version: 0.2
This paper is supposed to analyze parameters of Nxt as a currency from micro- and macroeconomic perspectives. It is not a mere comparison of Nxt against other cryptocurrencies or fiat. It is about seeking a role a currency like Nxt can play in the global economy.
In the current world, there are two general expectations concerning currencies that are not often mentioned when speaking about them. Firstly, a currency is supposed to perform multiple functions. Secondly, a currency is supposed to be universal in a monetary area – either sole or competing other universal currencies. In my opinion, this approach is a mistake. The attempt to have currencies universal is economically irrational.
Anyway, cryptocurrencies have not yet broken this paradigm of versatility. They do not attempt to specialize for certain functions only. Nxt is and isn’t different, as it will be described later on. Nevertheless, existing currencies still do differ from each other and these differences are going to make them be specialized in use. Once the market gets used to cryptos and starts using them as tools rather than assets, the users will get more sensitive for the different parameters, which affect the utility of particular currencies for performing separate functions.
Which are the separate functions? There are two basic and more than 10 other. The two basic functions of money are medium of exchange and store of value (treasure). In economics, there is a Gresham’s law that basically claims that the better a currency suits the function of a store of value, the worse it suits the function of a medium of exchange. In other words, if a currency is designed in a way leading to deflation, people will prefer to get rid of other currencies and store the first one; and vice versa. A similar scheme can be applied on some of the other functions too. That is exactly why it is not rational to expect one currency to be universal. The more we adjust it to function A, the more difficult is to adjust it to function B.
Economics in theory often recognizes only the two main functions plus measure of value and sometimes even standard of deferred payments. The praxis is different. Over time, currencies were getting more and more functions that can be distinguished. The other functions may be:
· informational – what costs what; a denominator of values; what it is profitable to invest in
· allocative – joining the savings and investments; money flow to the hand that can use them in the most profitable way
· unit of account – the unit you denominate other things in when doing accountings
· clearing unit – unit of account used for offsetting mutual debts
· standard of deferred payment – money that are accepted as an instrument for settling a debt
· statutory – virtual penis; declaration of success; score; measure of control over the others
· social[1]:
o a manifestation of a social relation between the original and the new owner of the thing (money); e.g. tribute; ransom; tax, to some extend
o a secondary phenomenon confirming the modification of the social relationship between the original and the new owner of the thing (money); e.g. dowry
· wergeld – fine; compensation; retribution
· power – related to the authority standing behind the currency; increasing power of the monetary monopoly
· stabilizing – anchor for other currencies
· world reserve currency – enabling international trade
· investment – using money as an asset; making money out of money; speculation
· redistributive – government transfers; taxes; moving wealth from lower levels of the economy to the upper or vice versa
· stimulator of desirable behavior – ecological permits; generally tokens related to externalities; food stamps, to some extend
· money laundering – breaking the link between a (criminal) activity and its outcome (profit); connected to the depersonalization that money do
Some of the functions help rather an individual (micro), some help rather the society (macro). Any new currency faces a decision what kind of a problem it should be designed to overcome. Either the main task for the currency is to ease the people their economic activities or it is to promise them some profit. Cryptos appeared in reaction to huge failures of the current financial system based on credit fiat currencies.
The problem of fiat is to no extend that they would not be suitable for creating profit out of it; on the contrary. Fiat is that great as a speculative instrument that it causes a liquidity trap – a situation when money moves from real economy into the virtual casino of the financial markets; leaving potential economic subjects short of liquidity – meaning there’s not enough money they could use for trading goods and services, for purely monetary reasons.
The other problem with credit based fiat is that the more money banks create, the more debt they create too. Thus it is, for mathematical reasons, impossible to clear the long-term debt that banks owe to their own accounting balance[2]. The aggregate indebtedness of our civilization boosts by gravity, as well as implosive tendencies of the banks. Credit fiat cannot stand as a standard of deferred payment.
That’s why any new currency that is not being issued against debt helps the society. It supplies the population with liquidity that is otherwise being systematically drained from the real economy. More liquidity means more sales, more jobs, higher wages, healthier economy, moving towards the potential, motivation for real investments[3].
BUT: As it was said earlier, a currency cannot specialize for serving individuals and the economy as a whole at the same time. Just the fact that Bitcoin is designed as a deflationary currency motivates people to store it, not to send it into circulation. From this and only this point of view, we got a new way how to make money out of money instead of a solution to our real problem – the artificial sustainable insufficiency.
