How demand for a cryptocurrency is built on a blockchain #BuildItOnXDC
Currently in the crypto space, most people compare these digital currencies to fiat currencies like the Euro, or the Mexican peso, and, most commonly, the US dollar. Contrary to popular belief, while they may be similar to fiat in some ways, they are fundamentally very different.
Fiat currencies are issued by governments, and are a representation of labor in an economy. These government currencies are then regulated to help maximize economic growth and collect taxes to run the economy. This Keynesian approach is how most, if not all, modern economies operate.
Cryptocurrencies are vastly different. These currencies — instead of being a representation of labor and regulated by a government — are representations of runtime executions across a decentralized network, entirely regulated by the network’s source code. While, in a traditional economy, labor can be represented as work over time, the work being done on the blockchain is an execution of the network code, which is being run by nodes all over the world — plus the consensus of that network. The currency is an exchange in value for the output of an execution.
One way that cryptocurrencies can derive their source value is from the cost of the network executions, be it a transaction sending or receiving the native currency or the execution of a smart contract with consensus of the network. The price of the cryptocurrency represents the amount in purchasing power users have to engage with the network, while acting as capital to exchange assets on the network.
The second way cryptocurrencies derive their value is from the applications that reside on them. Each smart contract adds a new feature to the blockchain. As network features, and usage, increase, so does the amount of demand for the cryptocurrency used to interact with these new network features. This demand for the currency is based on the continuously added smart contracts that improve the network with more features.
A cryptocurrency also derives its demand from the demand of assets that may reside on the blockchain. Assets such as stocks, bonds, fiat currencies, and other traditional finance instruments can have asset derivatives on the network. Native crypto assets can reside on the network as well. Due to the decentralized nature of the blockchain, applications can scale globally without the need for additional parties to facilitate trade. This means assets that get traded on these blockchains can have worldwide participation from anyone operating on the network. As assets exchange and demand liquidity for those assets increases, the demand for the cryptocurrency also increases.
The cryptocurrency itself is a mechanism to move abstract value, but the blockchain itself can support other assets like digital representations of paper assets, fiat currencies, stocks, securities, bonds, and many more similar traditional finance instruments. These assets can be bought and sold with the cryptocurrency on the blockchain, giving it a native mechanism of exchanging capital for assets. These assets can also consist of ownership assets like non-fungible tokens (NFTs) in the form of mortgages, titles,patents,copyright, grants, and even accounting tools for inventory. These non-fungible assets represent tangible and digital goods on the blockchain.
As these finance instruments and non-fungible assets are presented and traded on the blockchain, the demand for these assets increases demand for the cryptocurrency to buy the asset. And as the asset’s price increases, more of cryptocurrency are required to buy a unit of the asset — which in turn creates further demand for the crypto currency. DApps that also reside on the blockchain have demand for their use and as demand grows with users for the DApp, demand grows exponentially for the cryptocurrency to engage with the DApps.
Foundationally, the network fee paid for every transaction is the exchange of value for consensus for the change in data on the network. Every transaction of the currency is a change in data in the amount of value 2 or more accounts hold in a transaction. This change in data coupled with the broader consensus allows for trustless executions not only for value, but also trustless executions in the change in data. Value can be exchanged without a third party, and data can be exchanged without the reliance on a central server. This allows for decentralized engagements among any party on the network in exchange for a network fee.
While the network has its fees, other applications and DApps that reside on the network will have their own fees. As users engage with the applications, DApps will accrue capital from their users. DApp creators and their investors can use this capital to execute other applications on the network, or to invest in the creation of new DApps or assets.
Cryptocurrencies derive their value from the ability to change data on a decentralized network. These changes can be to exchange value, manipulate information, and run complex features in the form of smart contracts and DApps which provide functionality to users who demand these features. And, due to the decentralized nature of both the network and the engagement, no party has any control over another party’s use of the network. No one can shut down the network itself or the DApps on them, while allowing for maximum participation and scalability to anyone simply by using the blockchain protocol.
Blockchain technologies are truly the future of the internet and how we engage with each other online. The value of cryptocurrencies is simply the cost of using the internet localized into a token for exchange online and the holder of the token can use that as a value medium to execute DApps and exchange value for value derivatives as the network keeps account of everything securely with finality globally to all internet users.
The content above represents my own individual perspective as an XDC community member and does not reflect the official stance of XDC Foundation
