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Abstract. Exact 40 years has been passed since F.A.Hayek published the first edition of “Denationalization of Money” in 1976, which demonstrated a theory of private competing currencies, at that time he was desperate in finding a political feasible solution to stop inflation. From then on the fact has proven that any one trying to issue private currency will be probably put into prison by the monopolists of currency creation, until the release of Bitcoin in 2009 with PoW blockchain technology. While this technologies evolving, a decentralized application named Peershare originated from PoS system(Peercoin) makes it possible to implement Hayek’s theory for the first time in human being’s history.
1. Brief currency history
Long before nations came into being, natural objects such as cowry had been used as common equivalent, and during sovereignty currency period, precious metals, e.g. copper, silver, gold were chosen to make various currencies until 20th century when governments finally shook off the restrain of precious metals. Within Bretton Woods System in late 1940s, one USD was designed as pegged to a certain amount of gold, but this system eventually crashed in 1971 due to dollar overissues and huge debts with an insufficient gold reserve level(15% of US debts) . From then on gold has been treated as “barbarous relic”, but credit currency experiments are still far from success in consideration of financial crisis in recently years.
Is economics a machine which should be manipulated by central banks via so called monetary policy? As F. A. Hayek said, “A money deliberately controlled in supply by an agency whose self-interest forced it to satisfy the wishes of the users might be the best. A money regulated to satisfy the demands of group interests is bound to be the worst possible.”[sup][1][/sup]
2. The error of the ‘beneficial mild inflation’
All inflation is so very dangerous precisely because many people, including many economists, regard a mild inflation as harmless and even beneficial. But there are few mistakes of policy with regard to which it is more important to heed the old maxim principiis obsta. Apparently, and surprisingly, the self-accelerating mechanism of all engineered inflation is not yet understood even by some economists. The initial general stimulus which an increase of the quantity of money provides is chiefly due to the fact that prices and therefore profits turn out to be higher than expected. Every venture succeeds, including even some which ought to fail. But this can last only so long as the continuous rise of prices is not generally expected. Once people learn to count on it, even a continued rise of prices at the same rate will no longer exert the stimulus that it gave at first. Monetary policy is then faced with an unpleasant dilemma. In order to maintain the degree of activity it created by mild inflation, it will have to accelerate the rate of inflation, and will have to do so again and again at an ever increasing rate every time the prevailing rate of inflation comes to be expected. If it fails to do so and either stops accelerating or ceases to inflate altogether, the economy will be in a much worse position than when the process started. Not only has inflation allowed the ordinary errors of judgement to accumulate which are normally promptly eliminated and will now all have to be liquidated at the same time. It will in addition have caused misdirection of production and drawn labour and other resources into activities which could be maintained only if the additional investment financed by the increase in the quantity of money could be maintained.[sup][2][/sup]
Therefore, nowadays many stable cryptocurrency projects actually betray Satoshi’s ideality by pegging their coins strictly to the inflated FIAT. Situation may become even worse when those “FEDcoins” try to achieve the “impossible trinity”.[sup][3][/sup]
The Impossible trinity (also known as the Trilemma) is a trilemma in international economics which states that it is impossible to have all three of the following at the same time:
• A fixed foreign exchange rate
• Free capital movement (absence of capital controls)
• An independent monetary policy
3. Gold standard not the solution
When Satoshi left the famous words “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” in genesis block of bitcoin, he/she expressed a trend of thought that people have more and more doubt on central banks monetary policy. However, the attempt of returning to gold standard by inventing an “Electronic Gold” may not be the best solution. Bitcoin, which was intentionally designed to simulate gold by satoshi, is vividly described by F. A. Hayek when talking about gold standard, “It may be that, with free competition between different kinds of money, gold coins might at first prove to be the most popular. But this very fact, the increasing demand for gold, would probably lead to such a rise (and perhaps also violent fluctuations) of the price of gold that, though it might still be widely used for hoarding, it would soon cease to be convenient as the unit for business transactions and accounting. There should certainly be the same freedom for its use, but I should not expect this to lead to its victory over other forms of privately issued money, the demand for which rested on its quantity being successfully regulated so as to keep its purchasing power constant. The very same fact which at present makes gold more trusted than government-controlled paper money, namely that its total quantity cannot be manipulated at will in the service of political aims, would in the long run make it appear inferior to token money used by competing institutions whose business rested on successfully so regulating the quantity of their issues as to keep the value of the units approximately constant.” [sup][4][/sup]
Unfortunately and surprisingly, with nearly one thousand of alt coins which mimic bitcoin, none is designed to implement Hayek’s concurrent currency theory.
