How Does Cryptocurrency Have Value, and Why Should I Care?

6 February 2020

This is part two of  a six-part Welcome to Crypto series, which will cover everything from the advantages of digital assets and how to buy crypto to how to read cryptocurrency price charts, and why they matter. 

Catch up:

Part 1: The Benefits of Cryptocurrency and Blockchain Technology

Introduction

Cryptocurrency might be the most important thing to happen to money since the gold standard. While it’s true that many people are still crypto-wary and don’t completely understand how digital currencies have and hold value, others who have followed crypto’s progress since Bitcoin was first mined in 2009 understand its relevance and benefits, and see crypto, especially stablecoins, as being even better than traditional money. The most promising digital currencies are disrupting the global financial services space because they offer financial freedom to all through decentralization.

Cryptocurrencies are Designed to be a More Efficient Money

Cryptocurrencies are digital assets that combine the science of cryptography with blockchain technology to enable financial transactions quickly, inexpensively, and more securely. Decentralized crypto does everything that traditional fiat money does— and far more—because it is global and not subject to totalitarian government controls or any third-party interference.

For example, Maker’s decentralized stablecoin Dai is borderless (e.g., one Dai token is worth the same in the United States as it is in South America, Europe, or anywhere else in the world) and exchanged peer-to-peer, without intermediation by any outside entity. Not only are users able to transact with one another directly at anytime and from anywhere, they do so autonomously, without the need to trust a central bank or counterparty, giving them complete control of their money.

Maker’s Mariano Conti explains how someone in Argentina getting paid in Dai can access a more stable currency than the Argentine peso.

The value of crypto is that it does exactly what users want money to do: store consistent value and act as a medium of exchange for goods and services globally, not just locally. The value of Dai, specifically, is even more advantageous for users because Dai functions as a unit of account within the Maker Protocol, the system that allows its creation, and within blockchain dapps (decentralized applications) in the Maker ecosystem.  

How Cryptocurrency Stores Value

Cryptocurrency, like any other currency, must be able to hold value effectively before it can work well as a medium of exchange. But where does that value come from and what makes for good storage of it?

Both Bitcoin and Ether (ETH; the digital coin of a leading blockchain called Ethereum) derive value as a result of supply and demand, making both volatile assets. Bitcoin’s volatility is legendary. ETH is volatile too, but its value is tied not just to the market, but also to its usefulness to both the Decentralized Finance (DeFi) and Centralized Finance (CeFi) movements. ETH supports the many smart contracts platforms built on the Ethereum blockchain, including the Maker Protocol and the dapps built by developers to work with Dai and the Protocol.  

Dai, meanwhile, is a stablecoin that maintains its value thanks to the collateral assets that back it, and the Maker Governance process which modifies Dai monetary policy to maintain the cryptocurrency’s soft peg to the US Dollar. Currently, the assets that Maker Governance has accepted as collateral in the Maker Protocol are ETH and BAT (the Basic Attention Token, which is an Ethereum blockchain-based digital advertising token). Because the Protocol demands over-collateralization, the value of the total collateral that backs Dai in the system is always higher than the total value of Dai in circulation. This over-collateralization ensures Dai’s stability, making it a better (that is, much less volatile) store of value than Bitcoin and Ether, and a valuable medium of exchange.

Transparency: A Huge Value-Add  

Imagine walking into your local bank and asking to see the bank’s complete ledger—the full record of all mortgages, debt obligations, transactions, etc. since it first opened its doors. Your request would be denied. But with the Maker Protocol (and any other decentralized platform built on a blockchain), every single transaction is available for anyone to see at any time because the blockchain is a type of digital ledger —one in which every transaction is recorded, authenticated, and shared across a wide network of devices called nodes. The digital ledger provides a trail that’s transparent, traceable, and visible to all. In this way, the blockchain eliminates any issues of trust and reciprocity (e.g., there’s no need for users to trust a central bank or authority to complete a transaction; users are in complete control of their money and how they manage it.

Decentralized cryptocurrency transactions are transparent, traceable, and always visible on the blockchain, offering high value to all.
The transparent, traceable, and always visible audit trail of the Dai stablecoin on Etherscan.

Cryptocurrency Is Empowering and Inexpensive to Exchange 

As transformative as the internet has been, the global financial system is still, comparatively speaking, in the dark ages. While the most popular Fintech apps, including Venmo, PayPal, and the like, have helped to deliver some traditional financial services in simpler ways, third parties are still involved, making it impossible for users to truly transact peer-to-peer. 

Moreover, people sending money across borders are not only dependent on third parties such as banks and wire services, but also forced to pay high fees for a service that’s far too slow in the modern age. Worldwide, nearly 7% of financial transactions are applied to fees. A large chunk of those fees goes to the many intermediaries involved in money transfers. In addition, traditional cross-border exchanges take a lot of time—some transactions take days to settle. When the cost of exchanging money becomes a drag on the currency’s value, no one wins.

Fintech apps also do nothing to help bank the nearly 1.7 billion unbanked people of the world. Only decentralized cryptocurrencies can offer un- an under-banked individuals access to many of the same opportunities banked persons enjoy. The most efficient currency is one like Dai, a trusted stablecoin that’s unbiased, global, and empowering.

As Dai Adoption Rises, Its Utility Will Grow 

Cryptocurrency represents the true potential of the internet to address the problems of fiat money. Today, the most efficient form of exchange is the direct and low-cost transfer of currency between people anywhere, regardless of their financial standing. As Dai adoption rises, and the overall value of crypto becomes more evident, more and more people will realize its advantages and overall usefulness. If you’re interested in a price-stable currency that you control, generate Dai today on your own terms


Next up in the six-part Welcome to Crypto series: The Different Types of Cryptocurrency Tokens Explained

6 February 2020