Upgrade to Pro — share decks privately, control downloads, hide ads and more …

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


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.

Ferdinando M. Ametrano

March 05, 2015


  1. Creative Commons Attribution-ShareAlike 4.0 International License. The Cryptocurrency Frontier in

    Commodity Monetary Standard Ferdinando M. Ametrano [email protected] 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
  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
  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
  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
  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
  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
  7. 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
  8. 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
  9. 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
  10. 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
  11. • 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
  12. 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
  13. 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
  14. 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
  15. 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
  16. Seigniorage Revenues Dissipation in Network Security Costs About $600M per

    year (miner remuneration) Ferdinando Ametrano 2015 19/45
  17. 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
  18. 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
  19. 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
  20. 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
  21. 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
  22. 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
  23. 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
  24. 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
  25. 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
  26. 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
  27. 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
  28. > 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
  29. < 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
  30. < 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
  31. 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
  32. 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
  33. 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
  34. 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
  35. 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
  36. 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
  37. 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
  38. 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