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Cryptocurrencies like Ether are backed by the network's virtual machine. You have to pay Ether to process a transaction on the Ethereum virtual machine and as t

Cryptocurrencies like Ether are backed by the network's virtual machine. You have to pay Ether to process a transaction on the Ethereum virtual machine and as transactions can do arbitrary computations, Ether is useful for things other than transferring Ether. Cryptocurrencies like Bitcoin don't have that feature, but that just makes them more like fiat currencies. You could argue that fiat currencies are backed by the force the state is willing to use to get its population to pay taxes in the currency, but that's not a stable backing, as the state could decide to accept another currency at any time. Some states do allow for tax payments in other currencies, which means that some fiat currencies have no backing by that mechanism. Some people are also forced to pay in Bitcoin, for example to ransomware, which should have a similar effect in forcing people to use the currency. Ultimately, I don't see why a currency would need backing. There is nothing wrong with a currency gaining value purely from its value and utility as a currency. Many other valuable things such as precious metals and art gain a large part of its value in the same way.

traveler01 4y ago
I do love when people response that the USD has value because of the it's "backed" by the government.
Eisenstein 4y ago
> There is nothing wrong with a currency gaining value purely from its value and utility as a currency. I mean, the problem with that is twofold: 1. If it has value as a currency then it gaining value incentivizes hoarding of the currency. If it is going to be worth more tomorrow, why spend it? In that case it has failed as a currency since the economy cannot grow without economic activity; specifically currency movement 2. If it only has value because people perceive it to have value (specifically, there is no need to use this currency over any other) then it is all based on faith. At that point a rapid devaluation can be triggered by any number of market actions -- all it takes is a little wavering for a selloff to start and the snowball starts rolling down the hill. This is the reason that crypto cultures can be so toxic -- if you start to question any of it (rock the boat) it is an existential crisis and you get the appropriate response, so no one is willing to question the underlying economics for fear of social repercussions

traveler01 4y ago

I do love when people response that the USD has value because of the it's "backed" by the government.

Eisenstein 4y ago

> There is nothing wrong with a currency gaining value purely from its value and utility as a currency. I mean, the problem with that is twofold: 1. If it has value as a currency then it gaining value incentivizes hoarding of the currency. If it is going to be worth more tomorrow, why spend it? In that case it has failed as a currency since the economy cannot grow without economic activity; specifically currency movement 2. If it only has value because people perceive it to have value (specifically, there is no need to use this currency over any other) then it is all based on faith. At that point a rapid devaluation can be triggered by any number of market actions -- all it takes is a little wavering for a selloff to start and the snowball starts rolling down the hill. This is the reason that crypto cultures can be so toxic -- if you start to question any of it (rock the boat) it is an existential crisis and you get the appropriate response, so no one is willing to question the underlying economics for fear of social repercussions