“A steady rate of monetary growth at a moderate level can provide a framework under which a country can have little inflation and much growth. It will not produce perfect stability; it will not produce heaven on earth; but it can make an important contribution to a stable economic society. ”- Milton Friedman
There are few thousands crypto assets already present on the market. Nevertheless quantity does not mean quality. If we look at a list of the top 10 crypto assets by capitalization oriented on deflationary models with a limited supply and extremely high volatility. Crypto assets are far away from mass adoption as a medium of exchange but popular as a store of value. Thus fiat money is used by the majority as the traditional mode of commerce. There are a few projects in the crypto space pegged to fiat currencies, like USD Tether, but they are not truly decentralized entities but rather look like fully centralised traditional financial companies. Thus, there is a niche and demand in the market for a stable medium of exchange which is decentralised and operates without trusted parties.
The SemiotNet protocol creates a token, Semiottcoin, that provides stability and privacy to the token-holder where the token remains agnostic to the network effects of volatility in money markets. Token users bypass the intermediary in a market relationship by subscribing directly to the market price of the asset, commodity, or security they desire. Monetary stability is a product of Semiott’s unique use of VDF-powered cryptographic time-locks and mixicles. These methods ensure that velocity and circulation of the pegged commodity is reflexive and immune to short-run volatility. The SemiotNet protocol’s use of time-locks enable it as a money streaming service whose confidentiality is ensured by its employment of zero knowledge proofs. The unique method used in the algorithm employs VDF-powered cryptographic time-locks in conjunction with the blockchain to protect the token user from significant volatile risk.
The Semiottcoin is both price-stable and growth-driven. It achieves price-stability via an elastic money supply, enabled by stable mining incentives. It also uses seigniorage created by its minting operations as transaction stimulus, thereby facilitating adoption.
The price-volatility of cryptocurrencies is a well-studied problem by both academics and market observers. Most cryptocurrencies, including Bitcoin, have a predetermined issuance schedule that, together with a strong speculative demand, contributes to wild fluctuations in price.
Bitcoin’s extreme price volatility is a major roadblock towards its adoption as a medium of exchange or store of value. Intuitively, nobody wants to pay with a currency that has the potential to double in value in a few days, or wants to be paid in a currency if its value can significantly decline before the transaction is settled. The problems are aggravated when the transaction requires more time, e.g. for deferred payments such as mortgages or employment contracts, as volatility would severely disadvantage one side of the contract, making the usage of existing digital currencies in these settings prohibitively expensive.
At the core of how Semiott Network solves these issues is the idea that a cryptocurrency with an elastic monetary policy would maintain a stable price, and make it viable for use in everyday transactions. However, price-stability is not suﬃcient for the wide adoption of a currency. Currencies inherently have strong network eﬀects: a customer is unlikely to switch over to a new currency unless a critical mass of merchants are ready to accept it, but at the same time,merchants have no reason to invest resources and educate staﬀ to accept a new currency unless there is significant customer demand for it. For this reason, Bitcoin’s adoption in the payments space has been limited to small businesses whose owners are personally invested in cryptocurrencies. Our belief is that while an elastic monetary policy is the solution to the stability problem, an eﬃcient fiscal policy can drive adoption.
A Brief History of Money
We keep it in our purse, we hold it in our bank accounts, we hand over our debit or credit cards to pay for things. We might even keep it in a box under the bed. But do we ever ask ourselves what money is and where did it come from? Is it just the cash and notes in our pockets and the electronic entries we see going up and down on our online bank balances or is it something more?
Governments make payments or banks issue bank credit which are just numbers on a screen noted as both assets and liabilities. But how do we define what actual money is? It’s not a straightforward question to answer.
In its long history, it has been represented and recorded in many societies and in many different forms – cuneiform tablets, grain weights such as the shekel, shells, beads, immovable stones, tally sticks and even precious metals. Ancient Egypt and Babylon had a sophisticated banking system based on grain storage. The Lydians of Greek Asia Minor are said to have invented coins in the 7th Century BCE and it is recorded that Alexander the Great struck them to fund his military campaigns. In Europe, coins appeared a thousand years before banking. It is believed that writing was invented to keep track of debts in communities.
Anthropologists and historians have found no evidence that money came into being in a barter, market exchange context although this story is repeated in university economics courses around the world and is still to be found in Economics 101 textbooks. In historic terms, money has been linked to its role as an institution that allowed societies to maintain order and security, provision resources for governance, security and development, and to record and clear debt. Today, in the same way, we should view it as an institution that aims to serve not just commerce and private enterprise but people and their communities. Money should be created to serve the people and not the other way around.
Second Great Depression
In 1929, the world economy plummeted into what’s known as the First Great Depression, which was the worst economic downturn in the history of the industrialized world, lasting for ten years. It began after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors. Since then, the world economy has been impacted by the 2007 financial crisis, where the US Treasury and Federal Reserve intervened to try to halt an economic collapse. Despite efforts, we still saw a recession take place in the following years which impacted many nations worldwide. Today, there continues concern that the world may fall into a Second Great Depression. For this reason, stablecoins that are governed by a protocol that is designed to try to stabilize the coin carry a significant risk of crashing to a zero value contributing to economic turmoil.
Not only is the future unpredictable, but as things become more complex, we are now facing the risk that countries and companies can attack each other by finding financial and technical weaknesses in digital currencies. Can you imagine a scenario where a government like powerful groups from another nation sells a significant amount of stablecoins for the sole reason of significantly damaging US businesses and citizens? Or can you imagine that there is a popular stablecoin that dominates the US market and then China buys 51% of the supply of the stablecoin and takes control of the underlying blockchain?