Now take a look at Nxt:
· Medium of exchange
Nxt is faster than Bitcoin and the blockchain is not that massive so it is more convenient to use Nxt[4]. The easiness of practical use and adopting of cryptos should be one of their main competitive advantages.
What may be discouraging is the build in fee for transaction. Right now, the transaction fee of 1 Nxt is acceptable even for micropayments but may seem too high e.g. for instant messaging, if someone would decide to use it this way – say there is a Nxt based DNS system allowing the users to communicate safer and ‘privately’ (Nxt allows to send so called arbitrary messages). Still, it should not be a problem arbitrarily cut the fee down when it turns to be needed.
· Store of value
There is a fixed number of Nxt coins which would normally open the door for deflation[5]. With Nxt this may possibly not be an issue because BCNext didn’t perceive Nxt to be a coin per se:
Regarding NXT as coins: NXTs are not coins... or at least the creator of Nxt didn't want them to be seen as coins. They are tokens that grant privileges for supporting Nxt.
Deflation is not much better than inflation. "Real" coins should be created on top of Nxt, and be issued in quantities that keep their value constant. BCNext understands that this is very arguable. The community should decide if it wants to follow the path showed by him, or stick to the Bitcoin legacy of an unchangeable supply of coins with which people hope to become rich by doing nothing.[6]
Even if Nxt should stay in use as a coin, there is no limit for a specific type of monetary expansion – the community may democratically and distributionally (simply by accepting it) decide to color certain Nxt coins so that they represent for instance a value of 100 Nxt. Any such monetary policy may technically not be enforced because everyone can easily get to know the history of each single coin. So if the community does not agree on the way a decision about a monetary expansion was made, there will be none.
So far Nxt seems to be flexible. It should be able to adjust to the amount of coins that the equation of exchange would require to keep the prices stable and economy on potential. The individuals should thus not be motivated to store the Nxt instead of using it; and by that supplying the economy with liquidity. But there is the reward for forging.
In the proof of stake system in Nxt, ‘miners’ are awarded according to the amount of Nxt that they already have. In relative terms, everybody profits the same percentage, everybody enjoys the same return of investment. In absolute terms it is not true. Why? Because the distribution would only be linear if the rich made much more transactions than the poor. This will never be the case because there is no reason to expect that the rich will be more economically active; or at least not proportionally. Even if the fee was not constant[7] but defined as a percentage of money send, the more active users of the currency still support the systems with proportionally higher fees. The incentive in form of a riskless appreciation goes against the wish to spend money. It is naturally true that the more talented and capable businessmen can profit so to cover the fees they pay – but to who’s expense? To expense of ordinary users of the currency, not the parasites. If the parasite only sits on his money and forges, it is not important that he does not earn by doing business. He experiences some opportunity costs but still his stake grows. In relation to the whole Nxt economy, he keeps getting richer. Mathematically the gain of all users may never be linear because there is a constant monetary supply. The only case in which the equation can work is when there is no activity and thus no fees at all[8]. In a nutshell, the model of forging is unfavorable for those subject who spend, it discourages of spending. The industrious may never get wealthy at the expense of the big stack bullies like this. It is another stepping over each other’s heads, another race towards the bottom. Once again, it is never possible for a currency to be optimized for functions of medium of exchange and store of value at the same time.
Knowing this it would tempt to advice to remove the advantage for forging at all. The system can be operated by computing capacities granted by sponsors. But still the bonus has a meaning. Without offering the early adopters a bonus, a new currency may never spread world-wide unless pushed forward by a central authority like is a state. My final recommendation would be to keep the bonus but consider removing it in the future when Nxt is a widely accepted and recognized currency.
Note: There are monetary concepts that even aim lessening the usability of a currency as a store of value in order to help the function of medium of exchange. This topic was discussed after the Second World War. Keynes came up with a solution in the form of inflation. With inflation, or expectation of further inflation, economic subjects tend to speed up their expenditures and the money circulates faster. Silvio Gesell offered a competing solution – demurrage. Demurrage-just like inflation-makes the money lose its value. But it does not touch the currency per se but the single units, coins and banknotes. The technical solution in his time involved re-stamping the notes. That was uncomfortable and it created some new issues related to the moment of re-stamping. Our own possibilities are much more sophisticated today. With strictly digital money, the demurrage can be as smooth and linear as vaporization of water. The ‘vaporized’ money than can be redistributed according to proof of bandwidth or whatever. This solves the problem of sitting on the money and the perceived problem with early adopters, however, it has nothing to offer to the early adopters who are necessary for promoting the currency on the first place.
