Blockchain Revolution and the Future of Money

Presented at Università degli Studi di Milano, Milan, June 15, 2015

The disruptive innovation of the Bitcoin protocol, with special attention to the bitcoin currency, is introduced. Framed in a quick history of money, bitcoin is evaluated as crucial step in monetary evolution, enabling competition between cryptocurrencies and traditional legal tender fiat currencies.
Despite rapidly increasing acceptance, so far the affirmation of cryptocurrency as better money has been thwarted by dramatic deflationary price instability. Successful at disposing of any central monetary authority using the Bitcoin protocol, the bitcoin currency has accidentally thrown away the flexibility of an elastic supply of money.
A new generation of cryptocurrencies with a non-discretionary elastic monetary rule ensuring price stability is introduced as "Hayek Money": a stable coin, providing stable prices and stable purchasing power, might be the future of money.

Transcript

1. Creative Commons Attribution-ShareAlike 4.0 International License. Blockchain Revolution and the Future of Money Ferdinando M. Ametrano ferdinando@ametrano.net https://speakerdeck.com/nando1970 Banca IMI Intesa Sanpaolo, Milano-Bicocca University, QuantLib, Hayek Money Scienze Politiche, Economiche e Sociali Università degli Studi di Milano Milan, June 15, 2015
2. Outline 1. Introduction 2. Bitcoin Primer 3. About Money 4. Hayek Money 5. Seigniorage Shares and Reserve Bank 6. Bibliography and Conclusions Ferdinando Ametrano 2015 2/77
3. What are bitcoins? https://bitcoin.org/en/ • Decentralized digital currency • Not 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 2015 3/77
4. Opinions • Ben Bernanke: [the virtual currency] may hold long-term 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 http://qz.com/148399/ben-bernanke-bitcoin-may-hold-long-term-promise/ http://www.bloomberg.com/news/articles/2013-12-04/greenspan-says-bitcoin-a-bubble-without-intrinsic-currency-value Ferdinando Ametrano 2015 4/77
5. Marc Andreessen: Bitcoin today is like Internet in 1994, weird and scary • No transaction costs • No amount limits • No intermediaries • No frozen funds • 24/7, 365 days • Social network enabled • Money for the Information Economy Ferdinando Ametrano 2015 5
6. A recent blockchain transaction https://blockchain.info/tx/8f1d3a8ef6b2d4a25d2f499279e01518b4770819ccbc39a765c4c326170c61b3 • About $83M transacted with $0.04 fee Ferdinando Ametrano 2015 6/77
7. Bitcoin Economy http://bitcoincharts.com/charts/bitstampUSD#tgWzm1g10zm2g25zv • Total number of BTC is about 14M • BTC Market Cap: about $3-14B (USD M0 is about $1,200B) Ferdinando Ametrano 2015 7/77
8. December 2013: China crackdown • People’s Bank of China crackdown: – prohibits financial institutions from trading, underwriting, or offering insurance in bitcoins or any other digital currency – Bitcoin is not to be considered a currency – owning bitcoins is not outlawed or prohibited • As of December 2013 BTC China was world's largest Bitcoin exchange by volume • Alibaba, China's top Internet retailer, stopped using bitcoins as of January 19 2014. Ferdinando Ametrano 2015 8/77
9. February 2014: Mt Gox bankruptcy • As of January 2014 Mt Gox was world's largest Bitcoin exchange by volume • In February 2014 it filed for bankruptcy protection from creditors • It announced that around 850,000 bitcoins belonging to customers and the company were missing and likely stolen, an amount valued at more than $450 million at the time • Fraud or theft? Ferdinando Ametrano 2015 9/77
10. Silk Road • online market, operated as a Tor hidden service • online users were able to buy illicit goodies using bitcoins, while browsing it anonymously and securely without potential traffic monitoring • launched in February 2011 • shut down in October 2013 • Ross William Ulbricht, alleged to be the owner of Silk Road arrested in San Francisco • Many other black markets have filled in as successors Ferdinando Ametrano 2015 10/77
11. Bitcoin resilience Is there anything else in financial world: • Just 6 years old • Without government or corporation backing • That can lose its main (China) market • With fraud/theft at its main reference exchange (Mt Gox) • With such a bad reputation (Silk Road) That could be still alive and kicking? Ferdinando Ametrano 2015 11/77