Stability of Money – A Perspective
Monetary stability affects the flow of our spending, incomes, and the prices of our assets. The relationship between economic and monetary stability is defined by variables like inflation, monetary growth in excess of real growth, legislative polices, supply shock, employment, etc. And often, discretionary monetary policies create volatility.
In cryptocurrency, like Bitcoin, swings of over 10% in magnitude can occur in a day. While this attracts speculative traders, this level of volatility is not a characteristic of a stable currency and makes impractical for transactional use.
As history has already reported, once a stablecoin becomes tradable on secondary exchanges, the forces of supply and demand unleash enormous volatility on the underlying price, thus defying the very purpose of a stablecoin. There are two ways for any stablecoin to manage—or prevent—this volatility:
1. Design and implement creative internal protocols to work toward coin stabilization.
2. Completely eliminate all possibility for the stablecoin to fluctuate in the first place.
Semiott believes that no matter how other stablecoins design and implement their protocols to manage stability, they cannot anticipate all possible market conditions. The future is unpredictable and as it is often said, “we don’t know, what we don’t know.” The logical conclusion is that if there is a potential for price volatility, there will always be risk that the stability models will not cover all market fluctuations and fail, causing the coin’s price to collapse.
Furthermore, in the future, competitors, companies, and even nation states may turn their focus on economic warfare as an alternative to traditional combat. This will make destabilizing stablecoins an attractive weakness and used to target businesses and even the economies of other countries. Semiott is designed to overcome this very weakness. Semiott has been built to serve the public for many years to come. But, because no one can know the future, Stablecoins may still remain vulnerable to price volatility and require the intervention of a small group of people to make multiple decisions for years to come.
Stability of Money- Centralized Approach
The Role of Money in the Economies of Ancient Greece and Rome
Coined money was first invented in the Greco-Roman world. The monetization of Greek and Roman societies was a complex, dynamic, and often experimental process in which the economics of money were inescapably connected with cultural, political, and social developments. How did money contribute to the spread of market exchange and the development of sprawling territorial empires? Certainly, the rise of Greek democracy coincides with the adoption of coinage. Furthermore, in the wake of Alexander the Great’s conquests, the Eastern Mediterranean went through processes of both Hellenization and monetization – as Greek-style coinage systems promoted the development of financial institutions and market exchange.
The course of monetary development, however, was not a uniform process. Many of the Celtic cultures of Western Europe simply incorporated Greek coins into their existing traditions of reciprocity. Greek city states on the Italian peninsula used coinage, but inhabitants of the Latin‐speaking cities of central Italy, including Rome, were comparably under-monetized. Rome, in fact, did not adopt a coherent coinage system until the necessities of the Second Punic War forced Rome to finally adopt a Greek-style coinage system. By the late first century B.C., however, money served much of the Mediterranean world in one form or another. How prevalent was money use? Even under the Pax Romana in the first and second centuries A.D., the lines between “general purpose” and ‘special purpose’ money were blurred. Money may have only been useful to autarkic peasants whenever taxes and tributes were due. For urbanites, however, money served them regularly in interactions with strangers, neighbors, and even family.
Barter, commodity money, and credit maintained a role throughout Greco-Roman antiquity. By the third‐century A.D., the Roman monetary system came under strain as coinage standards became erratic. Eventually, all competing provincial and local coinages were abolished in favor of a single central coinage supported by strict legal tender laws. This experiment with fiduciary – like many in ancient Greek and Roman societies – was of mixed success. Money’s complex history and diverse functions in the Greco-Roman continue to captivate economic historians.
The Impact of The Bretton Woods Institutions
The Bretton Woods Institutions are the World Bank and the International Monetary Fund (IMF). They were set up at a meeting of 43 countries in Bretton Woods, New Hampshire, USA in July 1944. Their aims were to help rebuild the shattered postwar economy and to promote international economic cooperation. The original Bretton Woods agreement also included plans for an International Trade Organisation (ITO) but these lay dormant until the World Trade Organisation (WTO) was created in the early 1990s.
The creation of the World Bank and the IMF came at the end of the Second World War. They were based on the ideas of a trio of key experts – US Treasury Secretary Henry Morganthau, his chief economic advisor Harry Dexter White, and British economist John Maynard Keynes. They wanted to establish a postwar economic order based on notions of consensual decision-making and cooperation in the realm of trade and economic relations. It was felt by leaders of the Allied countries, particularly the US and Britain, that a multilateral framework was needed to overcome the destabilising effects of the previous global economic depression and trade battles
A summary on the Bretton Woods Institutions: The Bretton Woods Agreement and System created a collective international currency exchange regime that lasted from the mid-1940s to the early 1970s. The Bretton Woods System required a currency peg to the U.S. dollar which was in turn pegged to the price of gold. The Bretton Woods System collapsed in the 1970s but created a lasting influence on international currency exchange and trade through its development of the IMF and World Bank. The agreement stated that purchasing currency would lower the supply of the currency and raise its price. If a currency’s price became too high, the central bank would print more. This printing production would increase the supply and lower the currency’s price. This method is a monetary policy often used by central banks to control inflation.
