So the diagnosis is a problem with external risk free rate of return (caused by inflationary monetary policy) and improper risk premium valuations on the token itself, and the cure is an inflationary monetary policy for the token also?
Feels like the exact kind of logic that led to the aversion to the way current central banks operate mentioned by the author early in the piece.
>To date all major tokens have either a fixed amount of tokens right away or eventually (e.g., BTC) or a rate of inflation that asymptotically goes to zero (e.g., ETH).
These are both incorrect. BTC has inflation that asymptotically goes to zero. ETH has undefined inflation (the current codebase has constant inflation, but has a "difficulty bomb" that is supposed to force a hard fork that will presumably change the inflation).
EDIT: I think I read the OP incorrectly, I think what they meant was that while the rate of coin issuance in ETH is fixed, the inflation as a % goes to zero, and that due to quantization BTC issuance actually hits zero.
ETH's long-term inflation behavior is undefined because the dev team has shown their willingness to alter the consensus rules whenever they deem it necessary.
Your inferences about the future actions of the developers whose version of software you assume most users and miners will want to run aren't really like a hard and fast rule.
It's not possible for the rules of any coin to be set in stone, because people can run whatever software they want. The only reason that Vitalik and the Ethereum devs write the software that most Ethereum users run is because that is the software most Ethereum users want to run.
If someone developed a Bitcoin hard fork that most Bitcoin users and miners wanted to run, that would be Bitcoin, whether or not it conformed to any various ideals and philosophies that anyone has about money.
Yup, intrinsically worthless tokens engineered to have better than market risk adjusted, liquidity adjusted real returns compared to real productive investment will always be unstable and fluctuate wildly as they get more popular. This is a direct result of physical limits of production. As people hoard worthless tokens, their price increases and people hoard them even more instead of investing in real businesses with real production capacity. Eventually production capacity drops which means there is less things to buy with all the tokens. Stockpiled tokens chasing few goods means prices will rise (tokens will lose value) potentially suddenly as people try to get rid of them all at the same time before they're completely worthless.
The cycle then repeats.
When savings or financial promises are insufficiently tied to future production or to accumulation of real goods, it's always a ponzi scheme.
Your type keep screaming, "Ponzi, ponzi!" I am starting to think it is just because you are too lazy to read about a new tech that you don't understand and wasn't covered in any of your CS courses.
Whatever the reason, you have been and are still wrong about currencies. I don't mind, I'm laughing all the way to the bank, 1,000x returns on a $10,000 initial investment a few years ago has released me from the grind.
Keep calling it a scheme and people like me will keep calling you uneducated.
I really don't follow the rampant hate for the idea and technology of crypto on HN.
Sure it's diluted and abused (eg: Dogecoin, Pepecash), but so is the grand United States of America (where the majority of trolls seem to fester). Like any money, the worship of it breeds all kinds of terrible, but it can support good works as well.
If it's a technology with promise, as it appears to be, why reject it?
To go a little further, you seem to have the whole idea framed incorrectly. There are base techs, and tokens exists on the networks of those base techs. If a base tech is a currency, then tokens are shares in a business that operates on the respective networks. Through the crypto "realm" these are tradable with the currency of principalities and nations via exchanges. There isn't such a great separation in operation or ideology from what most people consider "real" economics.
The remaining problems seem to me to be limited to the technical, and there has rarely been a situation where people cannot overcome the technical.
If the crypto currency community was serious about its technology, it would engineer it with a proper monetary policy as the original article suggests, one where the coins gradually and predictably lose value with time. They could have fixed this problem a long time ago.
Could bitcoin's popularity stand on its own with just its net benefits as a transaction medium after the allure of ponzi investment has been removed? Right now it's mostly just the digital equivalent of gold but with even less intrinsic fallback value.
I appreciate your response, it helped me understand your prior point a little better.
You seem to be making a pretty large assumption, I have to contest. You're assuming that the end goal is for cryptocurrency to posture as a classical token of exchange of value. This has been put forward before, and continues to be put forward. With Bitcoin alone, I understand that its a valid assumption. Looking at Ethereum I see something different.
