The Internet paved a digital infrastructure where it is now possible for anyone or any group to issue their own currency and find people who will accept it if they find it valuable. Internet Moneys use an open source protocol with specific rules for how tokens are minted and how they can be exchanged. Instead of issued by a nation state, the tokens are backed by a network of people who find it valuable.
If you work in cryptocurrency you often get the question — so how do I get some. The real answer is that you can earn it, or you can pay someone else who has earned it.
The simple answer can be found by going to an online cryptocurrency exchange like Coinbase that will ask you for your banks information so that you can transfer a national currency like USD for bitcoin or ether, the two most popular cryptocurrencies. Other popular exchanges are Kraken, Shapeshift, and Okcoin. But even if you choose the simple answer, the value of the cryptocurrency you decide to hold will be more useful if you read on to understand the reality of the investment that you are making.
If you decide to earn it yourself, you participate in the cryptocurrency community in some way by (1) mining or (2)performing a service.
Mining is a continuous process where anyone can compete to earn freshly minted tokens using their computer to solve hard math problems. Bitcoin and Ether are two cryptocurrency economies that allow people to transfer their tokens by recording the exchange on one central ledger that is located on thousands of computers around the world. No one bank or company like Venmo keeps track of the transfers between people and companies; instead, anyone with internet access can audit the ledger at any moment in time.
Mining is essential to the network because it ensures that the record of transactions is untampered. However it is difficult to mine new tokens today unless you have lots of resources and low energy costs, one of the difficult problems that researchers are trying to solve.*
What do you have that you can offer to the market of cryptocurrency holders? Websites like Coinality can connect you with employers who pay in cryptocurrency. In fact I found a few of ConsenSys’s first hires there .You can also earn it by finding a bug with a code bounty, by participating (and winning) a hackathon, earning funds in a crowdsale, or receiving a grant.
Paying Someone who Earned It
If you pay someone who has earned it, they will usually charge some type of fee because they have already done some work to earn that currency in the first place. Perhaps your friend won’t charge you a fee, but an online exchange certainly will because they are taking on the extra risk of trust.
There is also a time component — If you want to purchase cryptocurrencies using an exchange like Coinbase, the process will feel similar to signing up fro a service like Venmo or Paypal. It will take a few days to get verified, and each time you buy/sell, it will take a few days for the order to go through.
However if you are purchasing from a friend by giving them cash (or another trade that you agree to) in exchange for some cryptocurrency tokens, the transaction can happen as quickly as it can be posted to the ledger of the blockchain in question (anywhere from a few seconds to 12 minutes). You would just need to create a wallet to hold your tokens using a provider like Blockchain, Electrum, or Armory.
Once you create a wallet, you will need to write down your seed in at least 2 secure places that can be accessed offline (think a bank vault and a personal safe). A seed is a really long password that will allow you to gain access to those tokens at any point in the future. If you lose that seed, there is no one else in the world and no computer that will be able to restore access to those tokens for you.
Once you create your wallet, you will have an address (think an email address or an internet IP address) that you can give to others so that they can send you some tokens. You can use that address to receive funds from anyone in the world that you can find to give them to you. Each time you do a new transaction from your wallet, you can generate a new address so that you create more possibility of preserving the privacy of your identity and your transactions. Your wallet stores all of the addresses that you generate and the history of all of their transactions.
What can you do with those tokens for now? You can use them to purchase flights at Cheapair.com, to buy any product on Overstock.com, and you can even get a Visa debit card by linking your Coinbase account. You can use them to take part in fundraisers for new cryptocurrency protocols, like the Ethereum fundraiser in Sep 2014 which was the second largest crowdsale ever at the time and raised $18mil USD. Or you can simply hold onto them in your wallet; thus you are investing in the idea that the particular digital ledger will become the infrastructure for a valuable economy and your tokens will help you participate in it.
Internet Money is just a way for us to send around value to each other by using a trusted source of data, a ledger, that accounts for all tokens in existence and allows them to be transferred only by their proper owners. That ledger is ensured by the particular kind of cryptography unique to cryptocurrency technology. Read on to understand the complexities of ensuring the fairness of that ledger system when extended to global commerce, and how it fundamentally asks us to re-imagine the role currency plays in our society.
The Problem with Cryptocurrencies of Today
*Maybe Satoshi modeled bitcoin as an ideal example of governance by the free market, or maybe he crafted an experiment to show whoever can access the most machinery and energy will gain control of an economy.
The hard limit of resources required to mine Bitcoin has led to the centralization of mining with a few companies in China, meaning that a few companies are minting all the new bitcoins. Check out this Planet Money podcast on the issue.
New mining algorithms attempt to address this problem, but they assume a fundamental limitation (resources or tokens) that will always lead to an unequal distribution and thus control of the currency, especially if we scale them to meet global needs.
Future of Cryptocurrency Value
What happens to the value of cryptocurrencies when we are no longer comparing the price of the cryptocurrency to nation-backed currencies of today?
If Jay Z and Kanye did a release of a song that you could only purchase using bitcoin, they would greatly increase the value of all bitcoins in existence. If the city of Jaipur issued an ethereum-backed local currency, it would similarly drive more value into the Ethereum ecosystem.
But instead of pumping value into a system where the currency is controlled by unknown and hard to regulate miners, industries, regions, and even the international political community will probably issue their own cybercurrencies instead. They will incentivize people who want their transactions to be valid to follow the rules of the issuing body, similar to how taxes work today. This path renders a network of currency systems that are centralized only in the wallets of the users who hold the tokens that correspond to the digital ledgers in question.
Internet Money is fundamentally a political system because it controls the way the community can earn and exchange value. We’ll do best as a society when we own up to the fact that these economic experiments must be implemented in mature ways that pick up where the money of today falls short.
Money of today falls short in its capture of true value — impact on the earth, impact on health, and the impact of inequality on society. Perhaps the opportunity is to rethink our mining algorithms to reflect the communities that we want to build. I’m not an expert in abstract math or cryptography, but I am an expert in practicality and basic human needs, and it seems that we must reconcile the gap between the two if we want to build a currency system intended for widespread human use.
If bitcoin wasn’t an experiment in libertarian idealism, it could be a demonstration of a fundamental right to exchange resources in a way that reflects true value. Our goal is to determine what true value is by reflecting on the future that we want to create, and design a currency system and mining algorithm(s) that captures value accurately and fairly. Instead of proof of work or proof of stake, what about proof of contribution to the community in question? How could that be randomly and democratically assigned and implemented?
That work is already happening in communities across the world already, from Black Lives Matter, to skillshare and barter clubs, to cooperatives and community gardens, to renewable energy initiatives. Blockchains are just another component of future public works that will help us achieve international accountability for our impact on human lives and the planet.
Thanks to Catalin Dragu at ConsenSys for the graphics.