Crypto basics for beginners… from another beginner.
Unless you’ve been living under a rock, I’m sure you will have heard of cryptocurrency, but to a lot of us it seems rather a strange and mysterious concept, the province of Millennials and Silicon Valley types, rather than an everyday reality. Until about six months ago I would have said the same of myself. I am still far from being an expert, but I have more of a clue than I used to, so here I am going to do my best to make crypto seem less mysterious and more accessible because, like it or not, cryptocurrency is coming, and is going to be a significant part of our futures (a bit like that darned “internet” thingie that once seemed so avant garde…).
If you’re wondering why you would even care to find out more, there are many possible reasons, but the one that appeals to me the most is this: in our mainstream economy, we have created a system that works well for some (the wealthiest top few %) and not so well for everybody else. But money is just a man-made device (with the emphasis on “man” — as the chief designers of our modern economy were mostly male) for exchanging value. Cryptocurrencies are also a device for exchanging value, and because they are not owned by a government, they have greater liberty to tweak the rules of the game — for example, to make the game fairer for the have-nots, to level the playing field and empower women, minorities, and the Global South. That, to me, is reason enough to get interested.
On to those three things…
1. Whose butt does it come out of?
This may seem like a strange question. I shall explain.
I’ve been introducing about ten of my Sisters to the SEEDS cryptocurrency, because I feel that SEEDS and Sisters have a good alignment of values, in our shared aim to create a better, more sustainable, peaceful and equitable future. It has been a wonderful way to find out what reservations people have about SEEDS, and cryptocurrencies more generally.
One of my Sisters asked a particularly pithy question, relayed from her husband: “This currency — whose butt does it come out of?” To rephrase this poetic enquiry, he was asking: How is it worth anything? Surely you can’t just create a currency out of thin air, and have people pay good dollars/pounds/euros for it?
Well, actually — yes, you can. Like anything else (a house, an artwork, a glass of Elvis Presley’s drinking water or a lock of Britney Spears’ hair), something has value if humans, in all their wonder and weirdness, decide that it has value.
If I take out my purse and look at the cash inside (which has been there for several months now — even pre-Covid I hardly ever used cash… but I digress), I see the rather nasty pieces of plastic that have now replaced UK paper banknotes, and discs of cheap metal. These objects would be meaningless to a cow, tree, or space alien. The only reason I can spend them on food, clothes, or other goods and services because the vast majority of humans have agreed that these otherwise insignificant and useless objects represent a store of value that can be exchanged for things that are of actual value to me, in that they can be eaten, worn, or otherwise serve my material needs.
In effect, all money is a fiction. To answer my friend’s husband, all money comes out of somebody’s butt, be that the Bank of England’s butt, the Fed’s butt, the IMF’s butt, or whatever.
2. What is it for?
Why was cryptocurrency created? And how is it now used?
There are many different answers to this question. To take Bitcoin as the best-known example of a cryptocurrency, Satoshi Nakamoto’s 2008 white paper described it as “ a purely peer-to-peer version of electronic cash” — in other words, a currency designed to sidestep governmental control. Ideologically, it was intended to decentralise the money supply, and the timing of its origin was no coincidence — the aspiration was that it would combat the systemic problems that created the global financial crisis of 2008. A prominent Bitcoin miner, Wang Chun, is quoted as saying, “Bitcoin [gave] people back the control, and their freedom, for the first time since banks took it over some 100 years ago.”
However, Bitcoin and many of the other cryptocurrencies have ended up being used for old-school speculation by investors. You may well have heard of people making fortunes on Bitcoin as its value fluctuates wildly. As with anything else, if someone is able to buy low, sell high, there is money to made — in vast sums. So rather than being exchanged for goods and services, people have tended to invest in the currency itself, in much the same way that traders bet on gold or pork bellies, so some of the potential to be a gamechanger has been dissipated by people using a new currency for old paradigms.