It's possible to use ETH as an exchange of value, but that is not the sole limit of its use. It, by the nature of smart contracts, seems to run counter to the basis of classical business: trust. Using the system to validate contracts prevents the inherent need for trust amongst parties because the system will handle the terms regardless of whether or not you care to abide by the terms. In these cases, a programmer will take on a bit of a pseudo-attorney role, having each side reliant on the aptitude of their programmer to be able to determine if the terms will be carried out as described by the originator of the contract. "Will it do what they say it will?" If so, carry on. The other side can represent every inscrutable characteristic in a person, but if the contract is laid out properly you can safely do business with them.
What I described can surely be the basis for a new variety of scandal, but that is the next bridge to cross.
I'm not an economist, but I don't see the need for monetary policy of it isn't supposed to just be money.
I'd like to hear any further thoughts you have, given the alternative context I provided.
I'd also like to recommend having a quick look at the Enterprise Ethereum Alliance. It boasts a large range of members, with some of the founding members including giants of tech as it is: Intel & Microsoft.
A few large financial players have also joined up: JP Morgan, ING, Credit Suisse, BNY Mellon.
I can't speak for the motivations of any of these organizations, but they see enough value to have launched an organization to spur development on and of the technology.
Well apple also hoard tons of cash somewhere.Is that any more beneficial for society?Value is imo to big degree subjective and always will be.But your comment was insightful.
What Apple and other companies have been doing is also harmful and caused by poor monetary policy of western world central banks. Interest rates have been stuck to the floor because central banks prefer to strangulate their own countries than to let wages and prices catch up a bit.
Bitcoin monetary policy is orders of magnitudes worst than that however.
Interest rates have been stuck to the floor because fiscal authorities are afraid of deficits. Permanent structural deficit spending would allow central banks to raise interest rates.
Central banks have a mandate to keep prices stable. Interest rates are low because central banks don't have a choice.
> Wouldn't that eventually lead to a 'collapse of rome' type situation?
No.
Intuitively, it seems like piling up mountains of debt would lead to a default (or default equivalent) some day in the future. But if you're a government and your debt is denominated in a currency that you control, you'll always be able to meet your debt obligations by creating new currency.
Now you might think that this kind of "money printing" action would lead to inflation, which is the equivalent of a default that's distributed across the entire economy. This isn't true either.
This is where monetary policy comes into play. Any inflationary pressure caused by fiscal policy has to be compensated for through monetary tightening. Poof goes the distributed default.
The deficit can be way higher than it is now. And it can be permanent. We can cut taxes AND increase spending no problem.
There is, in fact, a limit to how much of this we can do. That is to say, there's no limit to how big the debt can grow, but there is an optimal size of the deficit, above which (and below which) we start to see some problems. But that optimal size has nothing to do with balancing the budget in the traditional sense.
If we don't kick the can down the road sufficiently, we're dropping the ball.
Okay, good faith response here, just trying to wrap my head around it;
>This is where monetary policy comes into play. Any inflationary pressure caused by fiscal policy has to be compensated for through monetary tightening.
So you're saying we print money to meet the demands of bondholders, but stop printing and raise the federal funds rate to combat inflation if it starts to grow past target?
The fiscal side can help but IMO you have to get the monetary policy right first because if fiscal stimulation is attempted and it causes inflation to go up towards target and bad central bankers tighten in response like they have been doing in the eurozone and to a lesser extent in the US, this will counter and undo the benefits of the fiscal efforts and leave countries in debt without much to show for it. If you repeat that a lot you may get
sordidasset's 'collapse of rome type situation'.
Once you get the monetary side right, you may not even need government fiscal help at all (though you might still need some of it).
I don't understand. What do you mean by "get the monetary side right"? What does that look like to you?
What's wrong with central bankers tightening in response to fiscal expansion? From where I'm sitting, central bank tightening seems like exactly what we need. And we can't have it without the fiscal expansion coming first. What do you mean when you say that monetary tightening will "counter and undo" the benefits of fiscal expansion?