12. Key Adoption Metrics http://www.slideshare.net/CoinDesk/state-of-bitcoin-q1-2015 Ferdinando Ametrano 2015 Quarterly Last 12 Months Mar-15 Dec-14 Q/Q Δ Mar-14 Δ Commerce Wallets 8,457,207 7,396,772 14% 4,448,142 2x Merchants 88,000 82,000 7% 52,704 2x Merchants’ annual revenue ($bn) 180 180 0% 2 78x ATMs 374 342 9% 47 8x Unique bitcoin addresses 203,189 157,377 29% 137,342 1x Industry All-time VC investment ($m) $676 $447 51% $164 4x Number of VC-backed startups 103 89 16% 47 2x Media Mainstream media mentions 458 580 -10% 2,594 -82% Technology Network hash rate (billion/second) 346,028,956 313,142,289 11% 41,813,922 8x Github no. of updated repositories 27,857 23,249 20% 9,915 3x Valuation Bitcoin market capitalization ($bn) $3.4 $4.3 -21% $5.3 -36% 12/77
13. Where can you buy bitcoins? What can you buy with bitcoins? • Buy bitcoins using USD or EUR at one of many exchanges, e.g. Bitstamp, The Rock Trading, etc. • Use bitcoins to buy: – web services – software – hardware – gambling services – Narcotics, guns, credit card numbers, etc. – Topping the list, in terms of the number of transactions, is tipping and donations Ferdinando Ametrano 2015 13/77
14. Companies Representing $180B in Annual Revenue Now Accept Bitcoin • e Ferdinando Ametrano 2015 14/77
15. Venture Capital Investments Million USD http://www.coindesk.com/bitcoin-venture-capital/ Ferdinando Ametrano 2015 2.1 95.8 334.8 890 15/77
16. Massively Simplify Banking I believe that blockchain technology will not only change the way we do payments but it will change the whole trading and settlement topic. It has potential to trigger “massive” simplification of banking processes and cost structure. When somebody with a strong brand and security level establishes it as a reliable service, then the whole industry will follow. Oliver Bussmann, CIO of Swiss bank UBS http://blogs.wsj.com/digits/2014/10/27/ubs-cio-blockchain-technology-can-massively-simplify-banking/ Major banks like JPMorgan Chase, Citibank and Bank of America have established teams of experts focusing exclusively on digital currency Edmund Moy, former director of the United States Mint http://www.coindesk.com/former-us-mint-director-save-bitcoin-regulators Ferdinando Ametrano 2015 16/77
17. Outline 1. Introduction 2. Bitcoin Primer 3. About Money 4. Hayek Money 5. Seigniorage Shares and Reserve Bank 6. Bibliography and Conclusions Ferdinando Ametrano 2015 17/77
18. The announcement From: Satoshi Nakamoto <satoshi <at> vistomail.com> Subject: Bitcoin P2P e-cash paper Newsgroups: gmane.comp.encryption.general Date: 2008-10-31 18:10:00 GMT I've been working on a new electronic cash system that's fully peer-to-peer, with no trusted third party. The paper is available at: http://www.bitcoin.org/bitcoin.pdf The main properties: Double-spending is prevented with a peer-to-peer network. No mint or other trusted parties. Participants can be anonymous. New coins are made from Hashcash style proof-of-work. The proof-of-work for new coin generation also powers the network to prevent double-spending. Bitcoin: A Peer-to-Peer Electronic Cash System Abstract. A purely peer-to-peer version of electronic cash […] Satoshi Nakamoto --------------------------------------- The Cryptography Mailing List Ferdinando Ametrano 2015 18/77
19. Satoshi Nakamoto http://mag.newsweek.com/2014/03/14/bitcoin-satoshi-nakamoto.html • Unknown identity: pseudonymous person or group? • Worked on Bitcoin since probably 2007 • Published the paper in 2008 • Released the code in January 2009 • Stopped involvement mid-2010 • Entrusted the project and a copy of the alert key to Gavin Andresen, effectively his successor • He owns about 1M bitcoins, never spent Ferdinando Ametrano 2015 19/77
20. Nakamoto's political motivations • "Yes, [we will not find a solution to political problems in cryptography,] but we can win a major battle in the arms race and gain a new territory of freedom for several years. Governments are good at cutting off the heads of a centrally controlled networks like Napster, but pure P2P networks like Gnutella and Tor seem to be holding their own." • "[Bitcoin is] very attractive to the libertarian viewpoint if we can explain it properly. I'm better with code than with words though." • In the Bitcoin's transaction database, the first entry has a note by Nakamoto: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks" Ferdinando Ametrano 2015 20/77
21. Source Code License Bitcoin was released under the MIT license, so it is: • open source; cryptographic software’s source code must be available to allows public inspection (absence of backdoor and security vulnerabilities) • free software; the user the right to use, copy, modify, and redistribute the software Instead, proprietary software is often close source and it only grants the right to use Ferdinando Ametrano 2015 21/77
