Originally presented on November 5, 2014 at the Inaugural CAIA-SKBI Cryptocurrency Conference 2014 hosted at Singapore Management University: http://skbi.smu.edu.sg/conference/111726?itemid=5806 Citations and references found in the notes of each slide. Abstract: With nearly six years of empirical data and use-cases behind the Nakamoto consensus method the community has observed that a cryptocurrency economy behaves differently than originally envisioned and intended.  What has arisen from these half-a-decade of physical interactions is a nearly complete rollback of the primary attributes embodied within the first of these Nakamoto consensus protocols, Bitcoin – to the point where it may best to refer to it as Bitcoin-in-name-only (BINO).  Consequently there are two other challenges within this existing BINO framework: (1) the diametrically opposed forces of speculative demand versus transactional demand; (2) decoupling coins from the ledger altogether.  This presentation discusses several proposed solutions to the challenges currently being devised by a multitude of teams.

1. Transitioning mindshare from the Bitcoin-for-everything monopoly to a
competitive consensus-as-a-service marketplace

2.  This is not an endorsement of or investment advice for the purchase
of any token, coin or service. This is strictly for educational
purposes.
 Consult with a financial professional and conduct thorough due
diligence before participating in this market. IANAL.
 I am head of business development at Melotic and an advisor at
Hyperledger.

3.  What we have today is not Bitcoin circa
2009
◦ Finality is no longer final (reversibility occurs)
 Rolling back transactions, taint/validation
 TTP and freezing of assets
 “Trust” used 11 times in main body of WP but in
practice consumer behavior trends towards
continual reliance of TTP
◦ ArtForz de-decentralized mining via GPU
(summer 2010) led later to ASIC scaling
◦ Mediation and transaction costs add costs to
a network with already high opex
 “A $700 million payments network that is rarely
used for payments”

4.  In practice, consumer behavior is
starkly different than expected /
intended
◦ “Hodling” behavior accounts for 50-80% of
all mined coins
◦ Low to no velocity in all but 10% of mined
coins
 Primarily used for things that current payment
systems in G-10 cannot legally be used for:
 Illicit wares, gambling, mixing (“getaway cars”)

6.  Initial user interfaces, on-rampability
suggests creators were not in touch with
how to reach and saturate new traction
channels (e.g., solves few real pain points)
◦ “Great Mensa divide”
 “I want a currency, not a hobby”
 End result is BINO and what Williams’
calls “Maximalism”

7.  “The human element appears to have failed
here, but we’d hate to condemn an entire
program based on a single slip up.”

9.  “Bitcoin transactions don’t go beyond the first transaction. The people who have
accepted bitcoins don’t use them to buy something else. It gets back to the
circular flow of income. When Starbucks not only accepts bitcoins but pays their
workers in bitcoins and pays their suppliers in bitcoins, when you go back four of
five stages of productions using bitcoin, then bitcoin will have made it. But that
isn’t happening now and I don’t think that will happen. [Because it isn’t
happening now and because so many more people are speculating on bitcoin
rather than transacting with it], volatility will remain huge and will deter those
who might have wanted to enter the bitcoin economy as users, as opposed to
speculators. Thus, just as bad money drives out good money, Gresham’s
famous law, speculative demand for bitcoins drives out transactional demand for
it.”
 Yanis Varoufakis, political economist at the University of Texas and the University of Athens

10.  Manfred Macx in Accelerando
◦ Creates formula / algorithm for central banks
 Feldman–Mahalanobis model
◦ Part of Second Five-Year Plan, did not
foresee savings constraints (assumed
industrial sector not agriculture) and fall in
foreign reserves
 Agent-based modeling
◦ Sometimes the assumptions do not work that
way in reality (CDO 2007, rationalizes around
goal state)

11.  Ferdinando Ametrano: “Hayek Money: The Cryptocurrency Price Stability
Solution”
 “Price Stability Using Cryptocurrency Seigniorage Shares”
 Massimo Morini: “Investor/Saver Wallets and the Role of Financial
Intermediaries in a Digital Currency”
 Byron Gibson: Dual currency Beta/Gamma solution, tx rate as blockchain-intrinsic
money demand proxy (unpublished)
 Dominic Williams: Pebble (forthcoming)
 Robert Sams: “A Note on Cryptocurrency Stabilisation: Seigniorage
Shares”

12.  Dual model of coins and shares embodies the functionality of fiat money at central bank:
money supply is expanded by purchasing assets with newly created money. Money
supply is decreased by selling assets, thereby extinguishing part of the money supply.
This can dynamically be done within a rules-based protocol in a decentralized manner.
Purchasing power is maintained.
 Exogenous: USD price of coin, deflated by the CPI, for “zero-inflation“ coin.
 Endogenous: Holding GHs/kWh constant, a change in difficulty signals change in coin
value, as hashing power is turned on/off until hashing costs equal the market value of
mining award. Define P(i) in terms of fees and difficulty, deflated by some hard-coded
Moore's Law-like assumption. This would avoid the need to represent market facts
about the outside world at all, keeping the stable coin scheme autonomous and self-referential.