The problem with monetary policy that's too expansionary is that it leads to the creation of lots and lots of debt in the private financial sector. And the thing about private debt is that it's WAY less stable than public government debt. As private debt builds up in the economy, the web of interconnected private debt obligations becomes ever-more brittle and susceptible to a chain reaction of defaults bringing down the whole system. See 1929 and 2008.
Fiscal expansion, on the other hand, increases the amount of public debt. This expansion induces a monetary policy tightening response that raises interest rates and reduces the amount of lending in the private economy. You're basically swapping in a more stable form of debt for a less stable form of debt. I'd rather have the stable form of debt.
To put it succinctly, fiscal expansion coupled with monetary tightening helps crowd out what Austrian economists call malinvestment in the private economy.
The "collapse of Rome" outcome is what we get when the federal deficit is too small for too long. It's not the other way around.
What is that NPV that thay are talking about? When I look at http://www.investopedia.com... (or https://en.wikipedia.org/wiki/Net_present_value ) I see following formula:
NPV = sum { C/(1+r)^t } - C0 - where C is future cash inflow and r is discount rate. If r goes to 0 NPV = sum (C) - C0 - that is far from infinity.
22 comments
[ 3.1 ms ] story [ 62.4 ms ] threadFeels like the exact kind of logic that led to the aversion to the way current central banks operate mentioned by the author early in the piece.
These are both incorrect. BTC has inflation that asymptotically goes to zero. ETH has undefined inflation (the current codebase has constant inflation, but has a "difficulty bomb" that is supposed to force a hard fork that will presumably change the inflation).
EDIT: I think I read the OP incorrectly, I think what they meant was that while the rate of coin issuance in ETH is fixed, the inflation as a % goes to zero, and that due to quantization BTC issuance actually hits zero.
https://www.reddit.com/r/ethereum/comments/5izcf5/lets_talk_...
It's not possible for the rules of any coin to be set in stone, because people can run whatever software they want. The only reason that Vitalik and the Ethereum devs write the software that most Ethereum users run is because that is the software most Ethereum users want to run.
If someone developed a Bitcoin hard fork that most Bitcoin users and miners wanted to run, that would be Bitcoin, whether or not it conformed to any various ideals and philosophies that anyone has about money.
I think you're confusing "inflation" with "issuing currency".
Inflation and deflation cannot be determined without a measure or prediction of the broader universe of goods and services that are available.
Whatever the reason, you have been and are still wrong about currencies. I don't mind, I'm laughing all the way to the bank, 1,000x returns on a $10,000 initial investment a few years ago has released me from the grind.
Keep calling it a scheme and people like me will keep calling you uneducated.
Sure it's diluted and abused (eg: Dogecoin, Pepecash), but so is the grand United States of America (where the majority of trolls seem to fester). Like any money, the worship of it breeds all kinds of terrible, but it can support good works as well.
If it's a technology with promise, as it appears to be, why reject it?
To go a little further, you seem to have the whole idea framed incorrectly. There are base techs, and tokens exists on the networks of those base techs. If a base tech is a currency, then tokens are shares in a business that operates on the respective networks. Through the crypto "realm" these are tradable with the currency of principalities and nations via exchanges. There isn't such a great separation in operation or ideology from what most people consider "real" economics.
The remaining problems seem to me to be limited to the technical, and there has rarely been a situation where people cannot overcome the technical.
Tell the UN, and the thousands of Syrian refugees being fed because of Ethereum that the technology is a ponzi scheme and ultimately worthless: https://www.wired.de/collection/tech/blockchain-fluechtlinge...
edit (another link): https://www.wfp.org/news/news-release/wfp-introduces-innovat...
You seem to be making a pretty large assumption, I have to contest. You're assuming that the end goal is for cryptocurrency to posture as a classical token of exchange of value. This has been put forward before, and continues to be put forward. With Bitcoin alone, I understand that its a valid assumption. Looking at Ethereum I see something different.
