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Truthful News for Cryptocurrency

Your honest source for all things blockchain and cryptocurrency

Cryptocurrencies are efficient for currency – tokens are not

Cryptocurrency has certain features that other blockchain technology does not. It is these features that makes it proper for use of currency.

These same features do not exist within tokens whether they are issued with a smart contract or not.

Cryptocurrency has two specific features that we are going to focus on.

First is an integrated limit on how many of the currency (coins) can exist without a public consensus taking place to change that limit.

Using bitcoin as an example, what this means is bitcoin has an integrated amount of coins that can ever exist. In bitcoin that number is 21 million coins.

Unlike fiat currency, cryptocurrency can not simply create more at the whim of a programming team or centralized authority. It would take public consensus to increase the number beyond 21 million.

What this means is more than 50% of all the mining nodes running the currency (the people who keep the transactions going) would have to agree to new code increasing the number beyond 21 million.

This is why it is said that a public consensus must take place. If at least 51% of the network does not agree, then the code will not get adopted and the old code with the limit will continue no matter what the programmers try to change.

Further if the code is change, others can opt to fork the currency to keep the limit in place on a new alternative currency.

The second feature we are going to focus on, is open source decentralization.

This is specifically true with blockchain, but may not be true with alternatives to blockchain which centralize things.

As explained with the process of increasing the limit, decentralization is the concept that no single authority can make changes without a majority consensus taking place.

Without this an open source decentralization, no one can be sure if the blockchain has been changed or what those changes may have been.

This means with a centralized blockchain like hashgraph, new currency could be issued whenever the programmers decide, and people have to trust without any evidence that the amount of currency they claim exists, actually does exist and the limit on that currency are actually what are claimed.

It is decentralized open source technology that allows these limits and prevents things from working exactly as the currency system of money works where a government or bank can simply create more whenever they wish.

So what makes tokens different? Tokens are completely centralized as are smart contracts. Whoever has issued the token or smart contract is completely in control of how many tokens are issued.

One could release 5 million tokens today, and then decide to release 5 million more tomorrow. That means the value of the tokens is reduced each time that centralized authority issues more.

Now some people are under the belief that if a token is released based on the terms of a smart contract, that they are immutable – meaning they cannot be changed, because once a smart contract is released on a blockchain it cannot be changed.

This is both true and not true. Actually it depends on how the smart contract is programmed. Also keep in mind, not all platforms require a smart contract to issue tokens. Waves is such a platform that anyone can release tokens without a smart contract.

However sticking with smart contracts lets look at the way ethereum works.

Someone could make a smart contract to release tokens and within that smart contract add the following functions.

contract Relay {
    address public currentVersion;
    address public owner;

    function Relay(address initAddr){
        currentVersion = initAddr;
        owner = msg.sender;
    }

    function update(address newAddress){
        if(msg.sender != owner) throw;
        currentVersion = newAddress;
    }

    function(){
        if(!currentVersion.delegatecall(msg.data)) throw;
    }
}

Without getting into the technical aspects of coding, what this code is doing if forwarding the one contract to another contract on the blockchain. This allows a contract to be updated with different versions.

So effective someone could start with a contract that limits the amount of tokens to be released, and then later decide to increase the amount of overall tokens.

Because a single authority controls the ability to do this, it doesn’t take new contract agreements to carry out the new issues of tokens.

This means exactly as stated about, a centralized authority can simply issue more and more of the tokens without public consensus despite the fact the tokens are issued on a decentralized platform.

Most contracts written on blockchain platforms these days are written in such a way that they allow newer versions of the smart contracts to be published, which means that we have nothing more than an electronic version of the existing fiat currency system in place.

It is for this reason, bitcoin and blockchain is considered to be the best form of cryptocurrency – because tokens have no true protection from creating more tokens at whim and most alternatives to blockchain are actually centralizing things in the name of “efficiency”.

People who are just getting into cryptocurrency need to be aware of the differences in actual cryptocurrency and tokens for these exact reasons. Whereas very few are exploiting such features at this point in the token world, that does not mean that as they begin to run out of tokens they will not start to do so.

Only blockchain based cryptocurrency is truly immune from this.

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