Before Bretton Woods, most countries followed the gold standard. That meant each country guaranteed that it would redeem its currency for its value in gold. After Bretton Woods, each member agreed to redeem its currency for U.S. dollars, not gold. Why dollars? The United States held three-fourths of the world’s supply of gold. No other currency had enough gold to back it as a replacement. The dollar’s value was 1/35 of an ounce of gold. Bretton Woods allowed the world to slowly transition from a gold standard to a U.S. dollar standard. The dollar had now become a substitute for gold. As a result, the value of the dollar began to increase relative to other currencies. The transition created more demand for dollars, even though its worth in gold remained the same. This discrepancy in value planted the seed for the collapse of the Bretton Woods system three decades later.
The agreement was needed because Hyperinflation caused the value of money to fall so dramatically that, in some cases, people needed wheelbarrows full of cash just to buy a loaf of bread. The IMF was not designed to print money and influence economies with monetary policies.
The creation of Bretton Woods resulted in countries pegging their currencies to the U.S. dollar. In turn, the dollar was pegged to the price of gold, and the U.S. became dominant in the world economy. The U.S. was the only nation that could print the globally accepted currency, and countries had more flexibility than they did with the old gold standard. When the dollar ceased to be pegged to the price of gold, it became the monetary standard with other currencies pegging their currencies to it.
But the system eventually collapsed. In 1971, the United States suffered from massive stagflation—a combination of inflation and recession, which causes unemployment and low economic growth. In response to a dangerous dip in value caused by too much currency in circulation, President Nixon started to deflate the dollar’s value in gold. Nixon devalued the dollar to 1/38 of an ounce of gold, and then to 1/42 of an ounce.
The devaluation plan backfired. It created a run on the U.S. gold reserves at Fort Knox as people redeemed their quickly devaluing dollars for gold. In 1971, Nixon unhooked the value of the dollar from gold altogether. Without price controls, gold quickly shot up to $120 per ounce in the free market, ending the Bretton Woods system.
An Overview of the Centralized approach
Over the years, the market economy brought about a dominant economic model primarily based on the centralized structure of financial institutions. In this sense, centralization denotes the creation of a few financial institutions and banks that are organized and managed from the top. According to Neuberger (1959), centralization can be conceptualized as the desirability of central control over decisions on credit allocation. In finance, centralization can be manifested in control exerted by financial institutions over the economy’s total money supply. For example, centralization implies that central banks can perform and supervise all the country’s banking operations, exerting an influence over other independent banks, regardless of their geographic location. Examples of these operations include the issuance of money by the central bank, a specific commercial bank, and other private issuers, identifying the type of money (electronic or physical) and controlling the transfer of money. Centralization is a crucial aspect, and it lies in the power of the central bank to create currencies and ensure price and financial stability. The centralized structure of the financial system has contributed to the privatization of profits and socialization of losses. For example, the weaknesses of financial systems and the breakdown of their dynamic stability have resulted in a persistent and significant rise in unemployment in the United States during the 2007–2009 global financial crisis. The 2008 global financial crisis has urged the general public to question the monetary instruments’ effectiveness and reliability and the ability of central banks and government authorities to respond to the crisis. The global financial crisis has also influenced the regulatory space of both banks and financial markets.
After the 2008 global financial crisis and the loss of trust in financial institutions, a mysterious person or group operating under the name of Satoshi Nakamoto released a paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System” in which the author introduced a new protocol for a novel cryptocurrency “Bitcoin” (Nakamoto, 2008). Nakamoto has brought forth a “blueprint” or procedure for developing a digital transaction system using as a medium of exchange its own digital currency, independently of the conventional money or so-called fiat currencies, such as the EURO or the USD. More than a decade later, thousands of cryptocurrencies have been introduced and used to conclude online transactions. Other cryptocurrencies, including Litecoin, GeisGeld, SolidCoin, BBQcoin, and PPcoin are similar to Bitcoin. They claim to offer technological improvements to improve financial transactions’ efficiency and security . The market capitalization of these digital currencies has been high, exceeding USD 500 billion and showing no signs of slowing down. The success and proliferation of cryptocurrencies are attributed to the technology of decentralized ledgers, blockchain. As per Treiblmaier, blockchain is defined as a “digital, decentralized, and distributed ledger in which transactions are logged and added in chronological order with the goal of creating permanent and tamper-proof records.” A specific blockchain represents a configuration of multiple technologies, tools, and methods that address a particular problem or business use case. Decentralized ledger-based currencies and systems are commonly used as payment instruments to purchase goods and services, exchanged and traded in marketplaces either for fiat currencies or other cryptocurrencies.
Figure 1 : SWOT analysis of centralized approach
An essential characteristic of decentralized ledgers is the system participants’ financial incentives in exchange for their concerted efforts to verify and record transactions on the ledger. The interest in the finance applications of decentralized ledgers has significantly increased because of the immutable financial transactions registered in the system, the strong governance, and the system’s resilience against security threats such as the DDoS attacks and single point of failure. The decentralization of the ledger has diverse implications on the money supply process. The most important one is independence from national and political control, including the central bank’s dominant role in the financial system. Therefore, the role of decentralized ledgers in the money supply process is to create digital currencies that can compete with central banks. Recall that the Bitcoin creator’s key objective is to allow network participants to exchange value and transfer money directly between them without the intervention of trusted third parties, such as the central bank or any other financial institutions. In the age of cryptocurrencies, the position of central banking in the money supply can be replaced with blockchain technology because the decentralized and distributed mechanism of the ledger enables to prevent the double-spending problem and to create a system that would bridge the trust gap inherent in the centralized ledger system for money supply.
