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Open Source Finance:
QuantLib, OpenGamma, and Bitcoin
Ferdinando M. Ametrano
[email protected]
Banca IMI IntesaSanpaolo
Milano-Bicocca University
QuantLib
Hayek Money
Düsseldorf , 4th of December 2014, QuantLib User Meeting
https://speakerdeck.com/nando1970/open-source-finance-quantlib-opengamma-bitcoin
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Open Source Software
software that can be freely
• used,
• changed,
• and shared (in modified or unmodified form)
• by anyone
http://opensource.org/
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Free Software
A software is free if its users have four essential
freedoms:
1. The freedom to run the program as you wish, for
any purpose
2. The freedom to study how the program works,
and change it so it does your computing as you
wish.
3. The freedom to redistribute copies.
4. The freedom to distribute copies of your
modified versions to others.
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Open Source / Free Finance
• QuantLib
• OpenGamma
• Bitcoin
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QuantLib
• The announcement:
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QuantLib
• SourceForge project registered on 2000-10-11
• First release 2000-12-05
• http://quantlib.org
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QuantLib (2)
https://github.com/lballabio/quantlib
• Commits: 17,078
• Contributors: 25
• Watch: 103
• Stars: 247
• Forks: 293
• Pull Requests: 173 since June 2013
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QuantLib (3)
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OpenGamma
www.opengamma.com
• Founded in 2009
• Raised a total of $23.35 million from Accel
Partners, Firstmark Capital, ICAP and Euclid
Opportunities
• Headquartered in London with an office in
New York City
• 70% of employees in R&D
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OpenGamma (2)
• Open architecture platform for real-time
market risk management
• Strong Java analytics library (adjoint greeks)
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OpenGamma (3)
https://github.com/OpenGamma
• Commits: 26,700
• Contributors: 33
• Watch: 32
• Stars: 184
• Forks: 123
• Pull Requests: 294 since November 2012
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OpenGamma (4)
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Bitcoin: The Announcement
From: Satoshi Nakamoto 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
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Satoshi Nakamoto
• Unknown identity: pseudonymous person or group?
• Worked on Bitcoin since 2007, published the paper in 2008
• Released as open source free software in January 2009
• His involvement stops mid-2010
• Entrusted the Bitcoin SourceForge project and a copy of the
alert key to Gavin Andresen, effectively his successor
• Must own about 1M bitcoins, never spent
Bitcoin: A peer-to-peer electronic cash system
http://www.bitcoin.org/bitcoin.pdf
http://mag.newsweek.com/2014/03/14/bitcoin-satoshi-nakamoto.html
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Bitcoin
• SourceForge project registered on 2008-11-09
• First release 2009-01
• https://bitcoin.org
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Bitcoin (2)
https://github.com/bitcoin/bitcoin
• Commits: 7,481
• Contributors: 262
• Watch: 798
• Stars: 6125
• Forks: 4452
• Pull Requests: 3500+ since December 2010
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Bitcoin (3)
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Open Source Finance
• Finance is usually closed source
• Academia has not adopted QuantLib and
OpenGamma very much
• Bitcoin is the most relevant open source
finance project
• Why so much relevant?
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Favorable 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.
• Jared Cohen: I think it’s very obvious to all of
us that crypto-currencies are inevitable
• Marc Andreessen: Bitcoin today is like
Internet in 1994, weird and scary
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Bitcoin Investments to Surpass Early
Stage Internet Investments
• f
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Unfavorable Opinions
• Nouriel Roubini: Bitcoin is not a currency as it is
not a unit of account or a means of payments or
store of value. It is a Ponzi game and a conduit for
criminal/illegal activities
• 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
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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/
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Bitcoin Economy
• Total number of BTC is about 13M
• Market Cap: $7B BTC vs $1,200B USD
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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.
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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?
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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
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Bitcoin resilience
Is there anything else in financial world:
• 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
• With such a bad reputation
That could be still alive and kicking?
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Hard to regulate
• Janet Yellen (November 2013 US Senate):
– 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
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Disruptive?