It's possible to use ETH as an exchange of value, but that is not the sole limit of its use. It, by the nature of smart contracts, seems to run counter to the basis of classical business: trust. Using the system to validate contracts prevents the inherent need for trust amongst parties because the system will handle the terms regardless of whether or not you care to abide by the terms. In these cases, a programmer will take on a bit of a pseudo-attorney role, having each side reliant on the aptitude of their programmer to be able to determine if the terms will be carried out as described by the originator of the contract. "Will it do what they say it will?" If so, carry on. The other side can represent every inscrutable characteristic in a person, but if the contract is laid out properly you can safely do business with them.
What I described can surely be the basis for a new variety of scandal, but that is the next bridge to cross.
I'm not an economist, but I don't see the need for monetary policy of it isn't supposed to just be money.
I'd like to hear any further thoughts you have, given the alternative context I provided.
I'd also like to recommend having a quick look at the Enterprise Ethereum Alliance. It boasts a large range of members, with some of the founding members including giants of tech as it is: Intel & Microsoft. A few large financial players have also joined up: JP Morgan, ING, Credit Suisse, BNY Mellon. I can't speak for the motivations of any of these organizations, but they see enough value to have launched an organization to spur development on and of the technology.
https://entethalliance.org/about/ https://entethalliance.org/members/
edit: Also just came across this in the news, for yet another approach http://www.reuters.com/article/us-thomsonreuters-blockchain-...
Bitcoin monetary policy is orders of magnitudes worst than that however.
Central banks have a mandate to keep prices stable. Interest rates are low because central banks don't have a choice.
I agree with you 100% about Bitcoin.
Wouldn't that eventually lead to a 'collapse of rome' type situation?
No.
Intuitively, it seems like piling up mountains of debt would lead to a default (or default equivalent) some day in the future. But if you're a government and your debt is denominated in a currency that you control, you'll always be able to meet your debt obligations by creating new currency.
Now you might think that this kind of "money printing" action would lead to inflation, which is the equivalent of a default that's distributed across the entire economy. This isn't true either.
This is where monetary policy comes into play. Any inflationary pressure caused by fiscal policy has to be compensated for through monetary tightening. Poof goes the distributed default.
The deficit can be way higher than it is now. And it can be permanent. We can cut taxes AND increase spending no problem.
There is, in fact, a limit to how much of this we can do. That is to say, there's no limit to how big the debt can grow, but there is an optimal size of the deficit, above which (and below which) we start to see some problems. But that optimal size has nothing to do with balancing the budget in the traditional sense.
If we don't kick the can down the road sufficiently, we're dropping the ball.
>This is where monetary policy comes into play. Any inflationary pressure caused by fiscal policy has to be compensated for through monetary tightening.
So you're saying we print money to meet the demands of bondholders, but stop printing and raise the federal funds rate to combat inflation if it starts to grow past target?
Once you get the monetary side right, you may not even need government fiscal help at all (though you might still need some of it).
What's wrong with central bankers tightening in response to fiscal expansion? From where I'm sitting, central bank tightening seems like exactly what we need. And we can't have it without the fiscal expansion coming first. What do you mean when you say that monetary tightening will "counter and undo" the benefits of fiscal expansion?
The problem with monetary policy that's too expansionary is that it leads to the creation of lots and lots of debt in the private financial sector. And the thing about private debt is that it's WAY less stable than public government debt. As private debt builds up in the economy, the web of interconnected private debt obligations becomes ever-more brittle and susceptible to a chain reaction of defaults bringing down the whole system. See 1929 and 2008.
Fiscal expansion, on the other hand, increases the amount of public debt. This expansion induces a monetary policy tightening response that raises interest rates and reduces the amount of lending in the private economy. You're basically swapping in a more stable form of debt for a less stable form of debt. I'd rather have the stable form of debt.
To put it succinctly, fiscal expansion coupled with monetary tightening helps crowd out what Austrian economists call malinvestment in the private economy.
The "collapse of Rome" outcome is what we get when the federal deficit is too small for too long. It's not the other way around.