Unlike blockchain-based digital currencies, the centralized ledgers for money supply are controlled and governed by financial institutions. The centralized ledger used in the money supply process is not accessible to all parties involved in the transaction; instead, it is managed by a third party. Historically, centralized ledgers have been used in registries (land, shipping, tax), exchanges (stock and bonds), or libraries (indexing and borrowing records), just to name a few examples. Likewise, centralized ledgers are considered the widely used data storage means in finance. Before the inception of the cryptocurrency Bitcoin, centralized ledgers are indispensable in transferring value and payments between the transaction parties. Financial institutions are viewed as trusted third parties in charge of centralized ledgers and are responsible for preventing the double-spending problem and validating transactions among the system participants. However, the introduction of decentralized ledgers typified by the Bitcoin blockchain system has significantly reshaped how money and transactions are carried out in the digital arena.
Stability of Money- A Comparison Between Centralized and Decentralized Finance
We currently find ourselves at the dawn of a new era: decentralisation. And from global civic and business leaders to everyday individuals, the world has started to take notes.
What is Centralized Finance (CeFi)?
Before DeFi was introduced, Centralized Finance was the standard for trading cryptos. It handles a stronghold over the cryptocurrency industry. In centralized finance (CeFi), all crypto trade orders are handled through a central exchange. Funds are managed by specifically running the central exchange. It means you don’t own a private key that provides you access to your wallet.
Moreover, the exchange identifies which coins they list for trading or how much fees you need to pay to trade with their exchange.
Concluding the concept of Centralized Finance, you don’t own your cryptocurrencies when buying /selling via a centralized exchange. Moreover, you are subject to the rules a centralized exchange imposes on you. Also, you are subject to the rules set by the centralized exchange.
What is Decentralized Finance (DeFi)?
In decentralized finance, there is no involvement of an exchange. The entire process operates through automated applications that are built on top of blockchain platforms.
Furthermore, decentralized finance tries to create a fair financial system in which everyone can participate. Ideally, even unbanked people can access some form of banking services through blockchain technology and made possible by DeFi.
More specifically, decentralized finance aims to create a permissionless, open-source, and transparent finance service ecosystem. This decentralized financial system provides services such as crypto lending, borrowing, yield farming, asset storage, and many more.
The main benefit of using decentralized finance over centralized finance is your ability to stay in control over your assets. This means you own the key pair for your wallet and you’re the only person who can move your funds. Furthermore, users who want to participate in DeFi have to use decentralized applications (DApps) built on top of blockchain platforms to access those DeFi services.
What Differentiates CeFi from DeFi?
The defining difference between centralized and decentralized finance is the involvement of an exchange. In centralized finance, the system is governed by exchanges. Whereas in decentralized finance, it is technology-dependent. DeFi users access financial services through DApps as discussed before.
This distinction rests on a more significant differentiator that is often overlooked. Due to the involvement of exchanges in CeFi, users transfer their risk to the exchanges. Therefore, exchanges are in charge to keep users’ funds safe.
In DeFi, these intermediaries are cut off. The transactions happen on the belief that smart contract protocols will work well.
There are some other differences as well. For example, centralized finance helps with fiat to crypto conversions and cross-chain solutions. If required, centralized finance is also able to move funds to help its customers or to block trading in case of a negative event such as a hack. On the other hand, DeFi is considered more transparent and non-intrusive because it does not ask for any personal information of the customer and is non-custodial. DeFi can also not block trading or put restrictions on users whereas CeFi can.
Decentralised finance: The impact
The biggest impact from decentralised finance will be felt by underbanked communities, or communities facing financial upheaval. With an internet connection and smart device being the only requirements (thus far), these individuals can easily gain access to a global financial trading market, and manage their own transactions. More importantly, these systems are also censorship resistant and publicly auditable, suitable for the prevention of corruption and manipulation as an added measure of security.
Both Decentralized and Centralized Finance aims to achieve the same goal. They plan to make crypto trading popular and improve the trading volume. However, the way these two ecosystems carry out their objectives is different.
CeFi promises security of funds and fair trade on those funds. Investors with conventional currency can also take part in crypto trading. Moreover, CeFi exchanges provide them with customer support services that DeFi services do not offer. On the other side, DeFi wants to make the space intrusion free. It provides a space for investors to implement their strategies without having to deal with an intermediary body.
Stability of Money- A Velocity Volume Framework
The fundamental idea behind Semiott was derived from the work of a pioneer in Economics, Palle S. Anderson. According to him, sometimes instability is illustrated by unexpected changes in the income velocity of money. More frequently, however, the stability problem is analysed in terms of the money demand function, i.e. the relationship between money stocks and a few key macroeconomic variables such as aggregate income and interest rates. In order to clarify conceptual differences and to provide a framework for the topics to be discussed in this paper, it may be useful to distinguish between three sources of instability:
- Firstly, the income velocity of money will change in response to fluctuations in interest rates as well as to movements in other arguments of the money demand function which are not related to income. Moreover, velocity changes may be observed because of lags in the adjustment of money demand to income. Usually, however, such changes are both predictable and transitory and they can be interpreted as movements along an otherwise stable money demand function with constant lag structures;
- Secondly, the money demand function itself may shift, reflecting either unstable parameters or new developments and involving unexpected velocity changes as well. For instance, the process of financial innovation and deregulation may at times accelerate, possibly affecting both the interest elasticity of different monetary aggregates and the balances held at each level of interest rates. Another source of instability may be shifts in the precautionary demand for money, related to changes in confidence, and ongoing institutional changes can create “ratchet” effects so that both current and earlier peak levels of interest rates and aggregate income affect money demand;
- Thirdly, since changes in money stocks are induced by movements in money demand as well as by factors on the supply side, the money stocks observed at a given point in time might be “off” the money demand function, unless the speed of adjustment is very high. In other words, over shorter periods the money stocks actually held may not correspond to the money balances desired. Such discrepancies will, of course, induce large and unexpected changes in velocity and give the impression that the money demand function has become unstable.
