The Future of Money: Hayek Money, Seigniorage Shares, Reserve Bank, and Proof-of-Payment

Presented at InsideBitcoins, Berlin, March 5th, 2015 (https://youtu.be/ndT59662sog?t=12m8s)

A stable coin, providing stable prices and stable purchasing power, is the future of money.

Bitcoin extreme deflationary price instability has hampered its usability, making it impractical for spot transactions and unserviceable for deferred payments. Ametrano (2014) has proposed as Hayek Money a cryptocurrency price stability paradigm of elastic non-discretionary monetary policy. An implementation using a dual asset ledger for stable coins and seigniorage shares is presented here. A DeCentralized Reserve Bank (as Decentralized Autonomous Organization) is introduced as active market agent using bitcoin as reserve asset to preserve price parity. The socially inefficient over-investment of seigniorage revenues in transaction verification can be avoided using proof-of-payment.
This schema frees coins from any speculative value, thus favoring money velocity and increasing the number of transactions. Seigniorage shares are effectively to be considered as a participation in a distributed central bank: as such the owners are entitled to seigniorage revenues in exchange for being subjected to the losses associated to coin price stability defense, obliged to validation task duties, and in charge of price index observation.

Transcript

1. Creative Commons
   Attribution-ShareAlike 4.0
   International License.
   The Cryptocurrency Frontier in
   Commodity Monetary Standard
   Ferdinando M. Ametrano
   ferdinando@ametrano.net
   https://speakerdeck.com/nando1970
   Banca IMI Intesa Sanpaolo, Milano-Bicocca University,
   QuantLib, Hayek Money
   Labex Seminar Series in Energy and Commodity Markets
   ESSEC Business School
   Paris La Défense, May 20, 2015
   

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2. 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 2/45
   

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3. 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 3
   

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4. 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 4/45
   

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5. 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 5/45
   

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6. 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 6/45
   

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7. A recent bitcoin transaction
   https://blockchain.info/tx/8f1d3a8ef6b2d4a25d2f499279e01518b4770819ccbc39a765c4c326170c61b3
   • About $83M transacted with $0.04 fee
   Ferdinando Ametrano 2015 7/45
   

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8. BTC/USD exchange rate
   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 8/45
   

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9. Venture Capital Investments
   Million USD
   http://www.coindesk.com/bitcoin-venture-capital/
   Ferdinando Ametrano 2015
   2.1
   95.8
   334.8
   890
   9/45
   

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10. 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 10/45
    

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11. 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 11/45
    

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12. 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 12/45
    

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13. • 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 13/45
    

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14. 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 14/45
    

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15. 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 15/45
    

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16. Bitcoin’s public ledger: the blockchain
    • Transactions are bundled in blocks,
    sequentially chained, about one block every
    10 minutes
    • The blockchain 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
    Ferdinando Ametrano 2015 16/45
    

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17. 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 17/45
    

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18. 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 18/45
    

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19. Seigniorage Revenues Dissipation
    in Network Security Costs
    About $600M per year (miner remuneration)
    Ferdinando Ametrano 2015 19/45
    

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20. Inelastic Money Supply:
    Deterministic Decreasing Rate
    chart
    2029: issued
    96.88% of all
    BTC
    2141: issued
    last
    0.00000001 BTC
    Ferdinando Ametrano 2015 20/45
    

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21. 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
    Ferdinando Ametrano 2015 21/45
    

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22. 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 22/45
    

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23. 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 23/45
    

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24. 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 24/45
    

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25. USD-Parity Rebased Bitcoin
    Daily rebasing
    Ferdinando Ametrano 2015 25/45
    

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26. Brent-Wheat Commodity Price Index
    Ferdinando Ametrano 2015 26/45
    

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27. Brent-Wheat Commodity Price Index
    Rebased Bitcoin
    Ferdinando Ametrano 2015 27/45
    

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28. Brent-Wheat Commodity Price Index
    Ferdinando Ametrano 2015 28/45
    

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29. 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 29/45
    

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30. Hayek Money Implemented as
    Dual Asset Ledger
    Split transactional and speculative coin
    demand with two non-fungible assets:
    • (stable) transactional coins
    • (unstable) speculative shares
    Blockchain technology tracks ownership
    and transactions for both
    Ferdinando Ametrano 2015 30/45
    

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31. Monetary Base
    • coins and shares in circulation, with
    prices
    and
    respectively
    •
    ≅ 1 is the goal
    • Overall outstanding monetary base = Coin +
    Share market capitalizations:
    = ∙
    + ∙
    •
    ≅ 0 and
    ≅ 0: cryptocurrency is dead
    •
    ≅ 0 and
    > 0: no interest for stable
    coins, shares are the equivalent of bitcoins
    Ferdinando Ametrano 2015 31/45
    

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32. 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
    •
    ≅ 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 32/45
    

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33. 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 33/45
    

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34. 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 34/45
    

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35. 
    > 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 35/45
    

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36. 
    < 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 be voluntarily destroyed in
    exchange for newly minted shares or other
    crypto-assets
    Ferdinando Ametrano 2015 36/45
    

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37. 
    < 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 37/45
    

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38. 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 away 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 38/45
    

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39. Leverage Bitcoin As Reserve Asset
    • Bitcoin is the first and most successful instance of an
    intrinsically scarce digital asset
    • Bitcoin is similar to digital gold
    • 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
    shares, possibly implemented as sidechain
    Ferdinando Ametrano 2015 39/45
    

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40. 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 40/34
    

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41. 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 41/45
    

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42. 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 42/45
    

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43. 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
    4. Proof-of-Payment to avoid increasing socially
    inefficient usage of seigniorage revenues for
    transaction verification
    Ferdinando Ametrano 2015 43/45
    

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44. 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 44/45
    

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45. 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 45/45
    

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