Understanding the real value of cryptocurrencies

Most cryptocurrencies aim to become the currency of the future, or a viable form of payment for a specific community, but this won’t happen until we address volatility challenges.

There are thousands of cryptocurrencies in circulation right now; a large majority aim to become the currency of the future, or an efficient payment mechanism for a very specific community, yet despite growing consensus that these cryptocurrencies hold a certain market value (as exchanges will show), an important question remains for many: how can I actually spend this?

Let’s assume you want to buy milk. Since your cryptocurrency holds a widely accepted value, it should be easy enough to go to the nearest grocery store and buy it, right? Unfortunately not. More likely, you will first convert your cryptocurrency into some form of fiat currency, interacting in the process with intermediate currencies and multiple platforms or exchanges, which cost you time and money. In the end, you’re still reliant on fiat to make the payment. What’s worse is that this roundabout solution is only for those lucky enough to live in a part of the world where such processes are accessible.

Is your cryptocurrency offering the practical value of a currency?

Not really, and there is a simple reason for this: unlike fiat currencies that hold stable prices in the near-term, asking a merchant to accept payment in cryptocurrency is (still) asking him to take on significant risk since prices are not guaranteed even in the immediate term, and practical value is still fairly ambiguous and limited to niche communities.

Vitalik Buterin once wrote: “Reminder: cryptocurrencies are still a new and hyper-volatile asset class, and could drop to near-zero at any time.” In many ways, the cryptocurrencies that comprise the current market are more assets than currencies.

Cryptocurrency value is driven by speculation, and although it’s possible to find liquid markets in exchanges and specialized communities, this generally misses the mark in terms of offering everyday utility to address real, global consumer needs. Cryptocurrencies won’t achieve massive adoption unless we start building products that consumers need and are able to use in their daily lives without jumping over major hurdles.

Why haven’t such products emerged yet?

Cryptocurrencies could eventually disrupt the cash market, however, the nearest (and biggest) opportunity is in the world of digital transactions. Although we have seen a clear uptrend in the net value of online payments completed with cryptocurrencies like bitcoin, moving from 9.8 million USD in 2013 to 190.2 million USD in 2017, research from Morgan Stanley showed that the last cryptocurrency hype in 2017 was accompanied by a dramatic dip in the number of retailers accepting bitcoin as a payment method. Stream and Stripe, some of the biggest players in cryptocurrency payments, have stopped their support, attributing their decision to bitcoin volatility. Just this month, after nearly four years accepting bitcoin payments, Expedia similarly removed the payment option from their site.

From our experience developing and deploying bitcoin ATMs across the US and Europe, I can say with no doubt that the hype around cryptocurrency has been harmful to those who want to develop products around cryptocurrencies that fulfill the real needs of global consumers. In mid 2017, we saw the number of users purchasing bitcoin as an exchange instrument to send money abroad drop dramatically, due mainly to the sudden high volatility. And we were not the only ones faced with this issue. After stopping cryptocurrency payments on the Steam platform, members of the Valve engineering team claimed: “the value of Bitcoin is only guaranteed for a certain period of time, the amount of Bitcoin needed to purchase a game could change before Steam was able to update the game’s price, potentially losing the company money.”

How can cryptocurrencies emerge into currencies that hold practical value for consumers?

Building a solid ecosystem and incentivizing use — for both merchants and consumers — with reward mechanisms are a good start, but it doesn’t stop there as new uses tend to create new opportunities to speculate. To address the root of the problem, we need to find smarter ways to define prices.

Imagine a transparent transactional system that is smart enough to distinguish “real-use” transactions from the rest, issuing a reference price guided by how easy it is (or isn’t) to spend the currency. Defining price based on demand also creates stability that today we assume only of fiat currencies. What this model also allows is price growth as demand and liquidity evolve, offering users stable purchasing power, and a reliable store of value.

This is exactly what Send aims to achieve through the following steps:

Develop an algorithm to measure liquidity and issue a safe reference price that minimizes risk: Our consensus price formula is based on a simple idea: when there is new demand for a limited asset, asset price has to grow in such a way that the new market cap is enough to fulfill such demand. To learn more about the SDT price formula check out our Whitepaper.

Issue an asset priced using the above-mentioned algorithm, that is able to measure its own use within a trusted network: SDT has been developed as an ERC20 token, allowing for transparent measurement of transactional data occurring within Send’s ecosystem. Check our Github for more details.

Launch an app that meets real demand for everyday needs where users spend the SDT token: WeSend is the first ever peer-to-peer marketplace powered by SDT and used for remittances. 90K+ pre-registered users is proof of a real need.

Continuously support the community to build around SDT to fulfill new use cases: After the first use case (WeSend) validates Send’s hypothesis (see How is SDT able to expand in value while other crypto prices fall?), we will call on the community to build around SDT and grow the network with new use-cases — hopefully each one better than the last.

With SDT, we plan to offer more and more ways to actually spend cryptocurrency in the real world — fulfilling our vision that cryptocurrency can guarantee users the essential right to their money and solve real needs (see: Send Protocol Vision).

For more, visit www.sendprotocol.com.