Cryptocurrencies attract a lot of attention at the moment and yet they are not the only ones to be in expansions. Local currencies are also experiencing a real boom.
Cryptocurrencies attract a lot of attention at the moment and yet they are not the only ones to be in expansions. Local currencies are also experiencing a real boom.
The way Cryptocurrencies work is not that different from their cousins the Local Currencies and comparing them will help you understand what really is a cryptocurrency (and a Local Currency).
Organic
The objective of Local Currencies is to promote the development of local activities by creating a parallel economy where goods and services corresponding to a certain charter are exchanged against a unit of local currency. It has been demonstrated that 98% of the value created locally and paid in national currency (in euros for example) is recovered by Financial markets and markets speculation without benefiting to the inhabitants who have created it. By putting in place a local currency, the inhabitants of a locality (city or villages) decide to create an ecosystem separated from to the national economy which will retain the value created locally.
A protocol is a charter
To obtain tokens of these local currencies which are created from thin air (such as 90% of our national currency created by the private banks through credit), you must adhere to an association and sign the charter of this association. Local currencies typically propose charters that are oriented toward an economy respectful of individuals and the environment.
The process is the same to obtain cryptocurrencies, with the difference that instead of joining an association and a charter, you must download a software (the Protocol) on your computer.
We assume that the association is organised as a direct democracy which means that all members may take part to the decision-making process and that decisions are taken at absolute majority. We are doing this digression because that is the way blockchain based systems operate. For more information on the subject you can read our articles on decentralised networks consensus.
As a charter, a protocol is a set of rules that intend to govern the operation of the network of participants. For example a charter of local currency will state that only organic products can be purchased with the local currency. In the same way, a protocol will determine how many tokens the members of the network should receive for participating to the development of the network.
The bitcoin protocol for instance provides that minors will receive 12.5 bitcoins in addition to the fees attached to transactions for each blocks they have added to the blockchain. This compensation is justified by the fact that these minors have allocated the computing capacity of their computer installation to complete the mechanism of the proof of work and add blocks to the blockchain.
The blogger who is paid to post a quality article on Steem or a user of Augur that receives a dividend for his correct predictions, are similar exemples.
cryptocurrency
Each protocol is different and adapted to the economy developed by the network. Being open source, it can also be improved, completed or duplicated by anyone.
The purpose of a charter and a protocol is the same, that is to create an ecosystem with specific rules, its own currency and the purpose to resolve a problem. This protocol as this charter can be applied to any problem and organized freely. However the objectives of a local currency and a cryptocurrency are not necessarily the same.
Different objectives
The objective of a local currency is to develop the local economy according to rules that are not dictated by markets. In other words, the goal is not to increase the value of the local currency.
This is the reason why the value of local currencies is generally correlated to national currencies. One token of the local currency will be equivalent to one euros for example.
The objective of these currencies is however to attract a maximum of people who will exchange Euros against tokens of local currency as well as producers and resellers of products to supply the ecosystem. These persons are adhering to the association by conviction and generally do not have personal interests to do it, except a small incentive during the conversion of national currencies (a euros and often exchanged for 1.20 tokens).
The philosophy is different with the crypto-currencies, because the value of each token can increase (or decrease) compared to national currencies. The value of cryptocurrencies will therefore depend on the supply and demand rules on the cryptocurrencies exchanges. The value of that currency will depend on its perceived value (also called the “Current Utility Value”) and also speculation.
Users of crypto-ecosystems also adhere to the network by conviction, but also (and especially) because they are paid to do so. As we has seen they receive tokens for participating to the development of the network and they hope that their contribution will benefit the protocol and increase the value of the token they have received. These incentives in protocol development (also called “cryptoeconomics) is a real innovation and possibly a brand new business model.
At the moment we are paying to use internet with the content we post and our personal datas. But internet of money is changing all this and being paid to post content or use a platform will soon be the rule. Be prepared to see an exponential increase of the pace of development of protocols.
The velocity, a common problem
The purpose is different but these ecosystems are both seeking the same result which is the movement of their tokens. Without this exchange of values, an ecosystem cannot survive. In other words the goal of these ecosystems is to increase velocity (i.e circulation) of their tokens.
local market
Many local currencies which have decided that the value of their tokens should decrease if they are not spent within 3 months. The same goes with cryptocurrencies. If we take Steemit for instance, the members are paying others for their posts by a system of vote. Every time you vote, you grant the other member a certain amount of token. This amount is proportionate to the number of token you hold. So you are incentivized to participate to the network by transferring tokens.
It has been found that the value exchanged on the network corresponds to the valuation of the network. Willy Woo has even deducted the Network value to transaction ratio (“NVT ratio “) which determines if the value of a cryptocurrency is disproportionate in comparison to the development of the network. We now better understand why the circulation of cryptocurrencies is vital for the development of the Protocol.
Perhaps we could find a way to apply these new methods to local currencies without opening the door to speculation?
