Is Digital Money the Answer? - UNDERSTANDING THE BLOCKCHAIN; Episode 2
Hey there! Welcome to another episode of UNDERSTANDING THE BLOCKCHAIN.
You can check out earlier episodes here:
In the last episode of the series here, we discussed the concept of money, types of currencies and what makes them valuable.
Keeping up with our discussion, we’ll be exploring a fourth kind of currency. It doesn’t really cut as a category of it’s own because it fits into all three categories we’ve previously discussed. We’ll be talking about Digital Money.
Digital money is digital, literally. It exists on the computer, on phones, virtual networks, etc. It is a virtual kind of currency. There is no physical object or bill.
A lot of digital currencies stemmed out from video games and we’ll be exploring some to see how value is built around digital money.
The first is a simulation called Second Life Real Estate. It is basically like an online version of The Sims.
Second Life created its own virtual economy and in-game currency. People would invest real money to purchase digital assets in the simulation which had no value in the real world but was very much valuable in the digital world.
The fact that these digital commodities are scarce in the simulation makes them valuable but then it also possesses some attributes of Fiat currency. Also, these commodities are actually just a bunch of zeros and ones that the developer could alter or delete at any point makes this comparable to fiat.
These currencies derive value from a central level of trust that the users put in the developers, just like with Fiat where trust is placed in the government.
Another video game called Eve Online is similar to this. It is an MMORPG – massively multiplayer online role-playing game.
Eve Online uses a currency called the Interstellar Kredit (ISK). The ISK could be purchased by users in the real world with actual Fiat and be used to buy a space ship for example in the game. If the user’s space ship is then blown up in the game, the money is actually lost.
World of Warcraft is another MMORPG with utilizes a currency called Gold. This Gold could be used to buy items in the game. This is a real economy where players actually performed tasks to obtain Gold and sell them online in the real world for Fiat or their currencies.
With games like this, there is a real blur between actual economies and virtual economies. In the summer of 2017, the Venezuelan Bolivar (currency used in Venezuela) crashed. This was so bad that one unit of Gold in World of Warcraft became more valuable in exchange rate than one Venezuelan Bolivar.
This means that people relatively trusted the game developers of World of Warcraft more than they trusted the Central Bank of Venezuela.
Haven seen examples of digital currencies; this brings us to the primary weakness of digital currencies; it requires a Central Authority. This is the same issue facing the Fiat currency, centralization.
This is where Bitcoin and other cryptocurrencies come in. Unlike Fiat money and other digital currencies, cryptocurrencies do not require a central authority.