Stability of Money- The Link Between Velocity and Stability
1. Velocity in Money Explained
Monetary velocity is defined as total transaction value (GDP) divided by the monetary base per unit of time. The monetary base of a stablecoin is equal to its market cap, and the total transaction value represents the gross value of stablecoin that was transferred from one economic agent to another over a certain period of time.
For example, if the stablecoin market cap is constant at $100, and the stablecoin is used in $1,000 worth of transactions over the course of a year, then the stablecoin’s monetary velocity would be 10. Below we see the quarterly velocity of the U.S. dollar over the years, using two common measures of money supply, M1 and M2.
Monetary velocity is an important output to measure because it captures how economic participants are using the money in circulation. Put simply, velocity of money and demand for money are inversely related, as velocity is a byproduct of how a currency is being used. If velocity is very low, then one would deduce that most participants have a bias to hold on to their money. Conversely, if velocity is very high, then one would assume that most participants would rather spend their money than hold it.
Among fiat currencies, the Venezuelan bolivar has very high velocity because Venezuelan citizens want to spend their money quickly before hyperinflation erodes the present purchasing power, rather than invest in endeavors which increase productivity in the long-run. On the other hand, the euro has a very low velocity as the economy suffers from persistently below target inflation, gradually stagnating activity, and structural headwinds. In such an environment, the eurozone would benefit from targeted fiscal stimulus to boost aggregate demand. This would help shift the static piles of money from central bank and private bank balance sheets into circulation to facilitate lending and production.
From these examples we can see how velocity is one metric, albeit neither a perfect nor always easily observable one, that shows how well a currency is functioning within an economic system. Neither extremely high nor low velocity is desirable for a healthy functioning economy and currency, and the proper balance lies somewhere in between. Thus a reasonably low monetary velocity can signal that a currency is functioning as intended, both as a medium of exchange and as a store of value, which helps to maintain the currency’s value all else equal (note: the unit of account function is solved by pegging). A currency which maintains its value forms the backbone of a well functioning economy where agents can engage in contracts. As such, we view monetary velocity as one gauge of a stablecoin’s usefulness as a currency in the blockchain economy.
2. Monetary Velocity has Important Implications for Seigniorage
In simple terms, seigniorage is the profit a government receives from printing money. For a government such as the U.S., which operates the de-facto global reserve currency, printing money is extremely profitable. The U.S. and other governments manage their seigniorage profits generally by provisioning a foreign currency reserve and by capitalizing initiatives which benefit the welfare of the nation.
Over the past few decades of the modern era, governments and central banks have had a monopoly on seigniorage and were trusted by their constituents to exercise that power responsibly. Many governments successfully earned this trust, while many others failed. A government which mismanages its seigniorage is likely to erode the full faith and credit it was bestowed, resulting in currency depreciation and rising inflation, both which devalue its monetary base relative to other currencies.
Seigniorage is a powerful tool that must be calibrated and exercised appropriately. Governments know that the more useful and stable their currency, the more seigniorage they can steer from their currency reserve toward productive uses such as funding the country’s military or subsidizing the economy. Given that a useful and stable currency should have a reasonably low velocity, we can begin to understand the relationship between velocity and seigniorage. Lower monetary velocity enables greater seigniorage to be used for productive purposes, all else equal.
3. Applying the Concepts of Seigniorage and Velocity to Cryptocurrencies and Stablecoins
With the emergence of blockchain technology, anyone can provably secure and transfer value without a trusted government or third-party intermediary. Unfortunately, the lack of focus on adoption and cryptocurrency monetary policy, or ‘tokenomics’, has led to a value implosion for many otherwise promising projects and use cases. Even stablecoin monetary velocity is stubbornly high as most are only used for cryptocurrency trading. Cryptocurrency monetary policy matters greatly in this brave new world.
Each cryptocurrency that users and investors choose to purchase is essentially benefitting from the same power of seigniorage as governments. If I give you my fiat currency or my cryptocurrency in exchange for your token, my money now forms your reserves and I trust you to utilize those resources wisely, most likely in the service of adoption or stability. The value of your token or currency is the ultimate arbiter on whether you are successful or not, assuming the value is linked to the project’s underlying utility and adoption. If you were to put all the money you received for your token into a bank account and used it to back the value of your token, you would even be on your way to creating a centralized stablecoin if that was your intent, but development and adoption might suffer.
While most government currencies operate without the full backing of reserves, credible government pegged currencies have a full reserve. Since stablecoins are pegged currencies, they too should adhere to the proven practice of backing the peg with a reserve comprised of off-chain or on-chain assets and resources to ensure the long-run viability and stability of the stablecoin. Utilizing seigniorage wisely, and maintaining a reserve that can appropriately contract the economy in extremely adverse scenarios is of utmost importance. More efficient use of seigniorage for productive purposes, such as adoption, results in a greater share remaining for stability.
