A Cryptocurrency Price Stability Solution

Transcript

1. Creative Commons Attribution-ShareAlike 4.0 International License. A Cryptocurrency Price Stability

   Solution Ferdinando M. Ametrano [email protected] https://speakerdeck.com/nando1970 Banca IMI Intesa Sanpaolo, Milano-Bicocca University, QuantLib, Hayek Money Digital Currency Summit Barcelona, October 8, 2015

2. Table of Contents 1. About Money 2. Bitcoin: Currency and

   Protocol 3. Hayek Money 4. Dual Asset Ledger 5. BTC as Reserve Asset 6. Conclusions Ferdinando Ametrano 2015 2/31

3. Money as social relation instrument • Human beings are born

   into a gift economy • Enlarged relationship circle requires exchange economy • Barter economy, coincidence of wants • Trade economy, money as medium of exchange Ferdinando Ametrano 2015 3/31 3 4 5 6 2 1

4. Money for the Information Economy • Low transaction costs •

   No amount limits • No intermediaries • No frozen funds • 24/7/365 • Social network enabled Ferdinando Ametrano 2015 4/31 3 4 5 6 2 1

5. From gold standard to fiat money • Gold: the commodity

   money standard – resistance to corrosion and oxidation – high malleability – relative easiness of purity assessment – Pleasant color • Gold purity certification • Representative money • Fractional receipt money • Money and currency • Fiat money and legal tender Ferdinando Ametrano 2015 5/31 3 4 5 6 2 1

6. Friedrich August von Hayek Denationalisation of Money • history of

   coinage is an almost uninterrupted story of debasements; history is largely a history of inflation engineered by governments for their gain • why government monopoly of the provision of money is regarded as indispensable? It deprived public of the opportunity to discover and use a better reliable money Blessed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their own interest A Free-Market Monetary System, Gold and Monetary Conference, New Orleans, Nov. 1977, https://mises.org/daily/3204 Hayek, F. A., Denationalisation of Money, The Institute of Economic Affairs, http://www.mises.org/books/denationalisation.pdf Ferdinando Ametrano 2015 6/31 3 4 5 6 2 1

7. Bitcoin: a currency and a protocol • bitcoins: units of

   the currency • Bitcoin: protocol/software (aka blockchain technology) and the community bitcoins are transferred using Bitcoin • bitcoins are the first powerful protocol application: a digital property created inside the Bitcoin protocol Ferdinando Ametrano 2015 7/31 3 4 5 6 2 1

8. Bitcoin the protocol Distributed public ledger of transactions (aka blockchain):

   • shared with peer-to-peer technology • allows to transfer a unique digital token • the token can be exchanged, but not duplicated • keeps records of each and every transaction forever It can replace any processing central authority with decentralized peer-to-peer cryptographically secure equivalent Ferdinando Ametrano 2015 8/31 3 4 5 6 2 1

9. The bitcoin currency • Not to be found anywhere, they

   only exist as public ledger documented transactions • A bitcoin wallet is a public address 1FEz167JCVgBvhJBahpzmrsTNewhiwgWVG • the public ledger certifies for everybody how many bitcoins are associated to the wallet http://blockexplorer.com/address/1FEz167JCVgBvhJBahpzmrsTNewhiwgWVG It is mine; you are REALLY encouraged to tip Ferdinando Ametrano 2015 9/31 3 4 5 6 2 1

10. Bitcoin’s public ledger: the blockchain • Transactions are bundled in

    blocks, sequentially chained, one block every ~10m • The cryptographic link between blocks requires (large amount of) computing power, setting the level of effort required to alter the blockchain history of transactions • Blockchain is resilient to network attackers Ferdinando Ametrano 2015 10/31 3 4 5 6 2 1

11. Network hash rate https://blockchain.info/charts/hash-rate?timespan=all&showDataPoints=false&daysAverageString=1&show_header=true&scale=0&address= Specialized non-generic hardware, with hashing capacity

    13,000 times that of the combined 500 largest supercomputers Ferdinando Ametrano 2015 11/31 3 4 5 6 2 1