· informational
Only the major (dominant) currency in the monetary area may play this role. Complementary currencies cannot have much different pricing, valuation of other goods and services, because of the arbitrage. It a currency is dominant it must also be stable and not manipulated. It is a hard task because it's solving includes achieving a high informational equality in the economy, checks and balances against misusing the economic power to shape the markets at will, manipulating the benchmarks etc. It surely helps when at least the currency itself is not controlled and manipulated by one interest group. But this subject is far beyond the object of this paper. The odds for Nxt to become a dominant currency somewhere are low in the near future.
· allocative
Fiat currency does not truly perform this function. Credits are mostly given from money that have not existed before. Credits are the basic way new fiat money are issued. Nobody has to make any savings in fact, the connection is broken and thus the allocative function is not driven by markets but by decision makers. It is a monetary version of central planning.
With Nxt, this is not the case because no new Nxt coins per se are to be issued. If a person wants to borrow, somebody must have made savings before. That is an argument in favor of Nxt. On the other hand, there are no Nxt capital exchanges or savings banks operating yet. Not even the OTC markets perform the function now[9]. I guess it is only a question of time when people would be able to lend in Nxt or cryptos in general for investments.
· unit of account
Accounting for state (tax and legal purposes) will perhaps never be possible in currency that is not recognized by the state. And making managerial accounting using a relatively volatile currency as Nxt is now is not practical either. Yet Bitcoin is widely used as a unit of account for knowing the value of a portfolio of cryptocurrencies, eventually for describing market capitalization of cryptocurrencies. Once Nxt reaches similar popularity, it may be surely used the same way – the more that they are going to be cryptos build up on Nxt.
· clearing unit
Again, Nxt is ideal for doing this for institutions that will hold accounts in currencies derived from Nxt.
· standard of deferred payment
Strictly speaking, Nxt or any other currency may not repay the original debt that arises when new money is being issued via credit. To clear the long-term debt, the bank is obliged to destroy, write-off the money in the same currency.
The ‘normal’ peer-to-peer debt may be paid off by virtually anything the sides agree, including Nxt of course. Fiat currencies-i.e. money enforced by a state-can be pushed by the state even as a default and unrefusable standard of deferred payment. Nxt can clearly not.
· statutory – virtual penis; declaration of success; score; measure of control over the others
This function is not economical. It is contra-economical, so to say. When Nxt becomes a collateral token for many on-it-based instruments and currencies, holding a lot of Nxt may appeal to the people who like to show their virtual penis. To solve this problem, I strongly recommend developing a derivate strictly for this one function. Many coins held irrationally out of the markets will be exchangeable for colored coin whose only function would be to declare: “Look, I had a lot of money and I donated it. This is a token proving how generous I am and what score I was able to earn.” This colored coin would be issued by a foundation that will redistribute the gained coins or just enrich with them the forged blocks.
· social[10]:
o a manifestation of a social relation between the original and the new owner of the thing (money); e.g. tribute; ransom; tax, to some extend
o a secondary phenomenon confirming the modification of the social relationship between the original and the new owner of the thing (money); e.g. dowry
A currency like Nxt may be used for these purposes better than ordinary currencies because the coins can be colored – the purpose (the legal cause) may be imprinted into them.
· wergeld – fine; compensation; retribution
A cannot see any advantages or disadvantages in Nxt compared to other currencies.
· power – related to the authority standing behind the currency; increasing power of the monetary monopoly
Nxt is not completely decentralized because there are specific people entitled to change its parameterization. There are some proto schemes of public voting already but the real democratic control is yet to be developed – if there will be the will to do so. At this moment it is hard for me to state, whether Nxt can be misused by the people standing behind it, working on improving it, implementing new functions; or to which extend. The plan is, reportedly, to publish the source-code, so that there are no barriers to switch to another currency when Nxt gets corrupt. That is generally a huge advantage of the world where complementary currencies exist simultaneously[11].
· stabilizing
Nxt will be a natural collateral for all its colored coins[12]. They will not only be derived from Nxt referencing to it but Nxt will be their direct carrier. That practically means that Nxt will determine the threshold price of its derivatives.