22. Bitcoin: a currency and a protocol • Bitcoin: protocol/software (aka blockchain technology) and the community • bitcoins: units of the currency bitcoins are transferred using Bitcoin • bitcoins are the first powerful protocol application: a digital property created inside the Bitcoin protocol Ferdinando Ametrano 2015 22/77
23. Bitcoin the protocol Distributed public ledger of transactions (aka blockchain): • shared with peer-to-peer technology • keeps records of each and every transaction forever • allows to transfer a unique digital token • the token can be exchanged, but not duplicated It can replace any processing central authority with decentralized peer-to-peer cryptographically secure equivalent Ferdinando Ametrano 2015 23/77
24. Smart Properties and Contracts • Smart properties: digital token programmatically exchanged using smart contracts • Smart contracts: math-based contracts with automated software settlement, with no legal systems or human actions required • Autonomous agents: software programs created for specific tasks, able to make and receive payments using Bitcoin • Decentralized Autonomous Organizations (DAO) Ferdinando Ametrano 2015 24/77
25. • Utilizing the blockchain is a natural digital evolution for managing physical securities, [this technology holds the potential to] benefit not only our clients, but the broader global capital markets NASDAQ Chief Executive Robert Greifeld • Pilot project: NASDAQ Private Market (pre-IPO trading among private companies) • Bitcoin technology replaces the informal systems used for sales and transfers of shares Ferdinando Ametrano 2015 25/77
26. No central authorities: examples digital tokens for: • Stakeholder shares, IPOs • Car ownership (car sharing) • Voting rights (liquid democracy) Distributed Autonomous Organizations: • Gambling online (no fees, no taxes) • Health insurance (without company costs) Ferdinando Ametrano 2015 26/77
27. Proof of Existence • Block chain as time stamp authority • Put a hash value in the «comment» section of a (monetarily negligible) transaction • Hash being a fixed length string that uniquely identify an arbitrary length digital object (e.g. a txt or pdf file) • Existence of that digital object at the transaction time is proved on the block chain www.proofofexistence.com Ferdinando Ametrano 2015 27/77
28. 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 28/77
29. Asymmetric Cryptography: Public/Private Key Pair mathematically linked, perform opposite digital signature functions: – private (secret) key used to generate the 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 Try at https://www.bitaddress.org Ferdinando Ametrano 2015 29/77
30. A bitcoin transaction: from public key to public key • Transaction: amount + receiver’s public key • The sender’s private key signs the transaction • With sender’s public key anyone can verify that: – The private key has been used, non-forged signature – Transaction has not been tampered or modified – The amount is at sender’s public key disposal • The transaction is published to the public ledger • Everybody knows that the receiver’s public key has received the transacted amount Ferdinando Ametrano 2015 30/77
31. Bitcoin wallet security • bitcoins are effectively owned by whoever can spend them • Securing a wallet: private key safe storage • PC client: Bitcoin Core, Armory, Electrum • Web client: greenaddress.it, blockchain.info • Cold storage: never exposed to Internet, stored away Ferdinando Ametrano 2015 31/77
32. Pseudonymity, Anonymity Bitcoin is really pseudonymous, not anonymous: • The public key does not provide direct information about the private key owner • All transactions are transparent to everybody’s inspection. • Perfect persistent public account history: the public ledger is forever • Too little privacy for honest people, too much for criminals https://blockchain.info/ http://blockexplorer.com/ Ferdinando Ametrano 2015 32/77
33. Bitcoin’s public ledger: the block chain • Transactions are bundled 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, setting the level of effort required to alter the block chain • As of 2015 the network computing power is 13,000 times that of the combined 500 largest supercomputers Ferdinando Ametrano 2015 33/77
34. 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 34/77
35. 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 35/77
36. Seigniorage Revenues Dissipation in Network Security Costs About $600M per year (miner remuneration) Ferdinando Ametrano 2015 36/77
37. Bitcoin Monetary Rule • 2009: 50BTC every 10 minutes – 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 2015 37/77
