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
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.
See you!
Hi @gamsam
Finally I've found some time to catch up and read few previously bookmarked posts.
For some people Digital Money = crypto. For many others it's not crypto, but instead it's new creation of FED and other central banks. Fully centralized digital currency.
Sometimes I wonder if digital currencies backed up by central banks will be a real threat to crypto. I wonder what's your view on that issue?
Can those currencies be cashed out to FIAT? Or is it only one-way transaction?
Solid read. Upvoted already ;)
Yours, Piotr
Hello @crypto.piotr
I can understand why some people might consider digital money to be equal to crypto. The fact though is that crytpocurrencies are just types of digital currency. There are a lot of other types of digital currencies like in-game currencies which was explored in this post.
Cryptocurrencies are decentralized digital currencies. This is what makes them unique and much different from other types of digital currencies. For a currency to be decentralized, it must meet a certain criteria and that is in fact what I talked about in my most recent post here.
I don't think digital currencies backed up by central banks will be a real threat to crypto because they still have the same problem that Fiat money has; CENTRALIZATION. They could be altered in a whole lot of ways because they are controlled by a central authority - the banks and the government.
Although these games themselves might not offer an option where the in-game currencies can be converted to fiat, most of them are transferable between players. Because of this, players have created third party platforms and forums as black markets where they can exchange their in-game assets for other commodities or fiat.
Thanks for the comment. Cheers