I’ve been reading a lot of mainstream news items lately where established financial journalists are calling out that crypto coins are all based on thin air. When I mentioned this the other day, in a conversation with a good friend of mine, he instantly said that he agreed with that bold statement. To me it’s almost impossible to understand how other people do not see that there is so much more than just the coins. I figured I’d sit down and write a few words about this topic.
The first thing people often tend to think about, when it comes to crypto, is the fact that it’s digital. You can’t pick it up and take it with you. Despite the fact that this is not true, because you can store it in an offline wallet, I can relate to the idea. People hear stories about a bunch of nerds with computers doing some sort of digital mining, and virtual coins are being created. Most mainstream media seem to pick up just that and publishes it without doing any actual research or trying to understand what’s really going on. I have a quite good understanding of blockchain technology. I’m still learning every day and I don’t have all the answers but I’m going to try to explain why crypto is actually based on anything but thin air.
The very basic idea of blockchain technology is that every participant has a ledger, with exactly the same information in it. Only if the information in all ledgers is the same it will be accepted as truth so there’s no way for it to contain any misinformation. These participants are all connected in a network. (or chain) Transactions in this network need to be verified and only when verified, new transactions will be added to the ledger of each participant. Verification can be done by one node only and this is called mining. The node that is verifying the transactions is selected by a consensus mechanism. I’m not going in any deeper but this is basically the concept for first generation blockchain. And most of it’s principles still stand today.
Since the first generation, blockchains have evolved. (Cardano e.g. is third generation blockchain) Nowadays they allow new applications to be run natively, on the blockchain itself. Maybe you have already heard of terms like dApps (decantralized applications) and DeFi (decentralized finance) When this technology becomes more mainstream more people will be using it and this will resolve in mass adoption eventually. Let’s look at the Internet, as an example. Back in the early nineties, when I got my first Internet connection, litteraly nobody was saying that email would be a thing. Web browsers were just a digital representation of documents and books. It took minutes to load just one picture. As the technology evolved so did adoption. Today most people can’t even imagine how life would be without the Internet. This will also happen with blockchain technology. New businesses will arise, new applications will be developed. Existing applications will find a better usecase by switching to blockchain technology. More users will be using these new services and mass adoption will be a fact.
OK, so the technology is great. That’s pretty clear. Why do these coins have any value then? Well, crypto coins are the reason these blockchain networks keep running. The blockchain is like an engine, and the coins (or tokens) are the fuel you put in to keep the engine running. We all know that without fuel your car won’t move, so we need fuel. Same thing with blockchain. And it simply won’t move with just thin air.