The intrinsic link between cryptocurrencies and blockchain

Indeed, several events over the last few years have augmented this narrative, including large-scale fraud at FTX, collapse of several lenders and hedge funds, as well as pump-and-dump schemes. However, these sorts of acts are not exclusive to cryptocurrencies, and have been perhaps just as prevalent in traditional finance over the years. As the digital landscape continues to evolve, it’s critical for enterprises to recognise the intrinsic link between cryptocurrencies and blockchain.

Cryptocurrencies are central to the functioning of most public blockchains (public blockchains are those that can be used broadly by anyone, although they are not all built equal and have varying levels of “enterprise attractiveness”). They are the payment mechanism for use of the respective blockchain and provide an incentive for both innovation of the technology and to those that help secure the networks.

Largely due to the prominence of Bitcoin, the primary use of which has arguably been payments for goods and services, it’s a common misconception that all cryptocurrencies are to be used in this way, leading to a belief that they have no real intrinsic value and are only traded by speculators. However, most cryptocurrencies are designed to be the payment mechanism for use of their respective blockchains, rather than purchases of goods and services. Many large corporations (e.g. Visa, PayPal, SocGen, EDF to name a few) already use public blockchains today, and when they do so, they make payments (sometimes referred to as “gas” fees), either directly or indirectly in the native cryptocurrency of that blockchain.

Greater blockchain adoption means increased demand for its cryptocurrency

Many blockchains have a finite, or at least controlled, supply of cryptocurrency. As a particular blockchain sees greater adoption, there will be increased demand for its cryptocurrency to pay for the use, which should place upward pressure on the value of that cryptocurrency. This creates an incentive for blockchain entrepreneurs and developers, who are typically remunerated in the native cryptocurrency, to innovate further and give their blockchain a competitive advantage over others. Additionally, proof-of-stake blockchains, which are the most prevalent and most used by enterprises, are secured through decentralisation of operators, who “stake” their cryptocurrency as their right to operate the network. They are rewarded for this through payments in the native cryptocurrency, and therefore the cryptocurrency helps to improve security of the network.

Without cryptocurrencies, you create no real incentive for entrepreneurs to build innovative blockchain technology. You create no incentive for groups to operate blockchain networks and ensure its security. Yes, cryptocurrency-free “private” blockchains exist, and have been used successfully by several companies to create operational efficiencies. But the real prize for most businesses will come from developing on public blockchains, which offer then the ability to scale products and services through access to a wide, global audience.

The need to evolve blockchain adoption

The traditional corporate world needs to progress their understanding of blockchain technology and cryptocurrencies beyond the headlines. In financial services, where this rhetoric is most common, corporate leaders that fail to evolve will be left behind by the more advanced financial institutions, who are already on a path to public blockchain adoption. Fortunately, there is still time to close the gap but, with 2024 set to be a big year for blockchain adoption, they should make the most of the opportunity now.