Blockchain is an emerging technology that changes how data is stored and shared. It is an important component of building a new digital economy.
Blockchain needs a digital currency – crypto – in order to function. This article will give you a brief overview of what crypto is and why blockchain needs crypto to work.
What is Crypto
Crypto – short for cryptocurrency – is a digital asset that is secured by principles of cryptography. It is “mined” on decentralized blockchains and used as compensation for miners who process transactions that keep the blockchain running.
Crypto might have a different function depending on its intended use. As a replacement for money, cryptocurrencies are units of accounting and mediums of exchange. They are referred to as either coins or tokens and can be remitted as payment in exchange for a good or service.
Some cryptocurrencies, like Bitcoin, are more useful as a store of value rather than being exchanged for goods and services like money. Because of this, crypto is also a digital asset that you can invest in. As the value of the cryptocurrency increases, your holdings also appreciate in value. This makes crypto similar to stocks in a company.
Cryptocurrencies can also be programmed with other features, such as membership in a club. FC Barcelona announced they would launch their own cryptocurrency in 2022. Their coin could be used to buy tickets and merchandise in addition to having voting rights within the club. The programmability of cryptocurrencies now makes “voting with your wallet” a real thing.
Cryptocurrencies used in digital games or fan clubs are similar to reward points you earn at your favorite store. Think about Starbucks’ rewards program. Starbucks issues gold card holders extra benefits based on how much money they spend in their stores. Some cryptocurrencies are designed to be an in-house reward system like this rather than a new form of money. And in case you’re wondering, it’s only a matter of time before Crypto Starbucks comes to a cafe near you.
Lastly, some cryptocurrencies were created as a joke. Meme coins like Dogecoin or Shiba Innu have absolutely no inherent value or purpose whatsoever. They were created as a joke with no utility in mind. That being said, AMC theaters accept Dogecoin and Shiba Innu while Tesla merchandise can be paid for with Dogecoin.
Why Blockchain Needs Crypto to Work
Crypto incentivizes miners to validate transactions. This is what makes the consensus mechanism of blockchains work and thus what keeps them decentralized. Without crypto, there is no reason for miners to validate transactions.
Think of this in terms of working for an employer. If there was no money involved would you show up to work every day? Probably not!
Like money, crypto also functions as a unit of accounting. Blockchain was originally invented to replace the existing financial system with a new, decentralized one. Hence, a lot of blockchain’s uses are related to finance.
While digital dollars do exist in the form of stablecoins – and in the future central bank digital currencies – they don’t provide the same level of decentralization blockchain enables. A stablecoin pegged to the U.S. Dollar is indirectly backed by the Fed and is thus still part of U.S. monetary policy. Depending on your perspective, this is either a good thing or a bad thing.
Not all blockchains need crypto in order to work. Permissioned or private blockchains, like Hyperledger Fabric, use the same distributed ledger as a public blockchain without a native cryptocurrency. Why? Private blockchains assign roles and permissions to users. Instead of relying on a random network of validators, private blockchains use internal employees to run the blockchain instead.
Key Takeaway
A public blockchain needs crypto to work. Without crypto there is no incentive for miners to validate transactions. This would render the blockchain nothing more than a public-access database.
Blockchains were invented with financial applications in mind. In order to provide an alternative to the existing financial system, blockchains need to have their own money supply independent of a central bank. Cryptocurrencies fulfill this role.