4. Peershare introduction
Although PoS supporters have successfully pointed out the high energy cost disadvantage of PoW, they ignore the scarcity concept more or less. Scarcity is the basis of economics, without scarcity, commodity has no price even it’s as critical as fresh air for humans. Some PoS supporters may argue the network effect is also a scarce resource so that a pure PoS system can be of great value as long as customers quantity is big enough. I suspect this view if we inspect the social medium such as Facebook, twitter, they are free to download and use. What if Facebook charge fee for 10$ monthly, would customers leave? What if charge 100$? The traditional telephone network consists of expensive hardwares(phones, telegraph poles), this explains why this network is hard to be replaced. Unlike those pure PoS systems, a peershare application can introduce scarce resource into its system, e.g. BTC or FIAT, thus the scarcity stands.
In peershare’s network, there are two units, one is the “share”, the other is the “coin”, both combined into one PoS blockchain. The shareholders achieve governnance via voting with their shares, and this is a big improvement over bitcoin. It(bitcoin) had some flaws, which include a high cost of maintaining the network and the disassociation of control of the network (given to miners) and ownership of its assets (Bitcoin holders).[sup][5][/sup] With peershare, the currency quantity can be shrunk or expanded as shareholders’ wish, and this is the best solution for flexible currency supply in crypto world.
5. IT technology cannot replace essential economics rules.
Satoshi contributed nothing to economics theories, what he did is just complying the old gold standard theory hundreds of years ago, i.e. He’s succeeded in making an electronic gold 2.0. But his brilliant blockchain technology is the very breakthrough IT innovation which makes Hayek theory practical. For central banks, F. A. Hayek’s theory is the evil which has been kept in the Pandora’s box for many years, but with blockchain technology as the key, the box will be opened, and this is even not perceived by the creators of peershare software!
A DAO or DAC, whatever you call it, also has to comply basic economics/accounting/financial rules. If this kind of organization must survive on its own without receiving donation from outsides, it is a Business entities with an aim of gaining a profit. Therefore the profit model is very crucial for a DAO powered by peershare. The first peershare application named Nubits suffers a lot of financial problems because of the absence of decent profit model, without a proper revenue source, this first trial may become a Ponzi with continuous operation expenditure bleeding its equity thus eventually crash the peg just like Bretton Woods System failed in 1971 due to insufficient gold reserve.
6. Issue Hayek money with Peershare
Assume you are going to issue a cryptocurrency named “Hayek Coin”, acronym HYK, accompany by “Hayek share”. The first step is to find a decent profit model, in cryptocurrency world, the exchange business is a good selection, and online content production/consumption is the next big potential business. For instance, many customers dislike to pay apple music monthly for 10$/month, they want to pay each song they listen, when they don’t listen, should be no fee at all. Many customers have to deposit s small amount of money via Paypal on various website to download articles, attachment, etc, this is really tedious. In fact every click of your mouse on webpage can be charged fee if necessary. Every information exchange, can be a money transaction. In this way, advertisements can be removed from websites and customers directly pay for the service. e.g. You pay 0.1$ to watch a video on youtube, and the author gets the 80% money while 20% belongs to website.Cryptocurrency wallet can be a browser plugin, a integrated wallet on chrome/firefox(open sourced), a customer deposits a small amount of cryptos(e.g 50$), and when browsing on internet, when clicking mouse, posting thread, downloading files, even viewing article, the payment is automatically finished within several seconds. The traditional payment such as VISA/MASTER (5000-50000 tx/s) cannot handle such micropayment volume all over the world. Business model of existing millions of websites can be completely changed by eliminating the agent/advertisement between customers and websites by blockchain technology!
There are also other income source such as lottery service, you just need to remember that if you cannot find a decent profit model, don’t start your business, and if your business scale is small, the currency quantity issued should also be small, this is determined by free market, so don’t dream you can issue a huge number of currency with small revenue/business. That’s a natural and fair rule. Customers’ confidence comes from the business profitability not from any other reasons such as your promise, or advanced concept. There should be a Maximum pay back period, it tells how long will a DAO pay off all its debts (HYK in circulation outside of DAO’s control)with predictable profit. I guess the pay back period should be within one year.
“The kind of trust on which private money would rest would not be very different from the trust on which today all private banking rests (or in the United States rested before the governmental deposit insurance scheme!). People today trust that a bank, to preserve its business, will arrange its affairs so that it will at all times be able to exchange demand deposits for cash, although they know that banks do not have enough cash to do so if everyone exercised his right to demand instant payment at the same time. Similarly, under the proposed scheme, the managers of the bank would learn that its business depended on the unshaken confidence that it would continue to regulate its issue of ducats (etc.) so that their purchasing power remained approximately constant.”
