Sunday, January 5, 2014

PonziCoins?

Quote from the movie: "Mice that roll barrels. Mice that stack coins."
Coins QR Code
After the relative success of BitCoin a lot of new alternative crypto currencies have been introduced. It is very hard to differentiate between the actual valid coins and coins that are better described as a Ponzi scheme.

In a Ponzi scheme the money of new investors is used to pay the old investors. This pyramid system works as long as new investors can be attracted.

Crypto currencies need to attract active users in order to keep the network alive, when a lot of nodes of the network is no longer working, the transactions will stop, rendering this currency worthless.

In order to attract these new users, a reward system needs to be in place. This reward can be obtained by mining, when calculating new blocks in the system is rewarded by new coins and/or to reward with transaction fees. There is an issue with both reward systems with regards to attract new users.
In the first system witch is usually proof of work, each user needs to add a lot of processing power in order to obtain new coins. The second system, usually based on proof of stake, the biggest reward is for the users with the highest bankroll.

But in the end we are talking about money. And the main purpose of money is to trade goods and services. So the acceptance of the crypto currency as a means to make payments is the most important and it seems the most overlooked property.

The main purpose of any new crypto coin should be to become the most accepted payment system, Not a get rich fast for the start-up crew, early adopters or users with the highest processing power. In that case parallels with a Ponzi scheme are easily made.

No comments:

Post a Comment