If a cryptocurrency were to have very low velocity and high adoption growth, it could more effectively utilize a greater share of seigniorage to fund necessary expenditures with less offsetting impact on the ratio of reserves backing the economy. Now we can begin to close the loop on seigniorage, growth, and monetary velocity. Available seigniorage is a function of monetary velocity and growth. Higher adoption growth and slower monetary velocity unlocks greater levels of sustainable seigniorage, which is money that can be spent to promote the welfare of constituents. This is true for governments and cryptocurrencies..
4. Slowing Velocity is an Important Step for the Maturation of the Blockchain Economy
Simply holding a currency can be a valuable contribution to the economy because this activity slows velocity. By holding on to a currency for a period of time, you are signaling that you value it (‘putting your money where your mouth is’ so to speak). You believe that the currency will maintain its purchasing power over a certain period of time, and can use the currency for other purposes than current expenditures. As more people hold a currency, longer-term contracts between agents can begin to take shape. Savings, credit, insurance, and mortgages are all examples of this behavior. For participants in the blockchain space, OTC smart contracts can be used as digital representations of these financial products. A plethora of blockchain use cases are enabled once velocity is slowed and stability achieved, with each helping to further maintain a reasonably low monetary velocity.
The blockchain ecosystem as a whole would benefit greatly from a focus on ‘tokenomics’ and understanding the impact of velocity. A few authors have proposed models to incorporate velocity and other measures to quantify a token’s value or have proposed ways for cryptocurrencies to manage velocity. Further analysis of these topics by the cryptocurrency community will bring greater understanding and provide promising projects with the tools needed to fulfill their mission.
The blockchain ecosystem as a whole would benefit greatly from a focus on ‘tokenomics’ and understanding the impact of velocity. A few authors have proposed models to incorporate velocity and other measures to quantify a token’s value or have proposed ways for cryptocurrencies to manage velocity. Further analysis of these topics by the cryptocurrency community will bring greater understanding and provide promising projects with the tools needed to fulfill their mission.
5. What This Means for Stability Under Adverse Scenarios
Lower velocity and higher adoption can enable greater levels of sustainable seigniorage to be utilized without cannibalizing stability reserves. But what if growth shifts downward or perhaps contracts significantly? How can a system be designed to maintain stability in an adverse scenario or shock?
Previously, we established that seigniorage can be sustainably allocated for productive uses, and that a secondary on-chain stability token can provide supplemental stabilizing capacity for any token, not just stablecoins. An on-chain stabilizing mechanism can compliment a reserve of real assets, and both can be operated in a decentralized and programmatic fashion. To the extent that an asset or token comprising the reserve is volatile, correlated, or exhibits tracking error, then its stabilizing capacity should be appropriately discounted. Bivariate dependence and volatility among reserve assets can shift in calm versus stressed regimes, which also must be accounted for. Central banks utilize increasingly sophisticated portfolio modeling and reserve diversification strategies to meet policy objectives, the foremost of which are liquidity, safety, and then return. Stablecoins can learn from and utilize these same practices, though would benefit from taking a more conservative approach to asset allocation than a number of central banks.
The ultimate intent of a properly designed and provisioned stablecoin stability reserve is to fully contract the monetary base at the pegged exchange rate, if necessary. Since stablecoins require the highest level of stabilizing capacity of any asset, robust modeling and conservative thinking will allow stablecoins to depart from their current centralized format toward a more decentralized format, which is necessary to power the growth of the global blockchain economy.
The Stablecoin Industry
What is a Stablecoin?
A stablecoin is a cryptocurrency that is collateralized to the value of an underlying asset. In the traditional currency world, there is no such thing as a truly stable currency. This is due to the fact that all fiat currencies, such as the US dollar and Euro, are subject to fluctuating exchange rates and inflation. These fluctuations are usually small enough so that it does not prevent them from being the primary medium of exchange on a day-to-day basis.
In the digital world, we have seen that cryptocurrencies are subject to massive volatility. For a small portion of individuals, often referred to as speculative investors, this volatility supports their preferred level of risk. But for the majority of mainstream consumers, this volatility is not an attractive option and is not a practical solution for their daily transactions or for long-term investments. In order to be successful, a stablecoin needs to offer protection from numerous volatility-inducing factors, whether they are those that we know today or 100 years from now. For example, we are seeing that as stablecoins become tradable on secondary exchanges, the market forces of supply and demand are imposing significant volatility on their price.
Today there are two ways for any stablecoin to manage this volatility:
1. By backing the coin with a currency, asset or commodity in hope that the market will trade the coin with the same value it has been pegged to.
2. To design and implement creative internal protocols that stabilize the coin every time there is a fluctuation.
Semiott proposes a new way to create a stablecoin based on a new methodology that eliminates the price fluctuations.
Why are Stablecoins Important?
They are intended to solve the volatility issue that arguably holds back the potential adoption of cryptocurrencies for everyday payment purposes.
Regardless of the currency type, stability is crucial to protect buyers and sellers from loss of value, either during a transaction or over the life of an investment. Without some form of stability, it is unlikely that cryptocurrency will ever be adopted as either a mainstream payment system or investment option. During a cryptocurrency crisis, even speculative investors need to temporarily park their funds with a stablecoin in order to avoid losses. With stablecoins, a new opportunity exists to provide protection against volatility with the benefits of being able to address the needs that our increasingly digital lives demand. Stablecoins provide a reliable, predictable form of payment that are compatible and complementary to emerging technologies without requiring complex systems or processes.
