A Crypto Puzzle
Developers come up with a new cryptocurrency that doesn’t involve “mining.” Instead, holders of the coins enjoy the creation of more coins, at the rate of 10% per year. (So you can use it to buy things, but if you just hold it, the number of coins you hold grows at 10% per year. The rate is instantaneous though.) They name it GrowCoin.
Inspired by the discussion at this post, their rivals enter the market and release FasterCoin, which is very similar to GrowCoin except FasterCoin reproduces at the rate of 20% per year.
Two questions:
(1) Is it “obvious” to you that nobody would ever hold GrowCoin once FasterCoin is released?
(2) Does that mean that no such cryptocurrency could ever be developed, since obviously a competitor could always just release a coin that has a slightly higher rate of reproduction?
Now you’re just talking about the Fed.
Even now, crypto currencies are being used more as a speculative tool than a means to facilitate trade. It will be a few years before they mature and these discussions can take place.
Aren’t there already crypto currencies that do these sorts of things. They have actual function apart from aelf reproduction though, like a system for their use in contract execution or something…
Scott Adams has a recent post on:
Blog.dilbert.com that covers this.
Well, the price just gets adjusted accordingly, no? FasterCoin will cost less dollars than GrowCoin.
We already have that today. They print GBP like crazy but they print ARS like crazier. But they both exist.
Although my example isn’t the same thing because in your example the holder gets the 10% return which doesnt happen with gbp. So I’ll just wait for the textbook answer 🙂
Your answer is good because the growth is perfectly predictable for both currencies. So, assuming that new coins are created only by the posited growth, if I hold 5% of the coins this year then I will hold 5% next year. So lots of things can affect whether the stock of coins has value, but neither is actually “growing”, so that won’t.
Hence it’s not at all obvious .
The crypto coins don’t have any physical material use, other than being a medium of exchange (i.e. you cannot eat them, nor recycle the bits into some other machine). Therefore the best possible thing you can hope for, in any medium of exchange, is moderately stable prices to facilitate usage (i.e. with stability people can easily calculate their needs, wants and income, thus budget). The purpose of the medium is to encourage people to exchange, not just to generate a bunch of nominal crypto coins.
And yes, I’m aware that you can never have perfectly stable prices, because you need room for adjustment, and the concept of price stability is only weakly defined anyhow… but I know it when I see it. You want the right balance, because too much volatility is bad, but price fixing is also bad.
However, I should point out that the coins themselves are not capital, they are tokens that might represent capital should sufficient number of people decide to offer to exchange real capital against such tokens. The nominal coin growth rates do not obey any physical rules, so the fixed percentage is arbitrary. Just a number chosen by agreement. Normal material capital objects don’t work like that.
If you want to view it as a real world capital object, then the NETWORK of coins together with the merchants and customers using those coins is the real physical capital. It’s a communication network with some agreed upon rules in order to encourage trust between the participants. If you could measure how much the participants do trust the network this psychic trust would also be physical capital (dare I say it, “Social Capital”) … just tricky to extract the numbers out of people’s heads, but presume there are ways to indirectly infer by their behaviour (e.g. if they use it a lot they would appear to trust it). If you wanted to also add in all the computer machinery devoted to running the network, that’s also physical capital, likely those things are roughly proportional to overall network size.
Growth of the overall network is what represents the real physical growth of capital here (i.e. the rate at which new merchants and customers are adopting either GrowCoin or FasterCoin is the metric that investors should be looking at when they decide which one to buy into; and also the percentage of that merchant’s business going through the crypto currency to measure activity levels and confidence). I would suggest that such network growth is non-linear, certainly not a fixed percentage, and given that the crypto concept is a relatively novel idea, the investors are basically flying by the seat of their pants in terms of judging future growth.
Obviously, if the network ever gets massive, it must hit diminishing marginal returns at some stage, when there are literally no new people available to join. However, it may fizzle out earlier, perhaps much earlier, if something else goes wrong and people start getting nervous. When mid sized it might actually go through a phase of INCREASING marginal returns (i.e. as new people join, they encourage their friends to join, etc) as an avalanche effect. This type of capital growth in the network as a whole is quite a separate thing to the nominal growth in the coin counts.
I sense a trap here, but here goes:
1) No. You would be interested in the expected future purchasing power of your holding not the nominal growth rate
2) No, its quite possible that an optimal cryptocurrency would expand in qty over time , and just increasing the number of units in people’s wallets would likely be the best way of doing it.
(I think bitcoin uses mining both as a way of expanding the base and of getting miners to validate the transactions for free so avoiding transaction costs).
I’m hoping Bob will explain the connection to the Krugman post 🙂
The connection will be the usual one: it will fail to refute something Krugman didn’t say.
1) Yes. But don’t discount people’s stupidity.
2) No. It could be developed. It just would never work.
“Two questions:
(1) The same question could be asked about counterfeit bank notes for silver: Would anyone hold silver notes once counterfeits had been made available? The answer is, not if everyone knew the notes had been counterfeited.
Cryptocurrencies aren’t money. They are only held because some people believe them to be money and will accept them. The cryptocurrency advocates will say that this is precisely what makes them money, but then they have to answer why it is they think that anything at all – including handfuls of dirt – could not be money *right now, this second* simply by willing yourself to accept them as such.
Gold and silver can be money *right now* because they have use-values – they can be used as means to satisfy ends.
Mere agreement is not sufficient to make something money.
(2) No, but it does mean that you need “the next sucker” to pass the older cryptocurrency onto.
> (2) No, but it does mean that you need “the next sucker” to pass the older cryptocurrency onto.
That’s how money works. If gold reverted to solely non-monetary usage, its market value would drop significantly. The entire process is irrational to some extent, but I have no idea how an economy of scale would work with out it.