Before I know more specific technical details of the solutions that are expected to be implemented in the near future, I cannot say how flexible settings there can be there for the colored coins. Economically speaking, the more adjustable the derivatives are, the better – the demand should call for the best solutions; the more secure, predictable and stable the anchor (the original Nxt), the better too.
· world reserve currency
A functional world reserve currency must be either backed by a respectable authority or it must lack the authority at all. Gold is a good reserve currency because it’s scarce and can’t be issued. Bitcoin is potentially a good reserve currency because its emission is predictable and can hardly be manipulated. The US dollar was a good reserve currency until USA’s position in global economy was undisputable – at least from the American point of view it was favorable. Nowadays, the USD is being maintained the major reserve currency by the US army and by the still mutually advantageous position of China holding USD reserves.
Next has none of these strengths. If a new information superhighway truly arises upon Nxt, then Nxt as a currency would appear to be a natural reserve currency for the traffic on it. But that is just a reading from a crystal ball.
· investment – using money as an asset; making money out of money; speculation
In the world of fiat currencies, a parasitic emission of new money against creation of debt is indistinguishable from any kind of primarily emission. Since the ‘70s, credit emission is even expected and predominant. Fiat currencies have no carrier, they are a mere accounting record[13]. An authority claims that money exists and is here and there. Due to the fractional reserve system and counting derivatives into monetary supply, everybody, who has a lot of money, can literally create new money. He or she does not even have to earn it anyhow.
Thanks to the invention of blockchain as a complete and shared public ledger of transactions, there doesn’t have to be any central authority stating that money are here or there and in that quantity. Everybody knows how much Nxt is out there in every moment and everybody can track all transactions. It is thus impossible that somebody just creates new money of nothing. Thanks to these parameters, it is unlikely that that bubble of ‘financial casino’ will overgrow the market economy so strongly, that it would become just a supporting farm for the financial sector[14].
Nxt surely can be used for speculation on the currency markets. But according to the points from the beginning of this paper, this role will be played rather by scam-coins designed purely for this purpose. They are more volatile and there are always new ones to come and experience their one day long bubbly evaluation just to die slowly afterwards. A coin that is not a copy-cat promises different ways of evaluation and should not be widely sought by the short-run speculators.
The comparative advantage of Nxt over these copy-cats is that you don’t have to do nothing more than just put the money in a wallet, let the application running and forge without any risks. You don’t even have to buy any hardware, keep it up-to-date and competitive, anything.
· redistributive
There have been many words said about Nxt pre-mine fair or unfair.
Q: How would you solve problem with scam accusations according to "unfair" distribution Nxt to 73 big stakeholders?
A: This problem can not be solved. Even if we had a million stakeholders the rest seven billion people would call this unfair. A world with the money can not be perfect.[15]
This is a normative discussion. Positively speaking, function of redistribution is desired by the monetary authority (or the people standing behind it). It goes against the free market. Since free market is something like a religion among certain economists it is a dogma to criticize any redistribution. In the world of parallel complementary currencies, there may be strongly redistributive partial monetary systems, nevertheless the claim for free market is satisfied because these systems compete each other for users. In such system, running a currency does not much differ from running any other business. Nobody can be blamed for addressing certain types of users who prefer either redistribution from the bottom to the top or vice versa.
As I pointed out in the section concerning store of value, the reward for forging does lead to the bottom -> top redistribution. It is not manipulated by any authority, it is even an implemented feature. If Nxt truly shall be more an anchor and platform for other currencies, it shall be neutral in the field of redistribution.
Interesting thoughts about distribution brought a Nxt-based currency NEM. Every pre miner was allowed to buy only one share. That should result in the same starting line for all the users once the currency enters the market. Anyway, if you strictly want to a give the money to everyone but once, you need to know some personal data of his/her. Otherwise the person can claim more money on alter egos. All pseudonymity is gone that way. The Auroracoin - a coin for Iceland - should be given to every island’s citizen. I imagine it like this: Somebody lets several hundred thousand aurora-purses open and send and then every citizen gets a mail (paper letter) with keys to that purse. It’s a one-shot ad hoc donation. Perhaps they can pseudonymize the money later, at least some of them would surely know how.
What if it should not be one-shot? What if the Icelanders were given an opportunity to earn a periodical basic income? There are two dangers:
1. Manipulation with the purse must be restricted to a single person. The person has to identify using some strictly personal sign – like fingerprints or DNA. This solution goes directly against the original ideas of cryptos. It is grants the donor with complete surveillance over everyone’s financial transactions.