“The issuing bank could, at first, at no prohibitive cost keep in cash a 100 per cent reserve of the currencies in terms of which it had undertaken to redeem its issue and still treat the premiums received as freely available for general business. But once these other currencies had, as the result of further inflation, substantially depreciated relative to the ducat, the bank would have to be prepared, in order to maintain the value of the ducat, to buy back substantial amounts of ducats at the prevailing higher rate of exchange.This means that it would have to be able rapidly to liquidate investments of very large amounts indeed. These investments would therefore have to be chosen very carefully if a temporary rush of demand for its currency were not to lead to later embarrassment when the institution that had initiated the development had to share the market with imitators.”[sup][6][/sup]
Therefore the reserve ratio should be maintained at high level but 100% reserve ratio is not a must because the DAO need to invest their revenue from selling HYK into stable/profitable fields, such as providing service to customers so that HYK is received or destroyed on a daily basis.
Now you need to peg HYK to a basket of commodities to keep it buying power stable, but in this real world, seldom people have chance of spending HYK to buy various commodities, fortunately you can peg HYK to USD with inflation rate adjustment, i.e. indirectly pegged to commodities. As long as HYK’s market capitalization is much smaller than USD, this is a very effective way. You may peg HYK to 1.12$ because USD has devalued 12% since 2009 when satoshi invented bitcoin, or 1.7$ when F.A. Hayek passed away in 1992. Price is the most effective advertisement in crypto world when HYK stabilized at a strange price for a long time, curiosity will arise.
So how the inflation rate is determined/calculated? Of course it should be voted in a decentralized way, please remember that there maybe thousands of inflation rates in thousands of customers’ opinions, an uniform, objective and accurate inflation rate doesn’t exist at all in real world(theory of relativity), although some authorities give out their calculation results. 3rd party inflation rate data sources are just reference for shareholders, peershare holders should vote the inflation rate continuously with minting, or in a monthly, yearly way. This inflation rate maybe not the most correct number, but a number welcomed by their customers most, including borrowers and lenders.
F.A. Hayek had suggested two efficient ways to control the money quantity.
- Buy and sell your currency
- Short-term lending
To build the buy/sell walls at HYK/USD or HYK/BTC pair will provide liquidity to your currency, to avoid potential exchange fault, you may build a (semi)decentralized exchange on with blockchain such as B&C exchange project, but paper money cannot be handled in such exchange, so the HYK/BTC is a proper solution on that platform. Be careful about the volatility of BTC, if you building sell wall and buy wall too tightly, e.g. 1.0$ sell, and 0.99$ buy at HYK/BTC pair, you may lose money due to speculation. One reasonable way is make some spread such as 0.95$ buy wall to compensate the risk, while on HYK/USD pair the spread can be as small as 0.01$. You can also build official 5% spread and leave some room for free market to provide smaller spread peg for their own interest. In order to implement anti-inflation, DAO must slowly raise the selling price of HYK according to inflation rate voted. Every time when you raise the price, make sure the buy wall price is lower than the previous sell price so that the short-term speculation can be avoided, this is the beauty of price spread. Some customers may complain that HYK is not very accurate due to the price spread. A question: If they have to hold a type of currency for several years, will they like an accurate inflated money or the anti-inflated currency with slightly fuzzy price?
Furthermore, the short-term lending can provide good quality low spread HYK to their customers. DAO’s lending business means some people can borrow HYK from the protocol with some collateral pledged to the protocol, this is smart contract. For safety and feasibility reason, only the share unit on own blockchain should be accepted as collateral, if other crypto assets(e.g. BTC) are accepted, attackers may find chances: they can pledge lots of BTC to borrow tons of HYK and sell all of them suddenly on free market with rumor/panic spreading, and if they succeed in breaking the HYK buy wall and depress HYK to a very low price, then they will buy back lots of HYK to pay back protocol fetching their BTC and get a lot of profit. However, if they pledge Hayek share to borrow HYK, their attack incentive wiped out because they will lose money due to share price plumbing after the attack.
The short-term lending’s beauty is quickly shrink/expand the HYK supply, the software protocol itself cannot perceive real world’s price, supply/demand information, but those shareholders can, they may vote a pledge ratio of Hayek share: Hayek coin according to share price and HYK supply manipulation. If they vote for a zero ratio which completely shut off the supply, within short term, all the borrowed HYK will come back to protocol otherwise the borrowers will lose their more wealthy Hayek shares.
The borrowers can also build HYK/USD pair on their own on various exchanges where the buy/sell wall spread is low, thus HYK’s quality improved.
7. Conclusion
Thanks for Satoshi’s IT innovation, Hayek’s theory has the first chance to be implemented since 1976, this kind of currency is as important as Bitcoin in 2009. Technology is always the best tool to break traditional monopoly.
“Blessed indeed 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.”[sup][7][/sup]
----F. A. Hayek
https://www.mises.org/library/denationalisation-money-argument-refined
References:
[1] Chapter III
[2] Chapter XVII
[3] https://en.wikipedia.org/wiki/Impossible_trinity
[4] Chapter XXV
[5] Nubits White Paper, https://www.nubits.com/about/white-paper
[6] Chapter VIII
[7] Chapter XXV
