The most common misconception in the cryptocurrency space is that it all boils down to market value. Back in 2000 with the dot-com bubble burst, a lot of people lost faith in the internet and thought it was a dying technology just because most internet companies failed. There are a lot of similarities between the internet and the crypto space today, the main one being that their true value lies in the technology itself, not the market value which was mostly designated through speculation.
So, sit back and enjoy an article about cryptocurrency and blockchain that does not promise to make you rich, but will attempt to explain this ever so fluid and abstract notion called value.
Types of value
The first thing we need to understand about value is that it's a human concept and with any such concept it’s dependent on context. There are two main types of value: an inherent value that relates to the qualities of the good or service and a market value that relates to a monetary price upon exchange.
Inherent value refers to what goods or services can do for us. This is evaluated before or during use and has a very utilitarian and personal nature. Because people are different and have particular needs, goods and services will be perceived differently and thus valued differently. Things that save us time, energy or money tend to be seen as quite valuable, the same holds true for things that help us relax, increase our self-esteem or social status, which are a little more abstract. We tend to see these things as being more valuable based on how good a job they do in meeting our needs and because needs change based on context, so does value.
Market value is relevant upon exchange and has to do with the inherent qualities of a good or service plus market forces like supply and demand, brand or competition. On the free market, the price of goods or services is mainly determined by supply and demand which is based upon the availability or scarcity of a thing and how many people are willing to purchase it. However, we need to be realistic and factor in more than supply and demand in the equation. Advertising is playing a large role in influencing the perceived value of things, people are inclined to pay more for brands. On the other hand, a brand is inclined to drop their prices if they have competition. So, price is a dynamic value given to goods or services and is dependant on a context broader than just supply and demand.
More simply put, market value is what people are prepared to pay for a good or service and inherent value is what the good or service does for you after. Like when you buy a chair, the reason you keep it around us that you can sit on it. And this functionality is the real value of the chair, not the 50$ you paid for it.
Speculative trading is the only use case in which the is no difference between the two types of value. And because most people buy cryptocurrencies just for making a profit, it’s easy to understand why the general public believes that market price is the central aspect of this technology. So, in an attempt to even the playing field, the efforts of this article will go into the direction of explaining the inherent value of cryptocurrencies and blockchain technology.
Cryptocurrencies, blockchain and the world
As we saw in the first part of this article, inherent value is only relevant in the context of human activity and needs. Different aspects of cryptocurrencies and blockchain technology relate to different aspects of human activity. The following examples will attempt to contextualize these aspects and provide instances in which real value is created.
The global nature of both cryptocurrencies and blockchain technology creates value by bringing people together in an inclusive and participatory by choice way. There are two billion people in the world which do not have access to banking infrastructure, there are several countries that are under international sanctions and a few that are closed off to international trade by choice. Most of these are due to either outside influence, government failure or authoritarian regimes and the people that live in these conditions have no blame to bear. In these contexts, cryptocurrencies offer a way for ordinary people to participate in the global economy. People can send and receive money almost instantly in a cost efficient way and through ICO’s they can even become international investors.
Through the tamper proof structure of blockchains, fraud can be mitigated. Economic and social sectors that are highly dependent on trusted third parties have a lot to gain by implementing blockchain technology. In this way, the degree of trust can be raised while the costs are lowered and sectors as supply chain management and voting can be upgraded. The use of blockchain oracles that track the production, shipping and sales of goods can create a clear and traceable path in which people have more information regarding the quality and the expiry of food, for example. While on the social side, blockchain technology is the first feasible infrastructure on which digital direct democracy can be built. The possibility of bring the democratic process to a smartphone in a secure and efficient way can create real social value.
The censorship resistant architecture of blockchains can be used to guarantee that once a deal is made, neither side can opt out and cheat the rules. The advent of blockchain based smart contracts, which are basically any agreement that can be mathematically defined, created a new paradigm of trust between individuals. We not have the capacity of creating mutually beneficial systems that are above the control of any individual or organization, while facilitating the guarantee of fairness in many aspects of human economic interactions.
A very important and unexplored aspect of cryptocurrencies is the possibility to incentivize different behaviors. Bitcoin distributes all the newly created coins to the miners, but steem uses 75% of the new tokens to fund a reward pool for quality content creators. This principle of distributing tokens to people that meet certain expectations or complete various tasks can be used to financially reward desired behaviors. For example, excellent academic performance can be rewarded with a token that is automatically distributed to students that meet the criteria. Or a local administration that rewards prosocial behaviour with tokens that can be used to get a discount on taxation or premium parking spots.
These are just a few of the ways cryptocurrencies and blockchains can be used to better human activity. This is just the beginning and the great news is that the majority of these technologies are open source and this is a major driver of innovation because everyone is able to participate and improve.
There are a lot of ways in which value can be created. Apart from monetary value, a whole world of possibilities has been opened for exploration through the global, tamper proof, censorship resistant and behaviour incentivizing nature of cryptocurrencies and blockchain technology.
We now have new tools to build a future in which value can be derived from trust, immutability and inclusion. And for those that are only interested in the monetary gains associated to cryptocurrencies, the more we created functional products that have these features, the more monetary value will be associated with them. So, the best long term investment is in the development of these technologies.