Five years ago, explaining to people what makes a cryptocurrency legitimate was so much easier than it is today.
For example, one could give a somewhat simple explanation when the term “blockchain” was mentioned in conversation by describing aspects of mining, and this would be considered satisfactory.
These days, new adopters will probably feel as though they’re in the middle of an ocean lost in a sea of endless options dealing with different kinds of *Proofs*.
A lot in this field has become even more complicated in part due to a plethora of utility tokens, currencies based on some centralization such as XRP, new corporative stablecoins, as well as securities that have flooded the nascent markets. It is no longer enough to have *just some* knowledge about the technologies that underlie the Bitcoin or Ethereum Networks.
It is no longer easy to figure out precisely what a cryptocurrency actually is or is not. Nowadays, one needs to be able to distinguish among degrees of legitimacy in crypto, or even among levels of distribution in new blockchain technologies. Let’s remember also how the world will be exposed to such options as completely centralized forms of electronic cash, like Facebook’s global coin “Libra”.
Future blockchain participants may need to learn how to survive in a world plagued by thousands of cryptocurrencies, of which, only a handful could be authentic in the original sense of the term. Thanks to the outstanding educational contributions of a league of crypto experts including Andreas Antonopoulos – whose ideas are the basis of this article -, we can have a clearer understanding of what makes electronic cash a “legitimate cryptocurrency”.
It is not the use of blockchain technologies or mining that gives a distributed currency its true nature as a cryptocurrency, but rather the economic model that is implemented and the political implications of said model. One can run a true cryptocurrency on top of a Directed Acyclic Graph (DAG) instead of a blockchain, as Iota and Nano do. One could also stake instead of mine as is planned by Ethereum and Cardano. And one can transact in second layers such as Lightning Network. These options beg the question: How can we know what makes a currency “crypto” then?
1. A CRYPTOCURRENCY MUST BE OPEN
Any person, without discrimination, must be allowed to use and contribute to the system. A cryptocurrency should not require KYC or AML, force one to provide ID or check their political status, or any kind of filtering. Anybody must be able to access it and use it, and also to contribute to its development. This means the code must be open, too.
2. A CRYPTOCURRENCY MUST BE PUBLIC
A true crypto cannot be private or semi-private, nor can its code be kept in secret, remain out of sight of – literally – any person in the world, not even for protection or security reasons. The source code, all the rules of the game, and all the opportunities, must be given in full exposure to all eyes that exist on the planet. Anyone should be able to audit and judge the system.
3. A CRYPTOCURRENCY MUST BE DECENTRALIZED
A cryptocurrency, in order to differentiate itself from any other type of currency, must comply with the possibility that there may not be an entity, individual or organization, a league of organizations, or any type of group of individuals controlling the system. The political and financial control of the entire network must be in the hands of all users and in the hands of all who want to participate. It may not implicate any kind of monopolization.
The only real power within a decentralized system must be the cryptography that enforces the system rules. Thus, the name of this type of asset is “cryptocurrency”. Decentralization is a modern form of democracy in which any person or group that wants to have effective power, has the right to participate by connecting to the system with the proper equipment without having to ask for permission to exercise power within that system. Decentralization implies “permissionlessness”, too. Without a high degree of decentralization, a currency cannot be a cryptocurrency.
4. A CRYPTOCURRENCY MUST BE NEUTRAL
A real crypto does not care – or even distinguish – if your transaction is a “good one” or “bad one”; “Your private key, your money!” This principle is fully respected and transactions are not filtered in any possible way, nor can they be stopped. Undesirable countries, organizations or actors are not designated, nor are specific individuals or groups discriminated against based on political tendencies or activities. It doesn’t matter who the user is. The rules are applied in the same way to all actors in the system.
5. A CRYPTOCURRENCY MUST BE CENSORSHIP-RESISTANT
No one should have the power to execute censorship over a cryptocurrency in any manner. All transactions must be un-censorable. If any kind of government, bank, organization or some developer retains some level of power to stop transactions or take away rights from a particular user, then the currency is not a completely legitimate cryptocurrency in the purest sense.
6. A CRYPTOCURRENCY MUST BE BORDERLESS
An authentic crypto is, metaphorically speaking, as capable of recognizing country borders as a flock of birds. Birds can fly through the skies and will never see or understand frontiers. Political borders are the result of human imagination. The nature of cryptocurrencies is border-proof. Borders can never affect a crypto. Real cryptos do not depend on countries or political issues. Countries cannot stop or remove a true crypto from its territory, though they can intimidate their citizens and impose fear for using one.
7. A CRYPTOCURRENCY MUST BE IMMUTABLE
A crypto is, in a way, a historical record of all the transactions that the community has carried out within the system via the decentralized asset. All payments or transfers of the system must be sacred. This means for no reason can a transaction be reversed, even in cases of theft or injustice. System rules expressed in computational language must be applied in all cases, blindly. And no transaction should be able to be repaired or reversed. Code is law!
8. A CRYPTOCURRENCY MUST BE UNSTOPPABLE
A crypto must be impossible to stop in any way, just as it is impossible to stop planetary movements or sunlight. This is to say, a totally decentralized currency governed by the laws of cryptography, must end up being impossible to manipulate even by its own creator. Once it starts running, nobody in the world should be able to interfere with faithful compliance of its system’s rules. Just as the natural rules of Physics hold the earth spinning around the sun, in the same way, the natural rules of cryptography and math keep the system of a cryptocurrency running. Nobody should be able to hack or tamper with the system. Stopping it must be impossible!
Taking these into consideration, any electronic asset in the world may then have the opportunity to earn the title of “cryptocurrency” if it can meet these guidelines: Be open, public, decentralized, neutral, censorship-resistant, borderless, immutable and unstoppable. Scientific research and engineering currently suggest that the best way to create currencies with these characteristics is to use the technologies of distributed blockchains and consensus mechanisms, such as mining or staking. However, as we have seen, it is not a particular technology which matters most in order to be a sound currency, but the fulfillment of the new universal values related to democracy and financial freedom.