13.  A non-agnostic ledger
◦ In order to use the Bitcoin network, you have to use bitcoins (vendor lockin)
◦ Cannot use the underlying tech without using a relatively volatile, illiquid asset
 Caveat: metacoins can use the underlying tech, the asset amount may be negligible. Anything
over the dust amount could be tagged as being something much more valuable so end user may
not have to care what the price of a few satoshis is. However, not ideal due disproportional
rewards / free riding security
 How to tap into the other proposed use-cases without having to use inflexible
bitcoins?
◦ Second generation of consensus ledgers such as Ripple and Stellar have native coins still
but protocol allows for trust lines for other assets
◦ Meher Roy’s OSI-like “Internet of Money” with multiple protocol layers
◦ Consensus-as-a-service without a coin: Hyperledger

14.  There are economic trade offs depending on the level of trust and
consensus required, but shoving everything onto one ledger, some
kind of jack-of-all-trades Houdini ledger, is a bit like the clown car at
a circus. It can be filled with a cornucopia of clowns and coins (and
clowncoins) but the economic incentives might not align with the
duct tape holding it together.

15.  Consequently, the community has evolved and created several new
potential methods for untrusted nodes on a public network to arrive
at consensus, to the point where consensus-as-a-service is
becoming its own commoditized subindustry. In the future, this will
likely be abstracted away and developers will be able to fine tune
and granularize the level of centralization and trust they want to
expose their users to.

16.  Beyond the annual academic Dijkstra Prize, the nascent digital
currency space has been fast in proposals but slow in actual
production-level roll-outs.
 Bitcoin protocol development has understandably slowed in the past
year and as a result most of the innovation has effectively been
outsourced to the altledger ecosystem. Here a steady stream of
both old and new entrepreneurs and developers are toying with
variables that cannot be touched with Bitcoin itself due to its current
development cycle.

17.  A friend compared the speed at which this
industry moved with dog years and this is
particularly true in the altledger space. As a
result, a new ledger can be forked, tweaked
and spun up that incorporates the latest
ideas in this space. Most do fail and will
likely fail in the future, but that’s the nature of
iteration in technology.

18.  Example: A Hyperledger consensus pool can
be implemented in different ways. Some
pools may exist of only known entities, like
banks, but more public pools can have their
own node membership requirements, like an
extended SSL certificate from a Certificate
Authority to prevent Sybil attacks.

19.  “Whenever SPAM comes up, people seem to be quick to jump to the easy
solution of "if we charge a little bit then it will go away" without thinking of
the damaging consequences this could have to adoption and legitimate use
cases. Let's take email for example, charging 1c an email would be pretty
negligible, but what happens to newsletters? Alert systems? Notifications?
Now imagine it's not 1 cent but 1 emailcoin. Would email have overcome
the early barriers to adoption to become the universal communication
system it is if you had to purchase a new currency just to use it? The
solution to SPAM is better software; blacklisting, greylisting, rate limits, etc.
Gmail is free but I get 0% SPAM in my inbox. Snail mail costs a stamp but
nearly 100% percent of my letterbox is unsolicited.”
 Dan O’Prey, co-founder of Hyperledger

20.  Meher Roy’s IoM
proposal
 A Decentralized
Exchange Protocol (DEP)
for exchanges between 2
ledgers
 A Real Time Gross
Settlement Protocol
(RTGSP) for transfers
between 2 ledgers.
 A Deferred Net
Settlement Protocol
(DNSP) also for transfers
between 2 ledgers.

21.  Real rocket ships to the moon will create utility and target user pain
points, not incentivize purchasing power transfers to early adopters
 BINO still has legs for certain niches and can be used in specific
domains
 Growing marketplace of ideas for distributing / ‘burning’ seigniorage
and dynamic MOE
 XaaS: Cryptographic “ledger” as a service (CLaaS) and consensus
as a service (CaaS) may arise in many forms (See Ryan Straus)
 Separation of powers (financial controls), regulatory compliance,
human elements will be perpetual hurdles (Boase)

22.  tim@melotic.com
 Twitter: @ofnumbers
 Melotic.com / OfNumbers.com

23.  By having two coins, one targeted at speculative demand (shares), the other targeted at tx demand (coins),
we now have a mechanism for distributing the seigniorage of the latter. When coin supply needs to increase,
coinbase can be claimed by share holders by a share proof-of-burn; shares are swapped for coin at a ratio
determined by the distributed auction mechanism. When coin supply needs to decrease, sharebase can be
claimed by coin holders by a coin proof-of-burn; coins are swapped for shares, again at a ratio determined by
the auction.
If the long term growth rate of coin demand is positive, shares will become increasingly scarce. It's easy to
show that the fair value of shares is the net present value of all future seigniorage (ie, all future changes in
coin supply).
Coin supply will expand and contract with coin demand, stabilising the market price of coin. What allows
these supply changes to happen is speculative demand, now expressed in the market for shares, the holders
of which are awarded with new coin supply, and diluted with coin supply reductions.
The two motives of demand--transactional and speculative--no longer work against each other as they do in
monocoin systems, but complement each other like a monetary ying and yang. Coin holders give up the
benefits of increased coin demand and get stability in return. Share holders provide the capital to absorb
reductions in coin supply and get in return any increase in coin supply.
In this way, the market value of coin is immunised from speculations about future rates of coin adoption.

24.  So the core operational principle of a protocol that aims to stabilise the
market value of coin is the following rule: at the end of some pre-defined
interval of time, if the change in coin price over the interval is X%, change
coin supply by X%. More specifically, let's call that interval of time the
rebase period, defined as every n blocks. The coin supply rule mandates
that:
where i is the i-th rebase period, Q is coin supply and P is coin price.

26.  Building a hospital without consulting a doctor or nurse is a bit like
trying to build an economy without talking to economists or financial
professionals. This is what has happened with the Bitcoin
community – throwing the baby with the bath water in an attempt to
recreate what they perceive as a superior model which by many
metrics has not fulfilled the promises due to a lack of insights from
real economists. Blockchains and hash-based ‘proof of work’ are
innovative but did not overthrow all the existing laws of economics.