They can be used for everyday means of exchange, a store of value, market entry, and most commonly, to provide a less volatile holding ground for investors and traders during the upswings and crashes of the cryptocurrency market.
Emerging stablecoins generally fall into one of four categories.
1.Fiat-collateralized stablecoins are the most common type of stablecoins and are collateralized, or backed by fiat currency like USD, EUR, or GBP, and in theory are supposed to be backed at a 1:1 ratio.
As of July 2nd 2019, USD-backed stablecoins are currently dominating the market exceeding $4.5 billionwith Tether retaining its first place, despite its transparency concerns and even after revealing that it is only backed 74% by USD and not 1:1 as its original claim.
Following Tether in the top 10 stablecoins are USD Coin, TrueUSD, Paxos StandardToken, Dai, Stasis Euros, Gemini Dollar, bitCNY, Reserve Rights, and StableUSD.
As cryptocurrency research firm Diar notes, there has been a major surge in USDstablecoin trading volumes, withCircleand Coinbase-backed USD Coin (USDC)posting a 130% uptick in volume between April and May 2019, hitting $3.6 billion inMay compared with $1.6 billion in April.
2.Commodity-collateralized stablecoins are backed by other kinds of exchangeable assets, such as precious metals. The most common commodity to be collateralized is gold — however, there are also stablecoins backed by oil, real estate, and baskets of various precious metals.
Currently, Digix Gold token (DGX) is among the most popular gold tokenization projects in the cryptocurrency industry. Tiberius Coin (TCX) iis backed by not one commodity, but by a combination of seven precious metals commonly used in technology hardware. PROPY has created a unified property store for the global real estate industry allowing home buyers to purchase property internationally without worrying about jurisdictions or title deeds.
However, even the most popular commodity-collateralized stablecoin, Digix has a relatively low daily trading volume of $25,128 USD with a $4,830,842 USD market cap in comparison with the most popular fiat-backed stablecoin, Tether with a ttrading volume of $27,352,398,423 USD with a $3,653,582,874 USD market cap, as of July3rd 2019.
3.Crypto-collateralized stablecoins are backed by other cryptocurrencies and are much more decentralized than the former two categories. Crypto-collateralized stablecoins allow processes to be even more trustless, secure, and transparent. There is no single entity controlling funds, and they enjoy ease of liquidity, but being the most complex form of stablecoin they have not gained much traction yet.
The most popular and promising example of a crypto-collateralized stablecoin at the moment is Dai. Created by MakerDAO, Dai is a stablecoin that has a face-value pegged to USD, but is actually backed by Ethereum (ETH) that is locked up in smart contracts.MakerDAO limits the effects of market volatility through a 1:1 soft peg to the U.S.dollar, maintained with an underlying basket of crypto assets, collateralized debt positions, and automated stability mechanisms.
Although in practice this concept has not worked out as planned when it comes to price stability. DAI has been below $1 for much of 2019 and has even dropped under $0.95on a couple of occasions. MakerDAO users have therefore voted to increase the stability fee on six separate occasions this year, with the most recent vote, at the time of this writing, on June 27th 2019 deciding that the fee will rise from 11.5% (as decided on April 11) to a high of 17.5% per year. Even with this hike, the MakerDAOcommunity is not confident that the value of DAI won’t keep fluctuating.
4.Non-collateralized stablecoins. An algorithmically governed approach to expanding and contracting the currency supply that is modeled after central banks’ management over their nations’ monetary supplies. Utilizing algorithms to automatically increase or decrease the amount of stablecoins in circulation for a low-volatility digital currency.
Among the first models proposed was the Seigniorage Shares Model named after Robert Sams’ article from October 2014, which describes stablecoins with flexible/elastic money supply governed by algorithms that programmatically buy and sell a stablecoin’s tokens in order to maintain the token price near the intended peg.
Non-collateralized coins are scalable, the most decentralized type of stablecoin that is not reliant on any asset’s strength. Meaning, even when another global recession occurs, or the entire crypto market crashes, an algorithmic stablecoin would be able to survive and maintain its stability. These are next-generation stablecoins that are disrupting the monetary paradigm, creating the utmost scrutiny by regulatory bodies while also arousing considerable interest.
Attempts from SagaCoin, Basis, Kowala, and others were unsuccessful due to being shut down by US regulatory bodies before even given a chance; others have pivoted towards different business models such as Havven into Synthetix, which transitioned into a crypto-backed synthetic asset platform; while others that looked promising during the ICO boom of 2017 have not been heard from since the bear market of2018.
Currently, the most well known elastic coin is Ampleforth, which was rebranded and was formerly known as Fragments, trading at $1.46 USD at a volume of $165,437 USD, asof July 3rd 2019. However, Amples are in fact not stablecoins, and actually thrive off volatility, also known as Smart Commodity Money.
Semiott belongs to the next-generation, non-collateralized category of stablecoins.
Semiott: A Time-Locked Stablecoin Platform
Stablecoins aim to solve this by offering price stability and steady valuations. A stablecoin should ideally retain its purchasing power and have minimum inflation. On top of this stability, they also have the benefit of other decentralized Fiat-collateralized stablecoins are pegged to a particular currency and require a custodian to hold the fiat currency or commodity as a collateral in reserve to guarantee the redemption of the token. There are generally four categories of stable coins that are backed either by fiat (ex: yen), commodity (ex: gold), crypto (ex: bitcoin), and algorithms.
