When you look out onto the vast ocean that is fiat currency, there is a tendency to look at one nation's fiat and assume it to be nearly identical to another nation's - at least in terms of function. Let's face it, almost every fiat currency works in the same way. Government mints it, distributes it among the people, and the people spend it. Things are not so easily explained in the cryptocurrency world.
We can rely on fiat working the same way in just about every part of the world. Yet cryptocurrencies can vary greatly in their acquisition, use, store of value, and more. In short, all cryptocurrencies are not the same. The differences are so drastic with some platforms that you would be hard-pressed to recognize them as cryptocurrencies.
This post will explore some of the differences between opposing cryptos. Whether a person prefers Bitcoin, Ethereum, or some other crypto whose name very few people recognize, it is wise to know how that particular cryptocurrency works to avoid being caught off guard.
Defining a standard for crypto
The first thing that makes crypto projects different is their status as legitimate cryptocurrencies. If you don't know what this means, compare what you already know about Bitcoin to what the press has told us about Facebook's Libra. Bitcoin is a legitimate cryptocurrency through and through. Libra may not be, depending on what it looks like when it is finally launched.
It is important in discussions like this to define a standard for what makes a digital currency platform a true cryptocurrency. For that we turn to Jan Lansky from the Czech Republic's University of Finance and Administration. In a very thorough paper outlining how the Czech government should approach cryptocurrency, Lansky set forth the following six criteria that must be met in order for a project to be a legitimate crypto:
A genuine cryptocurrency is decentralized in that it does not require a central authority to maintain its operation. Rather, the system is maintained by distributed consensus. This is to say that the computer nodes responsible for keeping the platform's network up and running must agree on changes to the system in order for those changes to be implemented.
2. Record keeping
Next, a genuine cryptocurrency system keeps permanent records of cryptocurrency units and who owns them. In Bitcoin's case, this is accomplished through a distributed ledger found on multiple computers scattered around the world.
3. Coin volume
A genuine cryptocurrency establishes within its code whether or not new tokens can be created. If so, the code dictates how those new coins can be created and who will own them. If not, the code specifies the maximum number of coins that will ever be in circulation.
4. Ownership proof
To be considered legitimate, a cryptocurrency system must be able to prove token ownership exclusively through cryptographic means. If any other proof of ownership is utilized, the system is either not a crypto at all or it is a hybrid system.
5. Ownership transfer
Genuine cryptocurrencies allow for the transfer of tokens between owners via network transactions. Furthermore, transactions must be initiated by the current owner of the tokens to be transferred.
6. Competing instructions
Finally, genuine cryptocurrency systems have mechanisms in place to deal with competing instructions for transferring ownership of units. A genuine crypto system will only execute one of the sets of instructions based on parameters established within its code.
Much of this may not mean anything to you if you only have a cursory knowledge of how cryptocurrencies work. Suffice it to say that not every project marketed as a cryptocurrency project meets all six of the criteria. Libra is a good example.
At least in its initial launch, Libra will not be completely decentralized. Facebook has said it will be several years before the Libra Association gains full and complete independence. Until then, Facebook will still control the project. For as long as they do, Libra will not be decentralized.
Coin creation and distribution
How coins are created and distributed is another significant difference between cryptocurrency platforms. As the cryptocurrency that started it all, Bitcoin's standard is the one all others are measured against. The Bitcoin code only allows for a total of 21 million coins. That's it. When the last of them is mined, there will be no more.
Under this system, the code has essentially created the coins. All that's left is to distribute them. This is done through coin mining. As you might already know, coin mining is the process of verifying transactions and building blocks in Bitcoin's blockchain. Miners are rewarded for the work they do with new coins.
Rewarding miners is the way the Bitcoin network gets new coins distributed. Miners can either hold on to their coins or sell them on the open market. Either way, coins are released and traded as a result of mining.
There are other platforms that do not place a limit on the total number of coins to be issued. Like governments minting fiat, these platforms have the ability to continue creating and distributing coins in perpetuity. Some distribute their coins by selling them, while others give them away in exchange for actual work done in support of the project.
The purpose for a given platform also plays a role in whether or not it is a true cryptocurrency. Take Ethereum, for example. The coin we normally refer to as Ethereum really isn't Ethereum at all. Rather, it is simply Ether. There is actually a big difference between the two.
Ethereum is a blockchain computing platform. It was conceived as a platform for developing applications that would benefit from the utilization of decentralization, distributed consensus, and smart contracts. Literally hundreds of Ethereum-based projects now exist, projects that have nothing to do with cryptocurrency. As for Ether, it is a cryptocurrency based on the Ethereum blockchain.
We have seen other blockchain projects in the past that have issued tokens that are of no value outside of those projects. If you are a big fan of online role-playing games, you have probably encountered such systems before. You acquire tokens for use in the games you play. Those same tokens are absolutely worthless outside of the gaming environment.
Token monetary value
Cryptocurrencies differ in terms of how their monetary value is established. Bitcoin's monetary value is almost entirely dependent on supply and demand. Knowing that there is only a limited supply of bitcoins, prices go up or down commensurate with demand. If more people are buying than selling, the price goes up. Prices fall when and as sellers outpace buyers.
Another way to determine monetary value is to tie a cryptocurrency to another known asset. Cryptocurrencies that fall under this category are known and stablecoins. The U.S. Dollar Coin (USDC) is a good example. Its value is pegged directly to the value of the U.S. dollar. One USDC equals one U.S. dollar.
Stablecoins do not have to be tied to fiat currencies. Their value can be determined by just about any other assets ranging from stocks and shares to a basket of government securities. In any case, a stablecoin's value is directly in line with the assets that back it up.
Finally, cryptocurrencies differ greatly in terms of their general acceptance. Once again, Bitcoin is the standard. It is the most widely accepted cryptocurrency around the world. If you run across any online or brick-and-mortar merchant willing to accept cryptocurrency, it is likely that merchant accepts Bitcoin - even if other cryptos are accepted alongside it.
The thing to understand is that some cryptocurrency platforms are not intended to be used as daily monetary systems. As such, you would not expect them to enjoy widespread acceptance among consumers and merchants. These types of cryptocurrencies serve some other purpose.
You might have a project that utilizes blockchain technology to control the flow of goods. We can imagine a shipping company here. They have developed a blockchain program for logistics management, a program that relies on the creation and transfer of tokens in order to keep track of inventory.
Those tokens have no monetary value whatsoever. Moreover, they have no value outside of the system itself. As such, general acceptance is never even a question. It is not necessary. Only those using the shipping system itself have any need for the tokens.
Do your homework
As you can see, cryptocurrencies are not all the same. There are many differences between them, some minor and others more substantial. The lesson here is one of doing your homework before you get involved in any particular cryptocurrency.
If you are just looking for crypto you can use to shop online or play your favorite video slot games, something like Bitcoin or Bitcoin Cash should suffice. If you are looking to invest in a new startup project that relies on blockchain technology for something other than commerce, there are other platforms you can invest in. The point is to know your crypto before you buy in. They are not all the same.