FIREBIRD is being created as an alternative to existing instruments characterized by non-transparent emissions and to deflationary crypto-currencies models that can lead to economic slowdown whilst widening the gap in participants' savings.
The Jamaica Accords, which exists since 1976, is a system of mutual settlements and relations, based on a freely floating rate, or in other words exchange rates which are set not by the state, but by the market. Now, 40 years later, what valuable lessons can we learn?
After moving away from the Bretton Woods system in 1971, the USD was completely de-pegged from Gold removing the guarantees to exchange the world reserve currency for any value. Gold is rapidly becoming more expensive, and gradually increasing effort is spent by Economy scholars to find the answer to what should be the best monetary standard in the modern world.
Underwriting monetary value by government level debt is often scrutinized whereas the return to the gold standard is also impossible due to the deviation of global gold production from the growth rate of the global economy.
Other proposed options, in particular the electricity peg create discrimination favoring certain countries and industries over others.
The question of how much money should be in the system, on first examination, seems simple. Let's say that holders of a certain currency have 2 cars and 2 coins. If they created a third car, they release a third coin. Thus, one coin is still linked to exactly one car. The system, however, becomes stronger, because with the same number of people they have more money.
A more effective method of development is when, in order to make a third car, the participants agree to issue a third coin in advance. The balance remains the same if this coin is utilized in the creation of that, third, car.
In real life, linking emissions to gross domestic product is not simple nor transparent. Nowadays, it seems, there are no objective and/or automatic methods for calculating GDP growth. This is due to the rise of intangible elements as a percentage of total led by the disproportionate growth in: services, digital products and derivative financial instruments as compared to real goods. Consequently, there are no guarantees for an effective growth in money supply.
According to the study by Credit Suisse, 85 world’s wealthiest people now own the same amount of total world wealth (1%) as 3.5 billion of the "poorest" people. Taking into account the fact that most of the money in the system since 1971 is "new", such a situation can be partly attributed to the distribution mechanism of incremental money supply.
A key function of money is providing a measurement of value. Existing monetary systems, however, do not have any built-in protection against being used as a speculation tool in currency markets. Consequently, as their value can be influenced by profit seeking speculators, they cannot, on a standalone basis be a universal measure of the value of all existing goods and services. External regulation is required.
Bitcoin, underpinned by nothing else baring a fascinating idea of a limited coins supply, was proven so popular that, despite its significant price volatility, has outperformed all quoted convertible currencies. This outperformance and the urge to own it, resembled the gold rush to some extent making us second guess whether BTC is actually made of gold. So what might be the problem here, disregarding of course issues, such as; speed of transactions, commissions and price corrections?
On the one hand, the value of crypto currencies is underpinned by its limited supply and by the progressively increasing complexity of mining. On the other hand, however, the same restriction of supply immediately raises a major issue. The inevitable expectation of deflation (appreciation of the crypto asset against other assets) caused by the increase in mass adoption will in the future lead to a decrease in turnover and cooling of the overall activity. This as the appreciating value of the crypto asset incentivizes saving rather than expenditure or utilization.
Example: if an entrepreneur has $1 million and knows that the purchasing power of this asset will decline over time, he/she will invest this money in real estate or another business in order to preserve and/or grow the real value. And if he/she owns 100 bitcoins, which are expected to grow in the long run, he/she will be dis-incentivized to invest them as they risk significant exposure to opportunity cost.
The aforementioned, in-built, deflation mechanism of the crypto currencies will inevitably lead to an increase of the socio-economic gap relating to accumulated savings. This will happen as the mathematics of the transaction will keep the proportional deviation constant therefore leading to an ever increasing gap in absolute dollar terms as the assets appreciate.
Example: 2 Users bought tokens at rate of $1/token. User 1 bought tokens for 200 USD, and user 2 for 100 USD. If token appreciates 1000% the difference in assets will still be at a ratio of two-to-one but the absolute delta will grow to $1,000 from $100.
