The virtual money in this case (an online statement) doesn’t actually exist, it’s just a value system used by the bank to be translated into hard cash if ever you have to make a withdrawal. But that virtual currency isn’t a thing in reality, even if on the backend it might have its own funky way of working in the financial system.
So how does that compare to crypto? Like with any currency, value is determined by 1) how useful it is to us and 2) what we say it’s consequently worth, so what’s the conceptual difference between, say for example, 20 chainlink (for example) “dollars” and 20 virtual dollars in my bank that represent cash?
Are they *actually* different things, and if so, how?
In: Technology
Money is broken down into two types, fiat and commodity. Commodity money has some sort of commonly applied purpose, and that common purpose makes the money inherently useful and valuable. The idiom “you aren’t worth your salt” comes from the Roman army. Rome had so many soldiers in so many different areas with so many different local currencies, they wanted to pay their soldiers with one thing that was universally valuable to simplify their payroll, so they chose salt. Salt is lightweight, easy to carry, doesn’t spoil, can be easily divided into specific amounts, and everyone everywhere recognizes it as valuable.
The trouble with commodity money is that state has no way to control how valuable it is. Imagine you’re a Roman soldier who’s been scrimping and saving his salt so he can send a bunch of “money” back home to his family. Right before he does so, someone invents a really cheap way to recover salt from seawater. There’s suddenly many, many times more salt floating around and it becomes much cheaper. This Roman soldier’s savings are now worth significantly less and he’s understandably upset. If the entire Roman economy worked with salt as their form of currency, the whole economy would be thrown wildly off balance.
Fiat money has no inherent value. The only value it has is the faith that people have in it. I have no problem selling my car, an inherently valuable item, in return for a bunch of paper pieces with pretty pictures on it because I have faith that when I want to purchase something from someone else, they’ll be willing to accept US dollars in exchange. While fiat money can be a little scary as you’re essentially putting your trust into a bunch of IOU coupons, the value of fiat money can be controlled by the state as the state can make or destroy fiat currency at will, which allows the state to stabilize prices and keep the economy going more smoothly.
Crypto and dollars are both fiat currencies. The only value they have is the faith people have in being able to exchange their fiat for actually useful goods in the future. The meaningful difference is that one is state-controlled, and thus more stable, while the other is lacks central control and thus is inherently more volatile.
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