Freicoin, a cryptocurrency known for its implementation of negative interest rates , is down 99% from its high about a year ago. Clearly, there has been a broad market consensus rejecting it and negative interest rates. It simply doesn’t compare well to alternatives. It seems likely that the adoption of negative interest rates could be enough to cause the market to reject NuBits despite other promising attributes.
Demurrage, especially variable demurrage, makes financial planning difficult if not impossible. Think about this simple question: if I have 1000 NBT now, spend 500 NBT in a month, then another 200 NBT in three months, how much will I have left to spend in a year? The answer of 300 is easy and intuitive when the nominal value remains the same. Add in variable demurrage and it not only becomes unpredictable, but even if you make assumptions about what the level of demurrage will be the calculations are complicated.
Based on my discussion with Benjamin and his writings, I think the reason he is advocating negative interest rates is that it seems like a sure way to control the degree of leverage, or the ratio of the value of all NuShares and the value of all NuBits. Imagine we make a promise that we will not let the ratio fall below 1 without correcting it. If it fell to 0.9, the thinking is we just impose a negative interest rate of 10% for a year and we can restore the ratio of 1. The problem is, this does not take into account the effect that negative interest rates would have on demand and the NuShare price. Negative interest rates would almost surely reduce the NuShare price. As a result, it cannot be used as a mechanism to place a ceiling on the degree of leverage. In order for this mechanism to ensure control of leverage, we would need to know that the NuShare price drop as a result of negative interest rates would be less than the negative interest rate. For instance, if you impose negative interest rates of 10% but the NuShare price drops 10% or more as a result, then it will not reduce leverage. I suspect that negative interest rates would actually increase leverage by reducing assets (NuShares) more than it reduces liabilities (NuBits).
It appears negative interest rates were also suggested as a way of ensuring default doesn’t occur. Some would argue that negative interest rates are themselves a default. I would imagine those advocating for demurrage would say it is not a default because you are telling people up front they might not get access to their entire balance. This is technically true, but who would want an asset almost guaranteed not to gain value (unless there is deflation) but which retains the distinct possibility of losing nominal value? It will still feel like a default to NuBit holders. People want a sure thing, something that absolutely can be counted on over time. Governments will often promise a sure thing, and people are tempted to believe these “sovereign” institutions. The reality is, there is no sure thing, and governments have proven this by failing to deliver on promises in innumerable instances. NuBits is also not a sure thing, as I describe in the last section of my whitepaper “When Nu becomes obsolete”. The default scenario presented there, which would come slowly, only after the tell tale sign of extremely high interest rates, and only after NuBits had passed from the hands of ordinary people into the hands of speculators willing to take high risk for a possible high reward, is preferable to the scenario of sudden default via shareholders casually voting for negative interest rates.
In summary, I am firmly opposed to negative interest rates because they cannot contain the degree of leverage, constitute a sudden default (as opposed the current design where any default would occur in a slow and predictable fashion) and would likely cause NuBits to be solidly rejected by the market.
