The use of ERC20 tokens in a private ethereum network

Question

I am being told to use a private blockchain instead of the public one in attempt to cut gas cost. But I was hit with the problem of the value of ether and tokens in this private blockchain.

I am implementing an ERC20 Token to be used in value exchanges between wallets that are controlled by our backend system.

In a public chain the token value is measured by ether which has a certain known value in USD. In case it is a private chain this value ( of ether and consequently erc20 tokens ) will have to be set manually.

So my question is : is the value of ether, in the private blockchain, set manually based on some off chain calculations ? is using ERC20 tokens in private blockchain when it s meant to serve as Fiat currency equivalent, a design flaw ?

thanks.

Answer 1

Typically even tokens in the mainnet are not strictly bound to any Ether amount. They may be purchases in a crowdsale (ICO) with certain amount of Ethers but after that their value starts floating.

Therefore the value of tokens is typically only up to the laws of supply and demand. This is actually exactly the same for Ethers - nothing states how much 1 Ether costs in USD, only supply and demand affect the price.

The same is true for your private chain tokens (and Ethers). Their value is only based on supply and demand. Now, as it is a private chain, the market is not very liquid (not much trading happening) and probably your tokens can't even be purchased anywhere. In private chains tokens don't typically really have any monetary value at all as they can't be traded for any other asset types (such as mainnet Ethers or fiat). Their value is only for internal usage but no real monetary value.