In currency systems with limited supply, widening of the savings gap leads to concentration of money in the hands of a small group of its most successful members. And, over time, the weight of this group increases with increasing speed. There is, therefore, a risk of a loss of interest of other participants to a specific monetary unit and, as a consequence, the risk of a depreciation of this currency (participants begin to look for other ways of mutual settlements). In order to balance such a system, loans and credits are needed (returns some money back to the system).
On the one hand, the world is moving towards full transparency of processes and transactions. On the other, disputes continue regarding the anonymity of popular crypto-currencies. It goes without saying that preservation of anonymity prevents proper regulation. This means that such a currency will either always be in direct conflict with prevailing Government issued currencies, or will need to find a way to simulate these.
It is also important to note that despite the anonymity of crypto-currency wallets, account verification is necessary for trading on exchanges, and companies conducting ICO’s now collect full information about investors (KYC). Thus, owners of such wallets needs to repeatedly re-confirm their identities, as opposed to having one fully verified multi-purpose account/wallet.
Limited number of market participants and lack of regulation leads to significant volatility of the conversion rate. Whilst not a problem in terms of long-term investments or short term speculation, this becomes a major issue when the adopting the currency to be used as a medium of for exchange of goods or services. How can one effectively set prices in crypto currencies when conducting its trade if prevailing volatility makes it virtually impossible to predict the expected income and or cost?
Due to their decentralized nature, blockchain based systems do not have a clear answer regarding rights of data administration. The situation gets ever more complicated by the fact that in an anonymous systems there is no clear connection between the user and the physical person or company.
Consequently, a large mining pool has the ability to take full control of the system running on the most popular consensus today, «proof of work». And if it happens, it will not be even possible to identify the invaders.
Is it possible to create a currency based on mathematical laws, rather than basing it on a subjective trust in the issuer?
There are known suggestions to create a monetary system with fixed, periodic supply. The problem with this approach is that if even the approved supply does correctly reflect the true growth of the underlying economy, the future is still very much uncertain. And as the quantitative coefficient of supply needs to adapt to changes, its triggers and sped (lead, or lag) are very difficult to estimate.
As discussed above, the deflation of such crypto-currencies with limited supply can reduce the number of transactions. A known method of systematic withdrawal of tokens from the wallet holders can stimulate activity. Users, however, react negatively to such measures, as in this case tokens do not fulfill another important function of money – means of saving and accumulation.
If transactions cannot be stimulated by the withdrawal of tokens, there remains the option of a programmed emission that has a decreasing effect on the purchasing power of each individual token. Since it is not possible to monitor the average level of profitability within the blockchain system to identify the optimal level of emissions, it is worthwhile to consider the way of linking emissions to the structure of transactions. This due to the blockchain system’s full transactional transparency. The simplest version of this supply mechanism is to release a small number of tokens for each transaction. Thus, the more transactions in the system, the more intensive is the issuance.
Such a system is counter intuitive as monetary stimulation is generally used in economic slowdowns rather than periods of growth. This traditional approach, however, only considers velocity of supply. But when another variable, such as the distribution mechanism, is added this method makes complete sense.
Let’s consider an automatic supply algorithm in combination with an intelligent system for its distribution among participants. Thus, new supply, despite reducing the purchasing power of each individual token, does not reduce the value of the aggregate token holding. And, on the contrary, increases it. Which means it is token withdrawal – in reverse.
Example: User 1 has 1000 tokens at $1, user 2 has 500 tokens at same price. The system released another 1,500 tokens, but distributed them in proportion to user portfolios. Thus, token value has depreciated by 50%, as supply has doubled, but the value of both user 1 and 2 portfolios had remained the same at $1,000 and $500, respectively. If the entire issue went to user 1, then he would have 2500 tokens for $1,250, and User 2 would have be left with $250. In other words, user one would have an increase of $250, whilst user 2 would have seen its wallet value decline by $250. This despite no physical withdrawal of any tokens.
The simplest version of the proportional distribution between users relative to current balances on their accounts would not change anything, except for the token value.
Consider a method that distributes the new, transactional, issuance in a way that is inversely proportionate to the outstanding balance on user accounts. This solution has several advantages:
If user's serial number is also written into the mechanism, one can get some similarities to a pension type of payoff, in which early users gain time value advantages over late joiners.