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Transitioning mindshare from the Bitcoin-for-everything monopoly to a 
competitive consensus-as-a-service marketplace
 This is not an endorsement of or investment advice for the purchase 
of any token, coin or service. This is strictly for...
 What we have today is not Bitcoin circa 
2009 
◦ Finality is no longer final (reversibility occurs) 
 Rolling back tran...
 In practice, consumer behavior is 
starkly different than expected / 
intended 
◦ “Hodling” behavior accounts for 50-80%...
 Initial user interfaces, on-rampability 
suggests creators were not in touch with 
how to reach and saturate new tractio...
 “The human element appears to have failed 
here, but we’d hate to condemn an entire 
program based on a single slip up.”
 “Bitcoin transactions don’t go beyond the first transaction. The people who have 
accepted bitcoins don’t use them to bu...
 Manfred Macx in Accelerando 
◦ Creates formula / algorithm for central banks 
 Feldman–Mahalanobis model 
◦ Part of Sec...
 Ferdinando Ametrano: “Hayek Money: The Cryptocurrency Price Stability 
Solution” 
 “Price Stability Using Cryptocurrenc...
 Dual model of coins and shares embodies the functionality of fiat money at central bank: 
money supply is expanded by pu...
 A non-agnostic ledger 
◦ In order to use the Bitcoin network, you have to use bitcoins (vendor lockin) 
◦ Cannot use the...
 There are economic trade offs depending on the level of trust and 
consensus required, but shoving everything onto one l...
 Consequently, the community has evolved and created several new 
potential methods for untrusted nodes on a public netwo...
 Beyond the annual academic Dijkstra Prize, the nascent digital 
currency space has been fast in proposals but slow in ac...
 A friend compared the speed at which this 
industry moved with dog years and this is 
particularly true in the altledger...
 Example: A Hyperledger consensus pool can 
be implemented in different ways. Some 
pools may exist of only known entitie...
 “Whenever SPAM comes up, people seem to be quick to jump to the easy 
solution of "if we charge a little bit then it wil...
 Meher Roy’s IoM 
proposal 
 A Decentralized 
Exchange Protocol (DEP) 
for exchanges between 2 
ledgers 
 A Real Time G...
 Real rocket ships to the moon will create utility and target user pain 
points, not incentivize purchasing power transfe...
 tim@melotic.com 
 Twitter: @ofnumbers 
 Melotic.com / OfNumbers.com
 By having two coins, one targeted at speculative demand (shares), the other targeted at tx demand (coins), 
we now have ...
 So the core operational principle of a protocol that aims to stabilise the 
market value of coin is the following rule: ...
 Building a hospital without consulting a doctor or nurse is a bit like 
trying to build an economy without talking to ec...
Moving Beyond BINO Beta
Moving Beyond BINO Beta
Moving Beyond BINO Beta
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Moving Beyond BINO Beta

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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.

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Moving Beyond BINO Beta

  1. 1. Transitioning mindshare from the Bitcoin-for-everything monopoly to a competitive consensus-as-a-service marketplace
  2. 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. 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. 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”)
  5. 5.  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”
  6. 6.  “The human element appears to have failed here, but we’d hate to condemn an entire program based on a single slip up.”
  7. 7.  “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
  8. 8.  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)
  9. 9.  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”
  10. 10.  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.
  11. 11.  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
  12. 12.  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.
  13. 13.  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.
  14. 14.  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.
  15. 15.  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.
  16. 16.  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.
  17. 17.  “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
  18. 18.  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.
  19. 19.  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)
  20. 20.  tim@melotic.com  Twitter: @ofnumbers  Melotic.com / OfNumbers.com
  21. 21.  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.
  22. 22.  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.
  23. 23.  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.

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