This article is a follow-up to “How Does Fiat Currency Become Cryptocurrency?“

Crypto’s original goal: self-sovereign, independent finance. Some see it as the dream; others impossible. Reality: separate system, yet as a practical matter, is often coupled to TradFi.

It’s a key nuance from the discussion of the on-ramping processes, liquidity provision, and reserve management. Crypto intertwines with fiat for access, valuation, and compliance, but this isn’t essential. Cryptocurrencies were designed as standalone assets, valuing from scarcity, decentralization, and network effects, not fiat backing. In practice, fiat bridges to tokenized economies for adoption/integration. It’s useful to further unpack this distinction, drawing on foundational principles of blockchain technology, economic theory, and legal frameworks.

Theoretical Independence

Can cryptocurrency self-sustain? Yes. Theoretically, not only can it retain independence, it could supplant Traditional Finance. (TradFi). That was part of the point. At its core, it functions without fiat. Bitcoin (Satoshi Nakamoto, 2008) was designed as a “peer-to-peer electronic cash system” free of central banks/intermediaries. Unlike fiat (value from government decree/legal tender, e.g., USD’s full faith/credit), crypto relies on mathematical scarcity, consensus mechanisms, utility, and network effects.

Blockchain networks like Bitcoin/Ethereum could endure indefinitely as self-contained systems, even without fiat. Rooted in code, computation, and community governance, not external money.

Practical Interdependence

As a practical matter, can DeFi be independent of TradFi? No. At least, I don’t think so. We even have another made up word, CeFi, that kind of covers a hybrid. (Fun facts: a portmanteau is when we combine words and a neologism is a new word or expression.) Fiat drives adoption, essentially coupling systems. The Reality: widespread crypto use relies on fiat interfaces, not tech limits, but market dynamics, regulations, and behavior. Most value is fiat-denominated. This is not a fundamental limitation of the technology but a consequence of user behavior: Cryptocurrencies derive much of their perceived value from fiat-denominated markets.

In stable jurisdictions, crypto won’t replace fiat’s infrastructure, protections, or policy tools. Yet in hyperinflation zones (e.g., Venezuela, Argentina), crypto acts as fiat alternative, showing partial independence.

Clarifying Bitcoin Mining, Exchange Liquidity, and Fiat Dynamics

There’s an important point about the creation of new Bitcoin (BTC) through mining, (a.k.a, “minting”) and its implications for fiat reserves on centralized exchanges (CEXs) like Coinbase or Binance. This highlights a fundamental distinction between non-stable cryptocurrencies like BTC and fiat-pegged stablecoins like USDC. Unlike stablecoins, which require 1:1 fiat reserves for issuance to maintain their peg, Bitcoin operates on a decentralized, supply-capped model without any inherent fiat backing. This does not, however, lead to exchanges “losing” fiat reserves in an unrecoverable way when BTC is traded for fiat. Instead, the process is governed by market-driven liquidity, trade matching, and operational balancing.

When a new BTC is “minted” through mining, there is no corresponding fiat reserve created anywhere in the system. Bitcoin’s value derives from its scarcity (capped at 21 million BTC total), network security, and market demand, not from any asset backing. This contrasts sharply with stablecoins, where issuers like Circle must deposit fiat into reserves before minting new tokens to preserve the 1:1 peg. For BTC, the absence of fiat reserves at creation is by design, aligning with its goal as a sovereign digital asset independent of traditional financial systems. Mined BTC enters circulation when the miner sells it on an exchange, uses it for transactions, or holds it. At this stage, no fiat is “lost” because the miner is introducing a new asset into the market, similar to how a gold miner extracts and sells physical gold without pre-existing currency reserves for each ounce. Mining BTC is like digging gold from a finite mine. New supply enters the world with no dollar tag attached. (Stablecoin minting is like printing casino chips only when a guest deposits cash. A 1:1 ratio is maintained, which is auditable, redeemable.)

When you (or a miner) trade BTC for fiat on a CEX, the exchange acts as an intermediary matching buyers and sellers, rather than a direct counterparty depleting its own reserves.

What About Other Tokens?

Other tokens need no mining. They’re created by declaration: “Here’s 10 million tokens; let’s value them.” Similar to company stock.

Unlike Bitcoin (programmatic mining for decentralized, capped issuance), most tokens are pre-issued/minted by founders, teams, or smart contracts, distinct technically/economically from mining. Mining Bitcoin is like digging gold from the ground. It’s slow and scarce. Minting a new token is like a company printing its own loyalty points. It’s instant, but only valuable if people agree they’re worth something. On Ethereum (ERC-20), Solana, or Binance Smart Chain: Single smart contract deployment. Founder initializes 10M supply; assigns to creator/treasury wallet. No computation/ongoing issuance needed.

Tokens on networks like Ethereum (ERC-20 standard), Solana, or Binance Smart Chain are typically created via a single smart contract deployment. For example: A founder writes a smart contract that initializes a total supply of 10 million tokens. Upon deployment, all (or most) tokens are assigned to the creator’s address or a treasury wallet. No computational work or ongoing issuance is required.

Examples: Uniswap (UNI) 1B tokens created September 2020, distributed via governance, liquidity mining, team. Pepe (PEPE)/meme coins: 100% minted at launch, no vesting/utility beyond speculation. USDC: Programmatic minting on fiat receipt (Circle), unlimited per contract but reserve-backed.

Key Point: value is not intrinsic. It is socially constructed through community adoption, exchange listing, marketing and narrative, perceived utility (governance, staking, access rights).

Think about it. This is not fundamentally different from how early-stage company stock gains value: A startup incorporates, issues 10 million shares to founders, and assigns a nominal par value (e.g., $0.001). No revenue, no assets; just a pitch deck and a vision. Value emerges when investors agree to pay for equity based on future potential.

This analogy holds at a high level, however, divergences exist in risk, rights, and regulatory treatment. Legal status, governance, dilution risk, legal risk and recourse can be different for crypto and laws are evolving. The analogy is more to understand the creation mechanisms and theoretical reasons for values. Stock confers enforceable legal rights; most tokens do not. Stock is regulated as a security; tokens often are not; shifting risk to holders. The analogy is intended for understanding value creation, but dangerous if one assumes equivalent legal safeguards.

Practical Realities of Purist Defy Failure

At least to date, DeFi and Decentralized tech in general fails both in reality and perception in several critical enabling areas. For all the brilliance or cleverness of both original core enabling technology and subsequent protocols, there’s just some unsolved problems that preclude DeFi owning the financial market space.

What are some of these areas?

• Fundamental Identity tools and lack of actually workable sensible Root of Trust options in a fully decentralized manner.
• Complexity of both within chain and cross chain protocol traversal.
• Interface complexity for even basic operations and significantly more complexity for more sophisticated operations. However, this isn’t merely a user experience issue. It’s that the inherent conceptual complexity outright precludes clearer user experience interaction.

What About the Future?

Advancements in tokenization and Layer-2 scaling could cut fiat reliance. For example, real-world asset (RWA) tokenization, (representing equities, real estate, or commodities on-chain), might enable fully crypto-native economies. However, complete decoupling remains unlikely without global regulatory shifts, as fiat’s stability and ubiquity will continue to anchor hybrid systems.

In summary, cryptocurrency can and does exist without fiat in its purest form, as a decentralized, self-validating asset class. The sometimes seeming “disappearance” of fiat noted is more accurately a transformation into reserves that underpin stability and accessibility, reflecting practical interdependence rather than existential necessity. For businesses navigating this space, understanding this balance is crucial for risk management and compliance.