• PayPal or Western Union did not received the
attention of virtually every central bank
• For a first evidence of bitcoin relevance look at
the on-going debate about it
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Bitcoin Price Growth & Adoption
Coindesk, State of Bitcoin Q2 2014
http://www.coindesk.com/state-of-bitcoin-q2-2014-report-expanding-bitcoin-economy/
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Merchants & Payment Processors
• PayPal accept bitcoin as of September 2014
• Sridhar Ramaswamy, head of Google Wallet
We are working in the payments team to figure out
how to incorporate bitcoin into our plans
• Amazon: granted patent for the use of digital
currencies as payment on cloud platforms
(Amazon Web Services)
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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
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Bitcoin: a currency and a protocol
• Bitcoin: protocol, software, and community
• bitcoins: units of the currency.
bitcoins are sent using Bitcoin
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Bitcoin the protocol
Distributed public ledger of transactions:
• allows 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
• the protocol is Bitcoin extra-legal tight regulation
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bitcoin the currency
• bitcoins are a digital property
• created inside the Bitcoin protocol
• the first powerful protocol application
• authorities replaced:
– central banks
– financial intermediaries
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bitcoins
• Not to be found anywhere, they only exist as
block chain 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
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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
• Tool little privacy for honest people, too much for
criminals
https://blockchain.info/
http://blockexplorer.com/
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Asymmetric Cryptography:
Public/Private Key Pair
mathematically linked, perform opposite functions:
• 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
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Asymmetric Cryptography:
Public/Private Key Pair
Keys are not granted by the network:
• No need to register the keys anywhere in
advance
• Only used when required for a transaction
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A bitcoin transaction:
from public key to public key
• The sender’s private key signs the transaction:
– transacted amount
– receiver’s public key
• Sender’s public key verifies that the transaction:
– originated from sender’s private key
– has not been 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
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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: blockchain.info, greenaddress.it
• Cold storage: never exposed to Internet,
stored away
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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, 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
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Network hash rate
• More powerful than the combined top 500
supercomputers (but less flexibility…)
• charts
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Mining
• Miners are the nodes of the network
• They provide the computing power for:
– processing and validating transactions (avoiding
double spending)
– securing the network
– synchronizing the nodes
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Mining (2)
• 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
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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
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Inelastic Money Supply
Decreasing rate fixed supply
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Bitcoin the protocol
• stroke of genius, major disruptive invention
replace any processing central authority with
decentralized
peer-to-peer
cryptographically secure
equivalent
• This really is Web 3.0
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Smart Properties and Contracts
• Smart properties are digital token 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
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No central authorities: examples
digital tokens for:
• Car ownership (car sharing)
• Voting rights (liquid democracy)
Distributed Autonomous Organizations:
• Gambling online (no fees, no taxes)
• Health insurance (without company costs)
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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
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Bitcoin 2.0
• Bitcoin-like block chains as public ownership
database for digital assets
• Meta-protocols: Namecoin, Mastercoin,
Counterparty, ColoredCoins
• Ethereum: next-generation smart contract and
decentralized application platform
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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
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Information Economy
• Mobile communication, Internet, and social networks
• Cryptocurrency: money for the information economy
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Money Comparison
Medium of
Exchange
Store of Value Unit of 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
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Money as value yardstick
• Unit against which the value 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
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Inflation and Deflation
• reduction in the purchasing power per unit of
money: money value decrease, price level
increase
• deflation hinders money’s unit of account role
and encourages its hoarding. This can lead to
perverse economic crisis.
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Monetary policy
• delegated to central banks or equivalent
monetary authorities
• institutionally designed to be independents
• central bank’s main objective is to safeguard
the value of the national currency
• low and stable rate of inflation is the implicit
or explicit goal
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Statement of the Problem
• The Bitcoin protocol has been 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
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Transactions
• Transactions/minute: 40-60 vs 200,000 VISA
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Friedrich 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
A Free-Market Monetary System
Lecture delivered at the Gold and Monetary Conference, New Orleans, Nov. 1977
https://mises.org/daily/3204
Denationalisation of Money-The Argument Refined, Third Edition
The Institute of Economics Affairs 1990
http://mises.org/books/denationalisation.pdf
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Analysis of the Theory and Practice
of Concurrent Currencies
• Commercial banks issue their own money:
– Keep the purchasing power constant
– Competition between currencies
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
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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 1BTC worth 500USD
– or 500BTC each worth 1USD
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Rebasing Process Reaction Lag
Daily rebasing
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Inflation adjusted USD
• Adopting the USD Consumer Price Index
• 6% inflation in the period March 2011-2014
1.06
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Brent-Wheat Commodity Price Index
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Brent-Wheat Commodity Price Index
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Brent-Wheat Commodity Price Index
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Brent-Wheat Commodity Price Index
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Gold Commodity Price Index
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Gold Commodity Price Index
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Hayek Money
The cryptocurrency monetary standard of
elastic fully automatic non-discretionary supply
regulated to achieve stable prices
with respect to a (commodity) price index
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Seigniorage Shares
• The perceived potential of a cryptocurrency as investment
asset leads to hoarding and limited transaction volume
• Shield coin holders from the direct effects of monetary
phases, restraining monetary policy’s costs and benefits to
holders of seigniorage shares
• Seigniorage shares are a participation in a distributed
central bank: owners are entitled to seigniorage revenues
in exchange for being subjected to the losses associated to
coin price stability defence, obliged to validation task
duties, and in charge of price index observation
• Free coins from any speculative value, thus favoring money
velocity and increasing the number of transactions
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Two Monetary Digital Tokens
• Two species of digital tokens: coins and shares. Block
chain technology tracks ownership and transactions for
both.