12. Mining • Miners are the nodes of the network providing

    the computing power for: – processing and validating transactions (avoiding double spending) – securing the network – synchronizing the nodes • Miners compete to process a new block of transactions. The winner provides a proof-of-work and is rewarded with the issue of new bitcoins. • Seigniorage revenues subsidize the network, making transaction almost free Ferdinando Ametrano 2015 12/31 3 4 5 6 2 1

13. Inelastic Money Supply: Deterministic Decreasing Rate chart 2029: issued 96.88%

    of all BTC 2141: issued last 0.00000001 BTC Ferdinando Ametrano 2015 13/31 3 4 5 6 2 1

14. Statement of the bitcoin Problem • Successful at getting rid

    of a centralized monetary authority • Has given up the flexibility of an elastic supply of money • No salaries, no mortgages Ferdinando Ametrano 2015 14/31 3 4 5 6 2 1

15. Money Comparison Medium of Exchange Store of Value Unit of

    Account Live cattle Diamonds Gold Fiat coins and notes Bitcoin • swappable • fungible • portable • divisible • recognizable • resistant to counterfeiting • reliably saved, stored, and retrieved • retain usefulness over time • non-perishable or with low preservation cost • relative worth unit of measure • stable value for stable price comparison • supply must be controlled in some way Ferdinando Ametrano 2015 15/31 3 4 5 6 2 1

16. Unit of Account Money as numeraire • Money is the

    unit of account against which the value of every other good is measured • The price system measures the value of goods relative to the value of money Good money should provide stable prices to best perform its role as unit of account Ferdinando Ametrano 2015 16/31 3 4 5 6 2 1

17. A Simple Example USD-Parity • USD/BTC: 15-Apr-11 1.0, 29-Mar-14 500.0

    • x500 increase for BTC demand relative to USD • 29-March-14: 12.5M bitcoins in circulation • Inflate their number 500 times to 6250M • On 29-Mar-14 it would have been equivalent – to own BTC1 worth $500 – or (rebased) RBTC500 each worth $1 Ferdinando Ametrano 2015 17/31 3 4 5 6 2 1

18. USD-Parity Rebased Bitcoin Daily rebasing Ferdinando Ametrano 2015 18/31 3

    4 5 6 2 1

19. Limits of This Simplistic Implementation of Hayek Money • The

    number of coins in a wallet changes without any direct inflows or outflows • Prices are stable (salaries and mortgages are now possible!), but the purchasing power of a given wallet is not stable • Coins still have speculative investment appeal and so enjoy limited transaction usage Ferdinando Ametrano 2015 19/31 3 4 5 6 2 1

20. Hayek Money Implemented as Dual Asset Ledger • Split transactional

    and speculative money demand with two non-fungible assets: 1. (stable ≅ 1) transactional coins 2. (unstable ) speculative shares • Blockchain technology tracks ownership and transactions for both = ∙ + ∙ Ferdinando Ametrano 2015 20/31 3 4 5 6 2 1

21. Coins • The supply is regulated to peg the coin

    to a given price index parity: ≅ 1 – Coins give up speculative value – Money velocity & transaction volume increase • Coins can be voluntarily burned in exchange for newly minted shares • New coins are (mostly) minted as share dividends Ferdinando Ametrano 2015 21/31 3 4 5 6 2 1

22. Seigniorage Shares • Share price is free to float, increasing

    or decreasing because of dividend expectations • Share market capitalization can be seen as expectation of future coin dividends: ∙ ⁄ expected number of future coins • Shareholders absorb monetary policy’s costs & benefits, shielding coin holders from volatility • Shares (not coins) are issued as transaction validation reward; shares are never destroyed Ferdinando Ametrano 2015 22/31 3 4 5 6 2 1

23. Seigniorage Shares Seigniorage: profit made by a currency issuer, especially

    the difference between the face value of coins and notes and their production costs Miners are replaced by shareholders entitled to seigniorage revenues as compensation for: – validation task duties – network security, node synchronization, etc. – the costs associated to coin stability Ferdinando Ametrano 2015 23/31 3 4 5 6 2 1

