1. You just make an agreement with someone who would like to buy your tokens for some national currency. If you ever played an MMORPG or Diablo 2 or something, you know that "imaginary" digital items can be traded for "real" money. There are many exchanges where you can do this conveniently.
2. For one example, consider how tedious it is to open a new bank account; with cryptocurrency, you just make a new keypair. Smart contracts improve on normal contracts in that they are executed automatically and cheaply. One of the first theoreticians of smart contracts wrote:
"A canonical real-life example, which we might consider to be the primitive ancestor of smart contracts, is the humble vending machine. Within a limited amount of potential loss (the amount in the till should be less than the cost of breaching the mechanism), the machine takes in coins, and via a simple mechanism, which makes a freshman computer science problem in design with finite automata, dispense change and product according to the displayed price. The vending machine is a contract with bearer: anybody with coins can participate in an exchange with the vendor. The lockbox and other security mechanisms protect the stored coins and contents from attackers, sufficiently to allow profitable deployment of vending machines in a wide variety of areas. Smart contracts go beyond the vending machine in proposing to embed contracts in all sorts of property that is valuable and controlled by digital means."
3. Lots of different people. Many of them probably purchased the tokens when the network was young and the exchange rates were much lower, or mined the tokens themselves. The sum of the market value of these networks starts at zero and gets bigger as the tokens become scarce and valuable.
>> consider how tedious it is to open a new bank account
You make it sound like a person needs to open a separate bank account for every transaction, which is clearly not how people manage their finances.
I'm in the same eli5 boat. I can't fathom why anybody would put real cash into such a system. It comes across as "because I'm rich as fuck and can gamble away my money on a stupid tech system that is not realistically viable". Just... why would anyone use this? It makes no sense, unless this just offers a way to attempt to hide one's identity while participating in illegal ventures.
I know a lot of tech nerds. Not one of them would ever join a system like this. I just don't get who is voluntarily subjecting themselves to this insanity. Can someone out there who has actually used Ethereum explain why they've done so? I would really appreciate some kind of insight into this whole concept, as I just don't understand.
No, I mean if you want a new bank account, for example because you started a new business, you need to put on pants go to a bank office and fulfill whatever the bank demands.
The banking world is extremely interested in blockchain technology and smart contracts. Browse through financial news and you'll see the extent of it—it's huge.
Your conviction that blockchains are stupid insanity seems to me like it will be proven very wrong in the next five years.
In the country of my current residence, there are government plans running that provide additional benefits beyond simple salaries. These are food-tickets, leisure and vacation credit that are allocated on plastic cards. I loathe these. They are a way of faking actual payment. These credits and tickets are not accepted everywhere, unlike the currency of the country is. They carry second-class monetary value, and the system is set up in a way so that these leisure credits time-out after 2 years of allocation. Imagine your dollars or euros disappearing due to expiration. Nonsense.
Beyond their inconvenient use, they are not valid outside of the country either. In essence, they have created a closed ecosystem, making sure that you can only spend this 'money' within their own system. You cannot transfer these funds outside of walled gardens, in this case the country's legislative boarders. I see cryptocurrency the same way. If everyone starts using it, it will have universal value. However, to use it, everyone would need to have access to internet and mobile devices. I do not see that happening anytime soon. And please don't reference the number of mobile devices. Internet infrastructure is much more expensive to build than to supplement everyone with cheap phones. [1]
I cannot really relate to your vending machine example either. In case of a vending machine example you are quoting that 'anybody with coins can participate in an exchange with the vendor.' This only works if the universally agreed currency is the one expected by the vendor. Your vending machine would not accept my Eastern European Monopoly Money whereas the expected input is in Euro. Same for cryptos: where the expected input is that of a currency backed by financial institutions trading in the same currency, I will laugh at you when you attempt to pay in bitcoin, dogecoin, ether (literally the primordial Greek deity of pure air), whatever.
With point three you suggest that the real value of these systems are for people who got into the Pyramid Scheme early. Again, I think these institutions are frauds, and I would not be surprised if it surfaced that the creators of this blockchain system planned to pull off such a scam in the first place.
National currencies must also be exchanged for other currency when you want to spend in some other currency regime. I can't spend my SEK elsewhere without exchanging, just like with BTC and ETH.
Even so, an asset can be valuable even if it's not used as daily currency. You can't buy a Coke with gold.
2. For one example, consider how tedious it is to open a new bank account; with cryptocurrency, you just make a new keypair. Smart contracts improve on normal contracts in that they are executed automatically and cheaply. One of the first theoreticians of smart contracts wrote:
"A canonical real-life example, which we might consider to be the primitive ancestor of smart contracts, is the humble vending machine. Within a limited amount of potential loss (the amount in the till should be less than the cost of breaching the mechanism), the machine takes in coins, and via a simple mechanism, which makes a freshman computer science problem in design with finite automata, dispense change and product according to the displayed price. The vending machine is a contract with bearer: anybody with coins can participate in an exchange with the vendor. The lockbox and other security mechanisms protect the stored coins and contents from attackers, sufficiently to allow profitable deployment of vending machines in a wide variety of areas. Smart contracts go beyond the vending machine in proposing to embed contracts in all sorts of property that is valuable and controlled by digital means."
http://szabo.best.vwh.net/smart_contracts_idea.html
3. Lots of different people. Many of them probably purchased the tokens when the network was young and the exchange rates were much lower, or mined the tokens themselves. The sum of the market value of these networks starts at zero and gets bigger as the tokens become scarce and valuable.