38. Inelastic Money Supply: Deterministic Decreasing Rate chart 2029: issued 96.88% of all BTC 2141: issued last 0.00000001 BTC Ferdinando Ametrano 2015 38/77
39. Outline 1. Introduction 2. Bitcoin Primer 3. About Money 4. Hayek Money 5. Seigniorage Shares and Reserve Bank 6. Bibliography and Conclusions Ferdinando Ametrano 2015 39/77
40. 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 • Bitcoin is money for the information economy Ferdinando Ametrano 2015 40/77
41. 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 41/77
42. IMF’s SDR, F. Saccomanni • Special Drawing Rights are international reserve assets, created in 1969 to supplement existing official reserves of member countries • SDRs address the lack of a non-national currency to be used as reserve asset • F. Saccomanni: cryptocurrencies could be an effective monetary policy instruments [...] we should pay more attention to the geniuses working on them, try to understand what of interest they could teach us https://it.finance.yahoo.com/notizie/saccomanni-non-bisogna-demonizzare-cripto-valute-172912255.html http://www.ufficiostampa.rai.it/pdf/2014/2014-10-09/2014100928490498.pdf Ferdinando Ametrano 2015 42/77
43. 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 43/77
44. 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 44/77
45. 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 45/77
46. 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 46/77
47. Stable Value of Money • Value of money is governed by supply and demand, as for any other good • Changes in bitcoin demand cannot be compensates by elastic supply: they directly translate in price changes and price volatility • Bitcoin speculative appeal leads to hoarding and limited transaction volume • Expectations about its future usage foster price growth but stand in the way of current usage! Ferdinando Ametrano 2015 47/77
48. Unfairness of the Elastic Supply of Fiat Money • Expansionary policy: most are denied of the pro-quota monetary base increase they would deserve as current money holders • Contractionary policy: the general loss of value is dumped on borrowers increasing interest rates • Paper money phasing out (2014 Rogoff) Ferdinando Ametrano 2015 48/77
49. The Holy Grail of Stable Prices • Gold standard, bimetallism, symmetallism • Fixed value of bullion (Aneurin Williams 1892) • Compensated dollar (1911-20 Irving Fisher) • Commodity Reserve Currency (1932 J. Goudriaan, 1937-44 B. Graham, 1942 F. Graham, 1951 M. Friedman) • ANCAP basket (1982 Robert Hall) • Futures contracts (1984 Miles, 1989-95 Sumner) • Quasi-futures contract (1994 Kevin Dowd) • Price index option (2000 Kevin Dowd) Ferdinando Ametrano 2015 49/77
50. Outline 1. Introduction 2. Bitcoin Primer 3. About Money 4. Hayek Money 5. Seigniorage Shares and Reserve Bank 6. Bibliography and Conclusions Ferdinando Ametrano 2015 50/77
51. Hayek Money • The Bitcoin protocol has been successful at get rid of any centralized monetary authority • The bitcoin currency has given up the flexibility of an elastic supply of money • Hayek Money is a price stability paradigm: the cryptocurrency monetary standard of elastic non-discretionary supply Ferdinando Ametrano 2015 51/77
52. Fixed USD Exchange Rate • 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 52/77
53. USD-Parity Rebased Bitcoin Daily rebasing Ferdinando Ametrano 2015 53/77
54. Inflation adjusted USD-Parity • Adopting the USD Consumer Price Index • 6% inflation in the period March 2011-2014 1.06 Ferdinando Ametrano 2015 54/77
55. Brent-Wheat Commodity Price Index Ferdinando Ametrano 2015 55/77
56. Brent-Wheat Commodity Price Index Rebased Bitcoin Ferdinando Ametrano 2015 56/77
57. Brent-Wheat Commodity Price Index Ferdinando Ametrano 2015 57/77
58. Brent-Wheat Commodity Price Index Ferdinando Ametrano 2015 58/77
59. Limits of This First 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 59/77
60. Outline 1. Introduction 2. Bitcoin Primer 3. About Money 4. Hayek Money 5. Seigniorage Shares and Reserve Bank 6. Bibliography and Conclusions Ferdinando Ametrano 2015 60/77
61. Hayek Money Implemented as Dual Asset Ledger Split transactional and speculative money demand with two non-fungible assets: • (stable) transactional coins • (unstable) speculative shares Blockchain technology tracks ownership and transactions for both Ferdinando Ametrano 2015 61/77
62. Monetary Base • coins and shares in circulation, with prices and respectively • Overall outstanding monetary base = Coin + Share market capitalizations: = ∙ + ∙ • If ≅ 0 and ≅ 0: cryptocurrency is dead • If ≅ 0 and > 0: no interest for stable coins, shares are the equivalent of bitcoins • So > 0, but really ≅ 1 is the goal Ferdinando Ametrano 2015 62/77
