Cryptoasset Primer 6: Why do we need so many?

This is part 6 of our ongoing series on the basics of cryptoassets. You can find part 5 here and the series begins here.

In our last post we touched on the nature of cryptoassets, but we find we are often getting a far more basic question – why are there so many cryptocurrencies?

The first thing to notice about this question is that it conflates “blockchain” and “currency”. There is a common misconception among people outside the crypto world that all digital tokens are just trying to copy Bitcoin and supplant fiat currencies. Philosophically, there may be something to this, but that is not really the point of the question. For many people, Bitcoin and blockchain are synonymous, going back to the fact that both were invented by the same ‘person’.

So in our previous post we tried to expand this view. Cryptoassets are a mechanism for participating in decentralized infrastructure. To be fair, no one really quite understands what this means. Nonetheless, for those new to cryptoassets the takeaway should be that most cryptoassets are not designed to be currency, at least not a currency meant to be used by individuals. There is a distinct subset of cryptoassets who are trying to do this, Bitcoin being the obvious example, but this is a relatively small share of the thousands of chains being built today.

Instead of thinking of cryptoassets as currency, it is better to think of them as software placeholders. They are closer to a form of stock. People buy and sell stocks all the time, but very rarely does anyone try to use stock to buy pizza or groceries. Cryptoassets can be viewed as a new financial asset class, alongside stocks and bonds. However, this view has its own pitfalls. Cryptoassets do not come with guaranteed rights (stocks) or obligations (bonds). Or to be more precise, each crypto project comes with its own sets of rights and obligations, and these are not tied directly to the cash flows of the underlying project.

Searching for a metaphor, the old idea of pneumatic tubes comes to mind. Remember those networks of pipes that carry messages or cash within a building? Here is the Wikipedia page on them. These tubes provide more than just a communication system, they move physical assets in a secure manner, and help coordinate company operations. Typically, these tubes require canisters to ferry contents around. In the blockchain world, digital tokens are the canisters, and the tubes are the overall network. As the tubes get used more the value of the canisters go up. Companies still use these systems, ask someone who has used them what happens when their canister gets misplaced, chaos generally ensues. (As a side note, the movie Logan Lucky has a great demonstration of this principle and the ongoing use for these seemingly old-fashioned systems. It is also an entertaining film.)

Owning a canister does not convey ownership of the contents of the canister, but there is value in that object. So an obvious question is who controls the overall network. At this point, the metaphor starts to break down a bit, but it does open the very interesting topic of governance of blockchain projects, a topic we will get to in a future post.

One response to “Cryptoasset Primer 6: Why do we need so many?

  1. Pingback: Cryptoasset Primer 7: dApps | DIGITS to DOLLARS·

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