Crypto Is A ‘Scam’, Right?

While some are still grappling with this question, blockchain technology is steadily paving the way for the future economy.

Anyone who has entered the crypto-sphere since the explosion of assets enabled by Ethereum’s ERC20 token standard knows how it can be quite a hurdle getting over their initial fears spurred from the negative press. This is heightened by the warnings from skeptical friends or concerned family members who have lost, or know someone who has lost a lot of money in online scams or fraudulent crypto projects. 

For beginners especially, who may still be unfamiliar with how cryptocurrencies work, the naysayers do seem to make a point. After all, how can something intangible–something that you can’t physically hold in your hands, have any value at all? As a newcomer, the notion that some numbers you just view on a screen can be worth substantial sums can sound too baffling to be true. 

It is quite natural–and wise–to feel some level of  apprehension before exchanging your hard-earned cash for any cryptocurrency. But the more you understand what cryptocurrencies are and how the technology works, the more you can set aside your doubts and see the opportunities they present for the future.

How is crypto legit?

To understand why cryptocurrencies have value, it can be helpful to ask why ordinary money such as dollars, euros, or pesos, have any value in the first place as well. 

When you think about it, government-issued currencies (also called “fiat” money) are merely numbers that are printed on paper. The paper material itself has no value, but because they are backed by the government as legal tender, people are able to put their trust in it and believe that they carry the value they represent. 

In fact, besides trust in the government, there is not much else backing the value of fiat money. Ever since the gold standard (a monetary system which fixed the value of currencies against actual gold reserves) was abandoned globally, the value of fiat currencies has since then, completely depended upon the flow of trade between nations. In short, fiat currencies’ values are simply derived from the legitimacy bestowed upon them by the governments that issue them.

Now when it comes to cryptocurrencies such as bitcoin or Ethereum, trust plays a part as well when it comes to their perceived value, but through a completely different approach.  

In crypto, trust is not derived from an authority such as a government, but rather facilitated through a decentralized network called a “blockchain”. A blockchain is a complex global network which operates completely through automated algorithmic protocols–without any central authority overseeing it. The protocol itself resides across the entire network, which effectively removes any single point of failure, making the network practically impossible to hack or influence. This security gives communities the confidence to put their trust and their money in the technology. 

In fact, blockchain networks are also called as “trustless” protocols since their algorithms allow different parties to transact with one another without these parties needing to put their trust on each other beforehand, or even without knowing anything about each other at all.

Crypto vs fiat

Fiat, by the standards of today’s technology, is already a crude invention, and cryptocurrencies were created to address the many flaws and pitfalls when it comes to its use. Bitcoin itself, the very first cryptocurrency which was developed in 2009, was specifically designed to address the problems with centralization and what many are calling a ‘broken banking system’.

• Fiat has no supply cap -  Because fiat is not backed by anything tangible, governments and financial institutions are free to create more money as they wish. Though this can be useful at times when the economy needs a jumpstart, more often, this leads to inflation, devaluing the currency itself, and creating more economic problems.

• Banks and other intermediaries can get in the way - Because fiat is subject to government and regulatory control, this means that not everyone is really free to spend their money as they wish. Institutions are needed to oversee large transactions, often causing delays. Meanwhile low-income communities and the unbanked are often hampered by regulatory measures from participating in greater financial opportunities that would otherwise benefit them the most.

• Fiat is too slow for an increasingly online world - Using cash for money transfers, and remittances can be a time-consuming and expensive process. Banks often require verification checks and documents before proceeding, and may deduct a hefty fee for their services. 

Cryptocurrencies, on the other hand, offer many practical and technological advantages over fiat currencies:

• Most cryptocurrencies have fixed supply caps - Because cryptocurrencies reside within self-regulating networks, the supply of many cryptocurrencies are often fixed, ensuring that they retain (or even increase) their value over time. Bitcoin for example, has a fixed supply of only 21 million BTC that will ever be in existence. Meanwhile, some cryptocurrencies have different systems in place as various utilities and ‘burning’ mechanisms to automatically control their token supply.

• Cryptocurrencies allow for direct anonymous transactions - Crypto transactions eliminate the need for a middleman to validate a transaction, allowing for direct peer-to-peer transfers without the need for either party to divulge their identity or any information about themselves. This makes crypto transactions significantly faster, more secure, and less costly than bank transactions.

• Crypto transactions are transparent and secure - A blockchain’s ledger can be viewed by anyone at any time, adding another layer of security and integrity as this means that all of the supply of a particular cryptocurrency can be accounted for by the entire network community. 

• Transactions are fast and convenient - Crypto transactions are instantaneous, requiring no more effort than it takes to send a text message, making it very ideal for payments and remittances. 

In fact, the advantages of cryptocurrencies are such that even governments themselves are paying attention. Already, many countries are looking into launching their own central bank digital currencies (CBDCs) which are basically fiat money in cryptocurrency form, utilizing the same blockchain technology. Though marketed as being ‘a combination of the best of both worlds’, CBDCs have their own fair share of supporters and critics alike, and it remains to be seen as to how they will be received by the general public once they are launched. 

Crypto doesn’t just stop at being ‘money’

If those advantages aren’t enough to convince anyone that crypto is the future of money, then discussing its applications within the emerging Web3 landscape might tip the scales for those who still have doubts.

Since a blockchain is an online network, the applications of crypto don’t stop at just being a new kind of payment system. Some blockchains such as Ethereum or Solana, can do more than function as a decentralized ledger. In actuality, these networks are more of ‘decentralized servers’ which means they can host a more widely distributed version of the Internet. In other words, these networks can run their own apps and store information without relying on centralized servers–heralding a completely new age of data privacy and security.

How do blockchains and cryptocurrencies play a role in Web 3?  Besides decentralized finance (DeFi) replacing traditional banking platforms and making online transactions faster, more secure, and foolproof, here are just a few to begin with:

• Redefining social media and cloud storage - With decentralized technology, users will be able to have full control over their personal online data, resolving concurrent privacy issues and unwanted third party infiltration. 

• Tokenized online economies - With cryptocurrencies, various decentralized applications such as online gaming, content sharing platforms and metaverse worlds can have their own streamlined economies to ensure that it's the users and creators themselves who profit directly from their online activities instead of mega corporations such as Google, YouTube or Facebook. 

• Decentralized autonomous organizations (DAOs) - Blockchain technology already has the capability to redefine the traditional political or corporate hierarchical structure. Through algorithm-assisted protocols, organizations can conduct their operations in a less centralized manner, relying instead on the tokenized votes of their entire communities for making decisions. 

• IoT and AI applications - With other emerging technologies lined up such as Internet of Things (IoT) and artificial intelligence (AI), decentralization can be utilized to ensure that these technologies are used responsibly and ethically, and decisions voted on by communities instead of being left in the hands of the few.

Conclusion

Cryptocurrencies are more than what they seem upon first glance, and we're merely scratching the surface of their potential for future applications. One thing should be clear though–the future is decentralized, and as for cryptocurrencies - their permeance is undeniable.

With crypto comes the opportunity to democratize finance, technology, politics, healthcare, arts and many other fields currently burdened with an ever-increasing concentration of power taken by a select few. So, to clarify, crypto isn't a deceitful scheme, it’s the antidote to the status quo and couldn’t have arrived when we needed it more.