Where STEEM And Other Cryptocurrencies Get Their Value

A decade ago, a white paper appeared that would change the world. In it, an individual(s) spelled out a new approach to the Internet what would forever change how things are.

Satoshi Nakamoto is known for inventing Bitcoin. A decade later, we see an entire industry that is unfolding based upon his/her/their work.

It is important to understand what took place in that white paper. A great deal of what we deal with today regarding this technology was not new.

A blockchain is a peer-to-peer network. Obviously, this was nothing new. Anyone who remembers Kazaa, Limewire or Napster knows they far preceded Bitcoin. It is also a distributed ledger which dates back to the 1970s. Cryptography provides the security, something that dates back to long before Satoshi.

On a peer-to-peer network, a digital file can be sent numerous times. For example, I can send a spreadsheet to both Bob and Mary. Tomorrow, if I so desire, I can send it to Fred. Digital files are easy to reproduce. With a network of this sort, it is easy to send information repeatedly. This is one of the biggest advantages to digitization over something being in physical form.

This is what got the record companies so upset. One person would take a file, share it out, and have it downloaded thousands of times.

Peer-to-peer networks showed how effective they are at sharing information. Since they entities were centralized, eventually they found themselves in legal trouble. Yet, the technology was sound.

The major element that Satoshi Nakamoto added was economic. By creating the Bitcoin cryptocurrency, he added a financial component to the peer-to-peer system that did not exist before. He essentially created information that had monetary value.

This created one problem. The advantage to a peer-to-peer system is that the information could be shared with thousands of people. This is great if it is a story about the atrocities in an African nation. It is problematic when that information is money.

Hence, the double-spending problem Nakamoto solved by using the incentive of problem solving known as mining.

At this point, Nakamoto is known for inventing Bitcoin. Fifty years from now, Nakamoto will be known as the Father of Cryptoeconomics.

That is the major contribution that was given to humanity. It is also a piece that gets overlooked.

Blockhchain is a very powerful tool. Having a network secured by cryptography which is a public distributed ledger to post transactions while reducing friction is extremely valuable. It is a game changer in terms of how business is done. However, in this context, it is more useful than revolutionary.

Adding in the cryptocurrency component turns it into a economic system. This adds the ability to provide incentives to the participants to behave in a way that is beneficial to the network. At the same time, there is a disincentive to not be a bad apple since that could cause financial harm to oneself.

A network that combines cryptography (security) with cryptocurrency (economy) is revolutionary.

Many people cannot grasp how cryptocurrency has any value. They mistakenly believe it is money that comes out of nowhere. This is incorrect.

To start, a cryptocurrency is tied to a blockchain. They go together and cannot be separated. Hence, any value the cyrptocurrency has is related to the underlying network.

Blockchains are cryptoeconomic ecosystems. By this I mean they are networks that are monetized in their design.

To illustrate, I will use Facebook.

This is an ecosystem that is enormous. However, it was not always that way. Facebook essentially is a platform that provides a place for people to interact online. In the beginning, it was a virtual hangout site. To some this is really cool yet it not worth a whole lot unless it is monetized. Hence, Facebook was confronted with the issue of how to monetize their system.

Of course, years later we see how this was done. Advertising is a big component of their model. We take for granted how logical that is today but 15 years ago, it was not the common practice. We also see commerce taking place in many different forms on the Facebook platform. This also adds to the value of the entire entity. Add in a few things like the broadcasting of sports and you see the behemoth of today.

We can compare that to a cryptoeconomic system like STEEM. Since July 4, 2016, the blockchain provided monetary rewards to anyone who was participating on the network. Since that day, the monetary component was built in. STEEM did not have to figure out how to monetize the activity on the blockchain; it was inherent in the system.

This is evidenced each time someone goes to his or her wallet and there is a payout. That green bar tells the individual what the payout is in STEEM, SP, and SBD. Those are the currencies that are used on the STEEM blockchain.

Each action has a certain value based upon the algorithmic programming of the blockchain. Some actions end up being dust while others are worth a few STEEM. It is all coded into the network.

Using Facebook, again, what is it that makes entity to be worth so much money? Obviously, the revenue stream and profits. However, it is really the activity that determines all that. In a digital system, activity is king. Facebook is worth a lot more than MySpace or Reddit because the amount of activity dwarfs those other platforms. This is what Facebook was able to monetize.

STEEM is a digital system. Hence, activity is paramount. That is what ultimately determines the value. More people tied to a particular blockchain means a larger ecosystem. Larger ecosystems have more activity equating to more people using the currency. On STEEM, the activity is all monetized.

So how does this compare to the price of things on coinmarketcap.com? It doesn't. There is no correlation to what I am describing here and the pricing action. They are two separate things. People like to tie them together but they are completely separate. Look at the top 10 tokens. Many of them are priced the way they are because of factors other than what is taking place on the blockchain.

It is similar to Tesla having a marketcap bigger than Ford and GM. Why does it have that? The balance sheet and income statement does not even come close for Tesla to the others. The reason the stock is priced where it is because people are using other factors to arrive at their decisions of whether to buy or not. With a stock like that, there is a lot of speculation. The same is true for many tokens.

This is one of the core reasons why I am so high on STEEM. The activity is there and is only going to grow. We are at the phase where development is crucial. Applications are what is going to drive traffic to the STEEM blockchain. With traffic, comes activity. All this activity has a monetary component built in. In turn, it makes the entire ecosystem more valuable whether the Wall Street casino realizes it or not.

That said, markets are often late to the table but rarely miss a good meal altogether.

Satoshi Nakamoto, the Father of Cryptoeconomics.

It is going to change the world.

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