Cryptoeconomics Government 101
Cryptoeconomics Government Series focused on Institutional Cryptoeconomics
I will skip with all the nonsense and go straight to the details.
What are Cryptocurrencies?
Just like the game coins that people purchase in games or prepaid mobile sim cards. Cryptocurrencies are currently regarded similarly. The difference resides in that Cryptocurrencies are not physical assets. And their role as intangible assets is ill-defined. There is in exchange for that currency. Thus, Cryptocurrencies are in fact functioning more similarly to USD, SGD, Yen than game points or prepaid sim cards.
What makes Cryptocurrencies different from those issued by the government such as USD, CAD, Singapore Dollars?
- Cryptocurrencies do not have the full backing of the government. No governments are behind it
- It differentiates itself from the way it is issued.
On point 1:
In most countries, the central bank or monetary authority issues the national currency. In the United States, it is the Federal Reserve, in Singapore, it is the Monetary Authority of Singapore. Although these currencies are fiat currencies or what many call paper money, it has the full faith of its issuing government which will honor its use. In most countries, it is illegal to refuse to accept nationally issued currencies in exchange for goods and services.
It is implicitly noted that since a currency eg. The United States Dollar has the backing of the US government. It will remain legit until the US economy collapses for whatever reason or that the US loses a major war.
Cryptocurrencies strive to be different in that regard.
- Cryptocurrencies are mostly based on blockchain framework and require computing power in order to release currencies into the system. The picture actually using your Desktop computer and imagine loading applications continuously. In layman terms, Cryptocurrencies users computing power or graphic cards power in order to solve complex math equations (this is all done by the cryptocurrency system itself)
- It is hence difference because, for fiat currencies, the US government backs the currency but the Federal Reserve can in actual fact issue unlimited amounts of dollars to pay off its debt.
- This cannot be done in Cryptocurrencies due to the nature of a computer code. Imagine a one-way tunnel for which 4 expressway lanes converge to. It’s going to get jammed.
Without the physical world, Ideas will not exist.
– Joey Lawsin
Can’t I just buy 100 desktop computers and reign supreme?
Yes technically you can, but computer programmers and scientists aren’t that dumb. What happens is that once every math equation is solved (usually 50 seconds to 15 minutes) the software will release a certain amount of that cryptocurrency to the LAST solver.
So if you have 1,000 computers working on that “math problem” but there is an old dude that’s solving the problem too. If his desktop computer is the last “solver” he obtains the full amount of the cryptocurrency. And the person with 1,000 computers which contributed almost 100% of the solving power gets absolutely nothing.
In other words, anyone has a chance and shot at it.
If it’s as computer program can’t it be hacked? Could a hacker simply change the numbers and have 1,000,000,000 Bitcoin?
How is that safer than government issued money which has millions of dollars spent on security features such as polymer notes, tamper-proof aluminum strips, holograms, intricately carved die, maximum security. And along with that insane jail and prison sentences for those that DARE to replicate or forge an official currency?
Interestingly this is where both fiat currencies and Cryptocurrencies get really interesting.
On top of the various security features, Fiat currencies are regulated by the central banks and department/ministries of finance of each country. Banks are issued licenses and are audited by shareholders and government regulators alike. Banks in many countries carry out fractional reserve banking which has propagated the growth of global economies. The idea is ridiculous but it works, and we understand how and why it works, so it is fine. Regulators are well versed to check audited statements and balance irregularities.
Central banks exercise their control using various central banking instruments such as federal reserve rates, reserve requirements and the like.
That’s how our current economic system functions. It does the job very well, we are living in extremely good times now with more trade and growth than ever before.
Fiat currencies too can be compromised by sophisticated forgers. There have been extremely good copies of various nation’s 100 dollar bills. A famous forgery, known as superdollars has been attributed to North Korea. Although central banks are continually increasing the barriers to forgery by investing more and more into the development of currency notes. It thus is a small issue, are cryptocurrencies as robust as the time tested United States Dollar or the British Pound?
What are the top 3 or most recognizable cryptocurrencies?
1) Bitcoin -> Most recognized and the most senior of all existing cryptocurrencies around. Bitcoin was first created and propagated in 2008, in the aftermath of the 2007/08 financial crisis. The name of its creator is Satoshi Nakamoto, his real identity remains unknown. Today, Bitcoin is supported by a team of developers of the Bitcoin FOundation. Bitcoin adopts an algorithm known as SHA256 and is flexible with regards to development goals. It has a developmental roadmap and the supply of all Bitcoins are limited to 21 million.
2) Ethereum -> A Kickstarter project, headed by the Ethereum Foundation which is located in Switzerland. THe most recognized developer is Vitalik Buterin. Ethereum markets itself through the use of the Decentralized Autonomous Organization for which users can utilize the Ethereum blockchain for many other purposes. Other cryptocurrencies have been built on the Etthereum blockchain. Ethereum adopts an algorithm known as the Dagger-Hashimoto and is flexible on development. It’s current largest goal is to develop the “Casper protocol” and to move Ethereum from proof-of-work [computer processing power] to proof-of-stake [proof of ownership of coins]. Developments are ongoing. There is no supply cap to the number of Ethereum that will be made available, the Ethereum Foundation will adjust as it sees fit, tapering supply down slowly.
3) Litecoin -> Supported by the Litecoin Foundation. Total supply is limited to 84 million, exactly 4 times the amount of Bitcoin. It is founded and supported by Charlie of the Litecoin Foundation. Litecoin runs on the Scrypt algorithm, previously notorious for needing huge computer processing power. Litecoin wishes to be the silver to the gold that Bitcoin is.
Cryptoeconomics Asia has two concurrent topics at the moment. Firstly, the micro cryptoeconomics series which is targetted for general readers who wish to understand current developments in the blockchain framework. Secondly, the government/governance series which are geared towards civil administrators and holders of public office.
Read about Crypto Microeconomics Series below.
Links to the Full Crypto Microeconomics Series
Crypto Microeconomics (Intro)
Crypto Microeconomics – Basic Definitions in Cryptoeconomics Part 1 & Part 2
Crypto Microeconomics – Role of Economics (Irrationality)
Crypto Microeconomics – Extended role of economics
Crypto Microeconomics – Introduction to Cryptoeconomic Microfoundations
Crypto Microeconomics – Basic Models and Agents
Crypto Microeconomics – IO Perspective
Crypto Microeconomics – The Real Economy