3. Doesn’t it use a lot of electricity?
You might have heard about how environmentally unfriendly cryptocurrencies are. From The Telegraph last year:
“Just one Bitcoin transaction uses the same amount of electricity as a British household for nearly two months, new figures have shown. The amount of energy needed to run the cryptocurrency has soared to record annual highs of 77.78 terawatt hours — the same as the entire electrical consumption of Chile.”
Why is this? Now, I don’t pretend to fully grasp what is involved in “mining” Bitcoin, never having done it myself, but as I understand it, the problem starts with the very same feature that made Bitcoin (and various other cryptocurrencies) attractive in the first place: the fact that the ledger, or accounts, are not held centrally by a bank but are distributed in encrypted form (the “crypto” in “cryptocurrency”) across a network of privately owned computers in a series of blocks of data (the “block” in “blockchain”).
Some people acquire Bitcoin simply by buying it, but other people earn Bitcoin by providing a service to the Bitcoin community. According to Investopedia: Bitcoin miners receive Bitcoin as a reward for completing the data blocks of verified transactions which are added to the blockchain. Mining rewards are paid to the miner who discovers a solution to a complex hashing puzzle first, thereby verifying the legitimacy of Bitcoin transactions. The probability that a participant will be the one to discover the solution is related to the portion of the total mining power on the network.
Err, yes. If you know exactly what that means, you’re a better man than I am. The article linked above includes the “Explain it Like I’m Five” version, if you really want to know more.
The main point is that there is only one reward per block of data, and the reward is large. Winner takes all. No doubt luck helps in the race to be first across the line, as there are trillions of potentially correct guesses, but so does computing power, and the more computing power you’re using, the more electricity it’s going to use. So the miners end up in an arms race to have the fastest mining facility.
But it’s important to realise that not all blockchain systems are created equal. For example, the Telos blockchain, which SEEDS uses, is based on EOSIO. Most of this article was Greek to me, but this sentence I understood: “EOSIO is 66,000 times more energy efficient than Bitcoin and 17,000 times more energy efficient than Ethereum” (GenerEOS, 2018)
Which brings me to several other ways in which SEEDS is different. In fact, I don’t really think of SEEDS as a cryptocurrency, but rather as a complementary currency that was designed to achieve the specific goal of environmental restoration, just as the Stroud Pound or Ithacash are designed to promote small, local businesses.
Stability: Unlike Bitcoin, SEEDS has a mechanism to keep its value relatively stable, avoiding the wild fluctuations between boom and bust. According to conventional economic theory, increased demand leads to a rise in price, while decreasing demand leads to a drop. Once a Seed reaches approximate parity with the USD in terms of spending power, there is a way to balance supply and demand for Seeds so that the value stays the same over time, making it even better than national currencies, which tend to lose value in real terms due to inflation.
Governance: Both Bitcoin and SEEDS are decentralised, meaning that nobody owns them, but in SEEDS there are governance processes that allow all Citizens of SEEDS to propose amendments to the rules, and to vote on them.
Different value system: While we might think of money as being value-neutral, actually it isn’t — or at least, not in its current design. An economy affects people’s behaviour by what it rewards and what it ignores. SEEDS specifically aims to support the regeneration of our ecosystem, so it rewards people for making a contribution to both the ecosystem and to the flourishing of the SEEDS system itself. It is aiming to reengineer the incentive structures to promote prosocial and pro-green behaviours.
I hope that has helped to slightly demystify cryptocurrency. In all honesty, you don’t need to understand anything at all about crypto in order to use SEEDS. You can simply use the SEEDS app as a way to buy and sell stuff, without knowing any of the above, just as you would use money.
But I know there is a big trust issue here, which puts people off cryptocurrency (and maybe the name doesn’t help, adding to the air of mystery and inscrutability). We are comfortable using money, because it has been around since before we were born, and we have (generally) been confident that if we put our money in a bank, we will one day be able to get our money back out of it. However, as Henry Ford once remarked:
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
So if you are a cautious person, you might actually want to hedge your bets and have some of your money tucked away in a different system, rather than having all your financial eggs in one basket.
And on the upside, if you tuck it away into SEEDS, you might just help save the world.
Originally published at https://www.rozsavage.com on February 6, 2021.