24. : Price Index Deflation Expansionary monetary phase 1. fresh new

    coins are minted as dividends to shareholders 2. For a given transactional coin demand satisfied by market capitalization ∙ , an increasing number of coins pushes down to parity • If > 1 then > 0 because coins are expected to be paid as dividend to shareholders • As in any stock dividend event, is expected to decrease Ferdinando Ametrano 2015 24/31 3 4 5 6 2 1

25. : Price Index Inflation Contractionary monetary phase 1. No dividends

    are expected on short-term: decreases 2. decrease implies that less coins are expected to be minted in the future, so is pulled up to parity proportionally to the ∙ share market capitalization loss 3. Coins can also be voluntarily burned in exchange for newly minted shares Ferdinando Ametrano 2015 25/31 3 4 5 6 2 1

26. DeCentralized Reserve Bank as DAO Enforcing Price Boundaries • As

    monetary policy tools, share dividends and coin burning might be not effective enough • A Reserve Bank (as Decentralized Autonomous Organization) could enforce price boundaries being always available to: – Sell newly minted coins for 1.05, accepting crypto-assets (to be accumulated as reserve) in return – buy existing coins at 0.95 giving accumulated reserve crypto-assets in return • To adopt non-crypto reserve assets would require a custodian legal entity, re-introducing centralization Ferdinando Ametrano 2015 26/31 3 4 5 6 2 1

27. Reserve Asset Accumulated With Proof-of-Payment • Instead of hardware and

    electric power expenses (proof-of-work), transaction validators pay BTC to the Reserve Bank • Validation privilege (and the associated share reward) is randomly assigned with chances proportional to the accumulated proof-of- payment amount • The Reserve Bank increases its reserves • Reference BTC price of seigniorage share is obtained as by-product Ferdinando Ametrano 2015 27/31 3 4 5 6 2 1

28. Leverage Bitcoin As Reserve Asset • Bitcoin is the first

    and most successful instance of an intrinsically scarce digital asset: it is digital gold • When used as reserve asset, its qualities are magnified! • Its limits are lessened. No more need to: – scale to huge (cash + bank accounts + credit cards) number of transactions – support economically inefficient micropayments – lower confirmation time • The Reserve Bank IPO: raise bitcoins, issue seigniorage share Ferdinando Ametrano 2015 28/31 3 4 5 6 2 1

29. Bitcoin as (Digital) Gold in The History of (Crypto)Money Gold

    • For centuries gold has been the most successful form of money • Its adoption was not centrally planned • It has been surpassed by other kind of money without becoming obsolete Bitcoin • Bitcoin is the most successful form of cryptocurrency • Its adoption has not been centrally planned • It might be surpassed by more advanced type of cryptocurrencies without becoming obsolete Ferdinando Ametrano 2015 29/31 3 4 5 6 2 1

30. Cryptocurrency prices and purchasing power stability 1. Hayek Money is

    the price stability paradigm of elastic non-discretionary money supply 2. Coin/share dual asset ledger to decouple transactional and speculative money demand 3. Bitcoin as reserve asset for a DeCentralized Reserve Bank (DAO) that performs market operations ensuring price boundaries 4. Proof-of-Payment to avoid increasing socially inefficient usage of seigniorage revenues for transaction verification Ferdinando Ametrano 2015 30/31 3 4 5 6 2 1

31. Bibliography • Ametrano F., Hayek Money: the Cryptocurrency Price Stability

    Solution, http://ssrn.com/abstract=2425270 • Morini M., Inv/Sav Wallets and the Role of Financial Intermediaries in a Digital Currency, http://ssrn.com/abstract=2458890 • Ametrano F., Cryptocurrency Price Stability With Seigniorage Shares And Reserve Bank, http://ssrn.com/abstract=2508296, https://youtu.be/XUT9T0RAmxo?t=2m44s, https://speakerdeck.com/nando1970/the-cryptocurrency-frontier- in-commodity-monetary-standard • Buterin V. https://blog.ethereum.org/2014/11/11/search-stable- cryptocurrency/ • Sams R., A Note on Cryptocurrency Stabilisation: Seigniorage Shares, https://github.com/rmsams/stablecoins/blob/master/00- main.pdf Ferdinando Ametrano 2015 31/31 3 4 5 6 2 1