An algorithmic stablecoin is a token that adjusts its supply deterministically in order to move the price of the token in the direction of a price target. Generally, an algorithmic stablecoin expands its supply when it is above the price target and contracts when it is below. The SemiottNet stablecoin relies on smart contracts that use algorithms to adjust the supply of the stablecoins based on VDF secured time weighted averages. This ensures that the algorithm will respond to changing market forces and ensures that the algorithm cannot be manipulated by bad actors.
The biggest challenge, with algorithmic stablecoins, is when demand-side forces are transposed into the token supply. In algorithmic stablecoins with an elastic supply demand there is a potential to “front run” adjustments by analyzing data in anticipation of upcoming changes in supply. This generates further directional momentum in what can eventually become violent feedback loop. This would detract from the purpose of a stablecoin. Semiott stablecoin solves this issue with its device of money streaming and quadratic funding. In particular, what makes Semiott stablecoin unique is its application of the VDF secured time-lock.
A time lock is a type of smart contract primitive that restricts the spending of a coin until a specified future or block height. These “time-lock puzzles” are computational problems that cannot be solved without running a computer continuously for at least a certain amount of time. Time lock puzzles are flawed in that those with more computational resources might be able to solve the time-lock puzzle more quickly, by using large parallel computers. Verifiable delay functions solve this by taking a medium-large quantity of non-parallelizable work to compute.
Time-lock puzzles are similar to VDFs in that they involve computing an inherently sequential function. Time-lock puzzles however are not required to be universally verifiable and in all known constructions the verifier uses its secret state to prepare each puzzle and verify its solution. A VDF by contract is a function with universal parameters that it produces during a one-time setup. Anyone is able to evaluate the function and product a proof that output is correct and verify the proof quickly. Semiott stablecoin employs zero-knowledge proofs of assurance. A zero-knowledge proof allows parties to prove than any other part has given a true statement, without conveying any additional information that may reveal themselves. Information is hidden on the ledger, while individuals are allowed to perform validation of that data. Since this output can be efficiently and publicly verified it serves as a public randomness beacon, ensuring anonymity.
In most cases we measure financial markets using geographic and demographic distributions of markets alone. Our unique approach is to parameterize time dimension into our stablecoin system. This multi-dimensional bonding curve allows the token to represent a portion of time parameters in certain proportions. Multiple dimensions of time – from seconds, minutes, to hours – are layered onto one another to smoothen possible variability of price found only within a certain parameter of time. This creates price control that is resilient.
Semiott Stablecoin Use Cases
Money-Streaming Wages By leveraging the functionality of Ethereum, money streaming via Semiott stablecoin can guarantee monetary security by streaming an individual’s salary or wage over a certain period of time. For example, a small start-up can ensure prospective employees that they will be financially compensated by sending them money second-by-second. This principle, of confidence in payments, can be extracted to any transaction between agents that involve timely payment. One could pay for rent to their landlord through money streaming or repay loans by deploying money streaming. This alleviates the hassle of scheduling, timing, and allocating payments.
Instant Verification Using zero-knowledge proofs and money-streaming, a mortgage applicant could prove and pay for housing without needing to verify their salary, or even their identity. Similarly, electronic auctions can employ the use of instant verification to verify purchases while anonymizing winners.
Pegging Stablecoins to Cost of Living Standards Semiott stablecoin can be pegged to services like the Consumer Price Index (CPI) of a territory, to allow token-holders to keep the value of their currency hedged against the possibility of inflation. If this had been implemented in Yugoslavia in 1994, citizens would have been able to retain the value of their currencies in order to exchange and barter for the goods they need. Similarly, this concept can be extracted to price tracking the value of any necessary commodity — whether it be petrol, groceries, or even insurance. Users would greatly benefit by entering the protocol pegged to the commodity that they believe is soon to sky-rocket in prices.
Summary Semiott stablecoin provides a strong and balanced entry into the world of stablecoins, guaranteeing the fiat value of currency. A stablecoins are designed to have stable value over time they are an ideal safe-haven asset. This is an excellent way for individuals who are looking to preserve their wealth without seeing any risk of loss due to inflation, which appeals those who may be established cryptocurrencies. New users, on the other hand, may not be able to go fully int cryptocurrencies so they instead can start with stablecoins that are less volatile. It is aligned with the heart of decentralization inherent in cryptography, no trusted parties are required to ensure the equilibrium of the amount of stablecoins within in this universe. In the end, a stablecoin is a Schelling point. This is essentially the network effect. It depends on user behavior and compatibility to grow.
Risk Factors To implement stablecoin technology, the use of cryptocurrencies should be widespread. This involves accessing the appropriate technology, consumer demand, corporate sponsors, and approval of regulators. Policymakers today worry about decentralization for several reasons including: transferring control of monetary policy from political figures to commercial enterprises, by removing banks ability to expand and contract monetary supply, and data privacy. While data privacy issues are largely resolved by the use of zero knowledge proofs, anonymity can be an issue faced with money laundering. However, it is not clear if money laundering problems are circumvented with their use in fiat policy as these issues present themselves in a different form.
In general, individuals who are looking to preserve their wealth without seeing any risk of loss due to inflation, which appeals those who may be established cryptocurrencies.
New users, on the other hand, may not be able to go fully into cryptocurrencies so they instead can start with stablecoins that are less volatile. It is aligned with the heart of decentralization inherent in cryptography, no trusted parties are required to ensure the equilibrium of the amount of stablecoins within in this universe.
In the end, a stablecoin is a Schelling point. This is essentially the network effect. It depends on user behavior and compatibility to grow.