Crypto unchained - chapter 3 - SKEMA Knowledge

Chapter 3:

Money rules the world

Digital or not, what drives crypto — like everything else — is still a matter of money.

”Money, get away […] Money, get back […] Share it fairly, but don’t take a slice of my pie”

(Money, Pink Floyd, 1973)

Crypto-assets are third parties based on a distributed network. In other words, rather than single entity managing data and proving trust, it is a group of individuals who come together and jointly maintain a fully distributed network which manages data and provides trust.

It proves useful at this stage to clarify the exact terminology of network participants. We differentiate users and nodes (often referred to as miners). Relying on our previous example, Alice and Bob are users. Just like any bank customer, they send and receive currency but do not need to work at the bank to enjoy the financial services. Nodes (or miners) are best described as employees. Just like a bank which has its employees to ensure services, distributed networks have their nodes which jointly provide the service.

To ensure a lasting participation of employees, banks (or any centralized and decentralized network) pay a salary. It is no different in a distributed network. To ensure a lasting participation of nodes, the network provides financial incentives. In other words, nodes get paid for validating transactions and maintain the blockchain up to date.

Why are nodes often called ‘miners’?

Network nodes are often defined as ‘miners’, ‘validators’ or ‘stakers’. The exact terminology depends on the consensus mechanism of the blockchain (proof-of-work, proof-of-stake, etc.). When the blockchain use a proof-of-work consensumsmechanism, the nodes are described as miners. Just as gold miners dig to find valuable metal, network nodes use computational power to validate transactions ( in order to earn coins). The idea is while the effort is certain, the compensation may vary a lot, just like mining. gold.

Why were native currencies introduced?

To pay its employes centralized networks such as banks generally collect fees or sell a product/service. Similarly, decentralized networks may require membership fees or other ways of raising money to pay their employees. Distributed networks also need to have funds to pay their employees. Rather than relying on existing currencies such as the USD or the EUR to pay its miners, Satoshi Nakamoto decided to create native currency specific to the bitcoin blockchain to pay his/her employees.

Creating his own native currency carries two benefits:

No need to actually have the fonds in USD or EUR. Employees are paid in the newly created currency units. Like central banks create money “out of thin air”. Bitcoin network creates coins out of bits: hence Bit-coins.

When relying a fiat currency such as USD or EUR, any service provider is subject to the laws and regulations implemented by the central banking issuing that fiat currency. By creating a new currency, Satoshi Nakamoto insured that the Bitcoin network is not subject to control via the back door of the fiat currency.

Every blockchain has its own native currency that pays its miners:

Bitcoin miners are paid in BTC
Litecoin miners in LTC
The bank holds all the power over your account (e.g. blocking access, freeze funds, etc.)

Similarly to how US and EU based companies pay their employees in USD or EUR.

The native currencies of distributed blockchains are often referred to as “coins”. Keeping this terminology in mind will help us establish our taxonomy of coins and tokens. In chapters 5 and 6 we discuss tokens as the native currencies of smart contracts.

Native currencies and taxonomy

Despite every crypto-asset having its own native currency, we cannot claim that all crypto-assets are crypto-currencies. Native currencies are primarily there to pay the blockchain employees. The services provided, however, can go far beyond a payment system. More precisely, there is a difference between incentive mechanism for employees (money) and the service provided to users (multiple and diverse).

Note:

While all crypto-currencies are crypto-assets, not all crypto-assets are crypto-currencies.

Consider real-world examples such as Dropbox, Google drive or iCloud. The service provided is cloud storage. To access this service, consumers typically pay in the fiat currency of their country or region; USD, EUR, etc. In other words, the motivation for the cloud storage providers is financial gain. The equivalent in the crypto-asset ecosystem is called Filecoin. It provides cloud storage to its users. The difference with Dropbox, Google drive and iCloud is that Filecoin is based on a distributed network whereas the well-known alternatives are based on centralized network. To pay for the service of Filecoin, users pay in Filecoins native currency (FLC). As such, the term crypto-currency appears to not properly fit the description of Filecoin. Calling Filecoin a currency, would imply to call Dropbox, Google drive and iCloud a currency as well. Doing so would be counterintuitive as we would confuse the incentive mechanism for employees (money) and the service provided to users (cloud storage).

Incentive Mechanism

Provided Services

Crypto-Asset Type

Bitcoin

Payment System

Payment System

Crypto-Currency

Filecoin

Payment System

Cloud Storage

Service Crypto-Asset

Ethereum

Payment System

Smart Contract

Smart Contract Platform

Bitcoin is a special case. It was designed as a payment system from the start, meaning the incentive mechanism for miners and provided service to users are essentially the same thing :a payment system. But not all crypto-assets are limited to providing just a payment system. This is why the generic term “crypto-assets” is used, which englobes Bitcoin (a crypto-currency) and Filecoin (a service crypto-assets). In chapter 6 we establish a comprehensive taxonomy.

To sum up, each crypto-asset has its own native currency. But not all crypto-assets are crypto-currencies. They can provide a broader range of services. The value of any native currency is (supposedly) derived, among other things from the service provided by the underlying blockchain. However, in most cases we observe that the price of native currencies is generally more prone to speculation than an actual valuation of the service provided.

Next we will look into where these currencies are stored and how they can be used.

Chapter 4:

From Wallets to Smart Contracts:

An Architecture of Digital Ownership

Users have two tools at their disposal to interact on a blockchain: wallets and smart contracts.