. As a result, many believe this is the main utility of a stablecoin, though this is not always true.
Looking ahead, as the addressable market for crypto expands I believe it will attract a critical mass of developers who will dream up entirely new applications that we can hardly begin to conceive today. Imagine a world in which all value was globally accessible and verifiable, and each person had control over their own data. The potential is more than just individual net worth on a blockchain — it’s identity, health records, college transcripts, insurance policies, land titles and more.
Stablecoins will undoubtedly play a major role, and I anticipate this will give rise to a thriving ecosystem of crypto-native applications. Native cryptocurrencies like bitcoin and ether are inherently integral in powering these technologies, and cryptocurrencies that maintain stable value will be equally important in linking the physical and digital worlds.
We need to step outside the current cryptocurrency trading bubble to see the potential of the technology that will transform our everyday lives. This includes promoting projects and institutions that are building useful and transformative applications that will not only improve efficiency, but help flatten the global economy to create a fairer and more interconnected system. These projects and companies will be built by those who not only recognize the world as it is today, but have the imagination to visualize a better future and the discipline to do so with integrity and within the constructs of appropriate laws and regulations.
Cryptocurrencies are not reinventing the concept of money, but they are significantly improving how transactions can occur in today’s global and digital age.