OPINION: What is cryptocurrency?

Bryce Weiner
Beyond profitable assets, cryptocurrencies are a set of solutions for problems most people don’t realize are problems, argues Bryce Weiner.

The term “cryptocurrency” was coined to describe Bitcoin as a software package without self-reference — as nothing like it previously existed. 

General understanding of what defines cryptocurrency has become refined over time as more such software packages were created, launched, and monetized. 

As Bitcoin was first, it’s fair to say that all cryptocurrencies are derivatives of the idea of Bitcoin, and most (if not all) would not exist without Bitcoin’s open-source codebase. 

The basic concept of a cryptocurrency is a peer-to-peer software network which utilizes applied cryptography to maintain the integrity and ordering of data which users contribute.

In the earliest days, people like me took that software and made changes to the economics or the operation, either making it more efficient or more suitable for a specific purpose. 

The software and networks we created are collectively known as “altcoins” (as in, “alternatives to Bitcoin”).

But ‘altcoins’ is inaccurate

Few networks seek to replace Bitcoin. Every cryptocurrency — including Bitcoin — has a “primary” use case: why that network exists and what problem or issue it intends to address (why it gives value to anyone in the first place).

Each primary use case is a vision of the world in which the cryptocurrency has fully realized its potential. Some use cases are whimsical and serve to excite the imagination but aren’t practical in implementation. 

Most often, such use cases are impractical as the world is filled with complexity and nuance rarely understood or respected when the use case is conceived.

This is why failure to manifest the use case is more common than not.  It’s the organic “great filter” of the markets which curates good ideas from bad — or the ridiculous. 

These are projects such as Uro (designed to disintermediate brokers from the global urea market), or SpankChain (the proposed universal currency for sex workers).

SpankChain picked up where urea-backed Uro left off. Both ultimately failed.

For Bitcoin, the primary use case is to change the world with an open, accessible financial network which spans the globe and finalizes transactions in under 24 hours, and in doing so created the entire market we witness today. 

As primary use cases go, the only one that comes close to Bitcoin is Ethereum. 

Ethereum seeks to change the world beyond Bitcoin — with automation

“Ethereum killers” and “Bitcoin killers” are a touch quixotic because they mostly aren’t new ideas, but refinements of the ideas already manifested.

Yet, it’s clear neither Bitcoin or Ethereum can fulfil every need or use case which one might conceive. 

There will always be new cryptocurrencies emerging from the froth of the markets and one can imagine an eventual “third major cryptocurrency” which builds on the world Ethereum created.

At an economic level, the earliest altcoins provided crypto miners means to gain return on their investment in a shorter timeframe than just mining Bitcoin — which in turn made Bitcoin mining operations more profitable in the long term. 

It’s not by chance that altcoins exploded when GPU mining began to concede profitability to the newer technology of ASIC mining chips. 

These altcoins allowed GPU miners to replace revenue lost by the advent of more efficient Bitcoin mining tech. The supplement to (or replacement of) Bitcoin profits persists as a draw for speculative and professional miners.

Read more: [What is Bitcoin?]

One of the first coins which enjoyed this result was Dogecoin: GPU miners found the network profitable as it emitted at least 1 BTC per day in tokens (DOGE’s lowest possible market price was 0.00000001BTC for the first 30 days).

In the current context of this essay, Proof-of-Stake and other consensus mechanisms which require less specialized equipment (and therefore a lower-risk endeavour no longer necessitating rapid ROI) are growing in popularity.

So, the number of new altcoins being produced has slowed down precipitously. 

Previously, altcoins could rely on a certain amount of miner support to monetize, upon which traders could therefore speculate. Massive PR and VC buy-ins have replaced this, and they now provide a new baseline for speculation. 

Speculation moved from betting on those projects that miners back to betting on projects on which notable VCs have wagered.  

As a result, the great filter of the markets is narrower and more selective.

Picking those winners moves from the hands of technologists and into the hands of venture capital — for better or worse.

‘In it for the tech’ is now a common joke in cryptocurrency

To say that rising values of what are (for the most part) essentially scarce assets (known as “number go up!”) isn’t why people sink money into these high-risk investments would be simply disingenuous. 

At this period in history, there is ample money to be made simply in the widespread use of any given cryptocurrency. 

However, the game of musical chairs described unforgivingly as “greater fool theory” eventually ends — even with Bitcoin — and it’s at that point where they must return value in operation, not speculation. 

This is true for entire networks as it is for NFT-based pictures of rocks. In NFT markets, this happens very quickly as tradable assets lose popularity for the next big thing.

NFT speculators find themselves “illiquidated,” a circumstance where they cannot find buyers for their asset anywhere near the price at which they paid. 

CryptoKitties provides a very telling window into this phenomenon. For all its popularity, funding, user base, and positive press coverage, in less than four years fewer than 30% of the top valued “kitties” have changed hands in the last 12 months.

CryptoKitties is yet to see anywhere near the same activity as in late 2017.

An asset which cannot be sold because there’s no buyers has an effective value of zero. So, the value paid for that asset has been “illiquidated.”

Every single cryptocurrency boasts a primary use case that is a dream, a vision, a potential of a better tomorrow for whatever portion of the population that asset is meant to address. 

If that dream is expressed well and executed in code, the hope is the market will respond and provide upward momentum of volume, price, and traction (hallmarks of the most popular, most traded cryptocurrencies available today).

The closer a cryptocurrency comes to fulfil its primary use case, the higher in value it should therefore go. It’s difficult to argue that the market at large prices assets by any other means. 

In cryptocurrency, zero to monetization isn’t a straight line

The parameters for success are constantly changing, but for every cryptocurrency which survives another day our industry gets stronger, creates more jobs, abundance, and inclusivity.

Beyond profitable assets, cryptocurrencies as a whole are a set of solutions for problems most people don’t realize are problems, and which solve them with varying levels of success (a fair measure being to not create more problems in the solution). 

Is Bitcoin too slow? Is Ethereum too expensive? Are NFTs too difficult to create? Is there a market unserved because of the engineering or governance decisions of other, more popular networks? 

This last question often motivates for new networks and innovation in the market at the time of this writing.

Read more: [Ethereum is making the same mistakes as the Bitcoin hard fork attempts]

A great deal of innovation left undiscovered and unrealized is in people using this technology to improve their lives without making it the focus of their lives. 

Cryptocurrencies which can be used — and create value by their use — without having to know a thing about how they operate or bear concern over how they’re governed is our next great frontier, and shall provide truly lasting value to our society.

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