Bitcoin and Cryptocurrencies: Elastic Money Supply
Presented at RiskMinds International 2014 in Amsterdam
Introduction to Bitcoin and Hayek Money, a new cryptocurrency generation with elastic money supply. How to engineer Hayek Money using Seigniorage Shares.
backed by any government or organization • instantaneous peer-to-peer transactions • no need for trusted third party • cryptographic security • low-cost banking for everybody everywhere https://bitcoin.org/en/faq http://www.coindesk.com/information/ Ferdinando Ametrano 2014 2/34
promise, particularly if the innovations promote a faster, more secure and more efficient payment system. • Alan Greenspan: It’s a bubble. It has to have intrinsic value: you have to really stretch your imagination to infer what the intrinsic value of Bitcoin is. I haven’t been able to do it. Maybe somebody else can. I do not understand where the backing of Bitcoin is coming from Ferdinando Ametrano 2014 3/34
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 Hayek, F. A., Denationalisation of Money, The Institute of Economic Affairs http://www.mises.org/books/denationalisation.pdf Ferdinando Ametrano 2014 6/34
Just 5 years old • Without government or corporation backing • That can lost its main (China) market and its main exchanges in 3 months • Subjected to fraud or theft perpetrated at its main reference exchange (Mt Gox) • With such a bad reputation (Silk Road) That could be still alive and kicking? Ferdinando Ametrano 2014 8/34
– Bitcoin is a payment innovation that's taking place outside the banking industry – It's not so easy to regulate Bitcoin because there's no central issuer or network operator. This is a decentralized, global [entity] • ECB (October 2012 report): – governments and central banks would face serious difficulties if they tried to control or ban any virtual currency scheme – there is no server that could be shut down if the authorities deemed it necessary Ferdinando Ametrano 2014 9/34
to transfer a unique digital token • the token can be exchanged, but not duplicated • keeps records of each and every transaction forever • shared with peer-to-peer technology • everyone knows the transaction happened, nobody can challenge its legitimacy • It can replace any processing central authority with decentralized peer-to-peer cryptographically secure equivalent Ferdinando Ametrano 2014 11/34
that can be programmatically exchanged using smart contracts • Smart contracts are math (not legal) based contracts that do not need human interpretation or intervention to complete: the settlement is done by software. • Autonomous agents are software programs created for specific tasks: with Bitcoin they can now make and receive payments • Decentralized Autonomous Organizations Ferdinando Ametrano 2014 12/34
used as programmable money • created inside the Bitcoin protocol • the first powerful protocol application replacing: – central banks – financial intermediaries Ferdinando Ametrano 2014 13/34
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 2014 14/34
• private (secret) key produce a digital signature • public key used by anyone to verify the signature • The bitcoin wallet address is the public key • The private key allows spending from the wallet Ferdinando Ametrano 2014 15/34
in blocks, sequentially chained, about one block every 10 minutes • The block chain is a history of transactions resilient to network attackers • The cryptographic link between blocks requires large amount of computing power, so the block chain cannot be altered without huge resources • Computing power is measured in hash/s, hash being the basic operation needed for validation Ferdinando Ametrano 2014 16/34
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 2014 18/34
halving every 4Y • This is the only way new bitcoins are released • It is called mining because of its similarity with the progressive scarcity of gold extraction • digital cash supply free of discretionary intervention Ferdinando Ametrano 2014 19/34
Account Live cattle Diamonds Gold Fiat coins and notes Cryptocurrency • 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 limited in some way Ferdinando Ametrano 2014 21/34
successful at get rid of any centralized monetary authority • The bitcoin currency has inadvertently thrown away the flexibility of a fully automatic non-discretionary monetary policy allowing for elastic supply of money Ferdinando Ametrano 2014 22/34
of every other good is measured • A good in itself: its value is governed by supply and demand • 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 2014 23/34
regulated to achieve stable prices with respect to a (commodity) price index Ametrano, Ferdinando M. (2014) Hayek Money: the Cryptocurrency Price Stability Solution http://ssrn.com/abstract=2425270 Ferdinando Ametrano 2014 25/34
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 1BTC worth 500USD – or 500BTC each worth 1USD Ferdinando Ametrano 2014 26/34
to hoarding and limited transaction volume • Introduce two species of digital tokens on the same ledger: – Stable coins for transactional demand – Seigniorage shares for speculative demand. • Shareholders have the right to validate transactions and are rewarded with the issuance of new shares. • Coins are – minted as share dividends and distributed to shareholders – Burned in exchange for new shares Ferdinando Ametrano 2014 30/34
to seigniorage revenues in exchange for being: – subjected to the losses associated to coin price stability defense – obliged to validation task duties – In charge of price index observation – network security, node synchronization, etc. • Shares are cryptographically identifiable, so those involved in double spending attempts are invalidated and “burned” away • Free coins from any speculative value, thus favoring money velocity and increasing the number of transactions Ferdinando Ametrano 2014 31/34
pegged to an index to make its value essentially constant at parity • The share price is free to float, according to monetary expectations: – it increases with expansionary phases – it decrease with contractionary phases Ferdinando Ametrano 2014 32/34
and respectively, ≅ 1 • The share market cap and the coin market cap add up to the overall outstanding monetary base: = ∙ + ∙ Sams, Robert (2014) A Note on Cryptocurrency Stabilisation: Seigniorage Shares https://github.com/rmsams/stablecoins/blob/master/00-main.pdf Ametrano, Ferdinando M. (2014) Price Stability Using Cryptocurrency Seigniorage Shares http://ssrn.com/abstract=2508296 Ferdinando Ametrano 2014 33/34
Technology – History of Money • Hayek Money is a new generation of cryptocurrencies with elastic supply • Dual currency ledgers (seigniorage shares, stable coins) are a promising prospective This is the eve of possibly the best money ever devised in human history Ferdinando Ametrano 2014 34/34
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