• Coins are divisible, shares are not. Both can be used for
transactions even if not fungible
• Coins are minted as share dividends and distributed to
shareholders
• The right to validate transactions is reserved to
shareholders, so here miner is a synonym of
shareholder.
• Miners are rewarded with the issuance of new shares.
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The Distributed Central Bank
• Seigniorage shares are a participation in a distributed
central bank
• 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
– 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
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The Coin and Share Prices
• The coin is actively pegged to a price index in
order to make its value essentially constant at
parity
• Share price instead is free to float:
expectations about expansionary monetary
phases increment it, while contractionary
phases depress it.
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Monetary Base
• shares and coins in circulation, with prices
and
respectively,
≅ 1
• The share market cap and the coin market cap add up
to the overall outstanding monetary base:
= ∙
+ ∙
• Share market cap is the estimation of future coin
issuance: assuming zero interest rate ∙
is the
expected number of coins to be issued in the future
• The monetary base coin equivalent is:
= ∙
+
= ∙
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Burning Coins for Shares
• New shares can be issued at every block in exchange for a
minimum auction price of
burned coins
• If no shares are bought in a block, in the next one the share
auction price will be lowered. If shares are bought in a
block, then the share auction price will be increased
• The auction is not really depriving shareholders of value:
assuming constant in an equilibrium state, the reduction
of coin monetary base will just shift value in the share
monetary base.
• Only the coin price
must be obtained exogenously to the
network, relying on shareholders for its observation
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Price Index Deflation
•
> 1, fresh new coins are minted and paid
as share dividends.
• This limits the appreciation potential of
, as
for a given coin market cap value ∙
, the
number of coins increases depressing
.
• As long as
> 1 the share price is obviously
non-negative
> 0, as coins are expected to
be paid as dividend.
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Price Index Inflation
•
< 1, no dividends are expected on short-term: shares lose value
•
is always incorporating the expectation of future coins “stored”
into the market share price, so as soon as
decreases then less
future coins are expected and
will experience a pull to parity
proportional to the share market cap loss.
• the share defensive help is exhausted when
approaches zero.
•
< 1 and
> 0: price stability might be still defended if the
market will consider further share devaluation enough to restore
parity;
•
≅ 0 and
> 0: this is the realization of the bitcoin case, with
shares being equivalent to bitcoins
•
< 1 and
≅ 0: price stability cannot be preserved unless coins
are burned;
•
≅ 0 and
≅ 0: the cryptomoney is dead
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Bibliography
• Hayek, F. A. (third edition 1990, first edition
1977), Denationalisation of Money - The
Argument Refined, The Institute of Economic
Affairs, mises.org/books/denationalisation.pdf
• Dowd, K. (2014), New Private Monies: A Bit-
Part Player?,
http://www.iea.org.uk/publications/research/
new-private-monies-a-bit-part-player
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Bibliography
• Ametrano, Ferdinando M. (2014), Hayek Money:
the Cryptocurrency Price Stability Solution,
http://ssrn.com/abstract=2425270
• Ametrano, Ferdinando M. (2014), Price Stability
Using Cryptocurrency Seigniorage Shares,
http://ssrn.com/abstract=2508296
• Sams, Robert (2014), A Note on Cryptocurrency
Stabilisation: Seigniorage Shares,
https://github.com/rmsams/stablecoins/blob/ma
ster/00-main.pdf
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