63. Coins • The supply is regulated to peg the coin to a given price index parity – Expansionary monetary phases: coins are minted as share dividends paid to shareholders – Contractionary monetary phases: coins can be destroyed in exchange for newly minted shares or other crypto-assets • When ≅ 1, coins give up any speculative value • Money velocity and transaction volume increase • Transaction validation is rewarded with the issuance of new shares, not coins Ferdinando Ametrano 2015 63/77
64. Distributed Central Bank 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 being: – obliged to validation task duties – responsible for network security, node synchronization, etc. – subjected to the costs associated to coin stability Ferdinando Ametrano 2015 64/77
65. Seigniorage Shares • Share market capitalization is the estimation of future coin issuance: assuming zero interest rate ∙ is the expected number of future coins • The share price is free to float: – increases for dividend expectations in expansionary monetary phases – decreases in contractionary phases • Shareholders absorb all monetary policy’s costs and benefits, shielding coin holders from volatility • Shares are never burned/destroyed Ferdinando Ametrano 2015 65/77
66. > 1: Price Index Deflation 1. fresh new coins are minted and paid as share 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 Ferdinando Ametrano 2015 66/77
67. < 1: Price Index Inflation 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 or other crypto-assets Ferdinando Ametrano 2015 67/77
68. < 1: Price Index Inflation (2) 1. < 1 and > 0: coin price parity might be restored by share intrinsic devaluation or coin burning 2. < 1 and ≅ 0: shares’ defensive help is exhausted, price stability could be preserved only burning coins but shares are not attractive Ferdinando Ametrano 2015 68/77
69. DeCentralized Reserve Bank as DAO • As monetary policy tools, share dividends and coin burning might be not effective enough • A Reserve Bank (as Decentralized Autonomous Organization) can enforce price boundaries: – Always selling newly minted coins for 1.05, accepting crypto-assets (to be accumulated as reserve) in return – Always buying existing coins at 0.95 giving new shares or accumulated reserve crypto-assets in return • A custodian legal entity would be required for non-crypto reserve assets re-introducing centralization Ferdinando Ametrano 2015 69/77
70. Leverage Bitcoin As Reserve Asset • Bitcoin is the first and most successful instance of an intrinsically scarce digital asset: it 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 70/77
71. 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 71/34
72. Transaction Validation Proof-of-Stake + Proof-of-Payment • Transaction validation rights are proportional to shareholding (proof-of-stake) • Instead of wasting hardware and electric power in proof-of-work, shareholders pay bitcoins to the Reserve Bank (proof-of-payment) augmenting its reserves • Transaction validation rights are randomly assigned between shareholders, with chances proportional to the accumulated proof-of- payment amount • Share price in bitcoin is obtained as by-product Ferdinando Ametrano 2015 72/77
73. Outline 1. Introduction 2. Bitcoin Primer 3. About Money 4. Hayek Money 5. Seigniorage Shares and Reserve Bank 6. Bibliography and Conclusions Ferdinando Ametrano 2015 73/77
74. Bibliography • Nakamoto, S. (2008) Bitcoin: A peer-to-peer electronic cash system, bitcoin.org/bitcoin.pdf • Antonopoulos, Andreas M. (2014), Mastering Bitcoin: Unlocking Digital Crypto-Currencies, O’Reilly, github.com/aantonop/bitcoinbook • Franco, P. (2014) Understanding Bitcoin: Cryptography, Engineering and Economics , Wiley http://www.amazon.com/Understanding-Bitcoin- Cryptography-Engineering- Economics/dp/1119019168 Ferdinando Ametrano 2015 74/77
75. 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 • 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 75/77
76. Conclusions Bitcoin is a disruptive invention • Technology: endless possibility in replacing central authorities The challenge today is to imagine what could be the forthcoming blockchain equivalent of Apple, Google, Amazon, or Facebook • History of Money: the eve of possibly the best money ever devised in human history Payment systems and exchanges will never be the same Ferdinando Ametrano 2015 76/77
77. Cryptocurrency prices and purchasing power stability 1. Hayek Money as 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 4. Proof-of-Payment to avoid socially inefficient usage of seigniorage revenues for transaction verification Ferdinando Ametrano 2015 77/77