2. Everyone only gets the purse and keys. No further checks are required and the basic income just keeps coming. Such solution will definitely lead to selling the keys and just another form of feudalism.
If the phenomenon will continue, the issue will be resolved legally. It is a task for lawyers and states, not for pioneer creators of young cryptocurrencies.
· stimulator of desirable behavior
Currencies or tokens designed for performing this function usually stand against a specific affair. When they are used for the supposed purpose-very much like a voucher-they get eliminated. That is something Nxt was not designed for. It does not operate with the idea of burning coins[16]. Burning coins when there cannot be made any new coins is another deflationary scheme. Technically, colored coins serving as a stimulator of certain behavior may be used that way and then-instead of being eliminated-it gets de-colored. This is surely an interesting challenge for developers.
· money laundering
There have been plenty words said about cryptocurrencies and money laundering. As far as I know, Nxt is no different than other cryptos in this matter.
Conclusion:
…
Come-from-Beyond. „BCNext's Plan.“ NXT WIKI. 10. February 2014. http://wiki.nxtcrypto.org/wiki/BCNext%27s_Plan.
Graeber, David. Debt: The First 5000 Years. New York: Melville House, 2011.
Hayek, Friedrich August von. Denationalisation of Money. The Institute of Economic Affairs, 1976.
Nxt community. „Whitepaper:Nxt.“ NXT WIKI. 11. March 2014. http://wiki.nxtcrypto.org/wiki/Whitepaper:Nxt.
Salsacz, Mgr. „NXT Myths.“ pages 26-27. https://docs.google.com/file/d/0BwAGADgnQcrtM3g1cU1VSHZtTGM/edit (přístup získán 11. March 2014).
[1] According to anthropologist David Graeber, the original functions of money were not commercial but statutory and social. The very basic quality of money is its power to depersonalize social relations. See (Graeber 2011).
[2] Which means nothing less than that the final creditor is not even a subject but a sheet of paper.
[3] All the way to the point when there is too much liquidity, the potential has been reached and inflationary tendencies appear. We are far away from there now. The inflation that we experience is caused by government actions on the field of taxes and mainly by intentional concentration of money on certain markets only – typically on housing estate market. The housing bubble is an example of a bubble boosted by central banks in order to make people with mortgages feel richer and take another credits – because it is the only way to keep the system alive.
[4] The in-use advantages of Nxt over Bitcoin are very well described here: http://wiki.nxtcrypto.org/wiki/Whitepaper:Nxt (Nxt community 2014).
[5] As more people get into the system the same amount of money will have to satisfy the growing economic activity (hypothetically speaking, there is not yet any relevant real economic activity denominated in Nxt). The trend will be strengthened by Nxt accounts’ losses and also by concentration of Nxt in hands of wealthy individuals that may be expected.
[6] See (Come-from-Beyond 2014).
[7] Yet they are constant!
[8] Mgr. Salsacz promotes the linear return of investment in his paper Nxt Myths (Salsacz). He has some good points comparing it to the real ROI of Bitcoin and he is right even when arguing whether Nxt distribution is fair or not. I agree that forging is as fair as possible but still the model discourages from using the money for trading goods and services.
[9] And the same more or less applies to Bitcoin as far as I know.
[10] According to anthropologist David Graeber, the original functions of money were not commercial but statutory and social. The very basic quality of money is its power to depersonalize social relations. See (Graeber 2011).
[11] This advantage described already August von Hayek in the ‘70s (Hayek 1976).
[12] Any other digital currency or asset can be hashed so that it is compatible with the Nxt platform and then transferred through it. And not only currencies: Nxt opens the gates for new decentralized information superhighway enabling peer-to-peer run services replacing Facebook, YouTube, Flicker, Dropbox asf. (See: Decentralized internet and Nxt solutions; https://docs.google.com/document/d/166d7sTEnuv9UMlipcJkuciJ3-mUWOWf_y8dzVb3pd30/)
[13] Yes, cash is a carrier. But the stack of cash on the whole monetary supply is irrelevant.
[14] Which has basically been the case in credit fiat economies in last decades.
[15] http://wiki.nxtcrypto.org/wiki/Whitepaper:Nxt
[16] A coin can be practically eliminated when send to an address for which there is no private key.