Basic cryptocurrency economics¶
Background¶
Prices of cryptocurrencies have fluctuated wildly
Prices of several cryptocurrencies have started or risen to very high level before plummeting
What are the driving factors behind these fluctuations?
The issues¶
The main issues which drive the price of cryptocurrencies appear to be
supply and demand
coinbase (mining)
difficulty
pump and dump
hype and fud
airdrop
lack of - or increase in use cases
speculation vs investment
change (increase) in public interest
These relate to supply and demand. Other economic aspects include
Donations
Divident payments
Universal Basic Income (UBI)
The coinbase, difficulty and mining strategy¶
Each coin has a built-in plan for the generation of new blocks and new coins
Bitcoin:
A new block should be made every 10 minutes
The coinbase for Bitcoin is currently 12.5 Satoshi
The coinbase is also the miner’s fee
The miner receives 12.5 BTC for mining a new block
Smileycoin:
Same principle but 10,000 SMLY and one block per 3 minutes
Coinbase is halved approximately every 7 years
Miner receives only 10% of the coinbase
The strategy: The “hash” of the block must decrease (difficulty increases) if the blocks are generated too fast.
Handout¶
The student should do some research into hash functions.
See for example Example: Bitcoin http://bit.ly/2PXIpYR.
Mining: The tragedy of the commons¶
Block Hash
5000 000000004d78d2a8a93a1d20a24d721268690bebd2b51f7e80657d57e226eef9
10000 0000000099c744455f58e6c6e98b671e1bf7f37346bfd4cf5d0274ad8ee660cb
25000 00000000ae4b125eb183e689b7231eafa8c992d5b8c952d9f3cd30a79a788ddf
50000 000000001aeae195809d120b5d66a39c83eb48792e068f8ea1fea19d84a4278a
100000 000000000003ba27aa200b1cecaad478d2b00432346c3f1f3986da1afd33e506
200000 000000000000034a7dedef4a161fa058a2d67a173a90155f3a2fe6fc132e0ebf
300000 000000000000000082ccf8f1557c5d40b21edabb18d2d691cfbf87118bac7254
518367 000000000000000000164ac8a0f61d8157b0920d13cb53cb7d47610bde077898
This would be called the “tragedy of the commons” in fisheries: The problem is that there is open access to a new resource and the fee for entry (zero) is not high enough.
Mining development¶
Bitcoin: Currently only large companies (“data centres”)
Originally on desktop computer, then using GPSs, followed by ASICs
Other coins: Commonly “mining pool” (grafarahópar?), but similar development
SMLY: Still mostly “solo” mining (coinbase-split is difficult for pools to implement)
Basic economics¶
Supply and demand drive the price of almost anything.
The supply and demand of a cryptocurrency can be influenced by
mining to generate new, the coinbase
airdrop
lack of - or increase in use cases
Increased difficulty will make mining more expensive but will NOT directly affect the price over any period of time: The increased difficulty may mean that some miners will stop mining or technological development will lead to better ASICs being used.
An airdrop is used to hand out large amounts of a cryptocurrency to groups of users. Auroracoin is such an example.
Examples of pump and dump or hype and fud abound. These are techniques used by groups and individuals who intend to affect the prices of cryptocurrencies.
Investment and speculation¶
speculation vs investment
change (increase) in public interest
like any asset, cryptocurrencies can be used for investments
See handout at https://tutor-web.net/comp/crypto251.0/lec01200/sl01240 for Bitcoin price development
Example of analysis, see https://hackernoon.com/https-medium-com-zvnowman-building-a-cryptocurrency-portfolio-for-a-10-year-holding-period-e7ed407a9754Handout¶
Bólur og svindl
https://coinmarketcap.com/all/views/all/
Skrýtin verðþróun, en verð á gulli og demöntum ræðst líka af framboði og eftirspurn (þ.m.t. væntingum og spákaupmennsku)
Bitcoin verðþróun …
Bóla? Sprungin?
Bitcoin verðþróun út 2013
Bóla? Sprungin?
Bitcoin verðþróun til 2015
Bóla? Sprungin?
Bitcoin verðþróun inn í 2017
Bóla? Sprungin?
Bitcoin verðþróun út 2017
Bóla? Sprungin?
Bitcoin verðþróun út 2018
Bóla? Sprungin?
Bitcoin verðþróun árið 2018
Bóla? Sprungin?
Example of analysis, see https://hackernoon.com/https-medium-com-zvnowman-building-a-cryptocurrency-portfolio-for-a-10-year-holding-period-e7ed407a9754
The airdrop fallacy¶
airdrop
Airdrop: Giving money to everyone
Airdrop without incentive to invest or methods to spend: Useless :-)
Setting up use cases¶
The only way for a cryptocurrency to have a value in the long term is for it to have a use case
The use case might simply be investment:
Bitcoin is a classic case
Cryptocurrencies appear to be used as investment portfolios
Use cases can also consist of companies accepting a cryptocurrency as a payment (Bitcoin in particular, but also Auroracoin)
Selling donated coupons is a common method used by non-profit organisations. Coupons can easily be sold for crypto (http://smly.is)
In the early days of Auroracoin there were too few use cases to support holding or using the coin.
Note: Groups could agree that all members of a crypto group should put something up for sale and thus be ready to accept payments in the cryptocurrency.
Donations¶
Several cryptocurrencies encourage
donations in the currency
The effect on price would normally be none, unless the coinbase is used as a donation which goes directly into circulation.
An interesting twist on donations is to use
investment in the currency as a means to support a cause financed by the currency (Education in a Suitcase)
See http://www.quotenet.nl/Nieuws/Het-wonder-van-SmileyCoin-rijk-worden-met-donaties-209798
Divident payments¶
Reasoning:
Reduce dumping
Increase investment incentive
Smileycoin approach:
Fixed portion, 45%, of coinbase goes to dividends
Recipient group: Addresses with at least 25 M SMLY
Method: Oldest untouched address receives entire next payment
Key figures:
Amount: 4500 SMLY per block
Frequency: 480 payments per day
Rich list: https://chainz.cryptoid.info/smly/#!rich
180 addresses as of Sept 7, 2018
The SmileyCoin economy¶
Handout¶
The SmileyCoin economy: Miners earn a few SMLY from mining but the coinbase is mostly (i) donated in 10 income streams to the Smiley Charity (fully automatic and decentralised) or (ii) paid as dividends to over 200 large supporters (also fully automatic and decentralised). Donors can also donate fiat directly to the Smiley Charity. The SmileyCoin Fund supporting the tutor-web will support other projects. Students earn SMLY while studying in the tutor-web. Any holders of SMLY can sell SmileyCoin on cryptocurrency exchanges. Vendors supporting the projects provide various discount coupons for sale on smly.is where students and other can purchase them for SMLY. Students may redeem or donate their hard-earned SMLY; and non-redeemed SMLY are eventually donated to the Smiley Charity.
Missing from the graphic is how the Smiley Charity pays forward the SmileyCoin income streams to include other charities as recipients. The forward payments are automatic and transparent.
Cryptocurrencies as a Universal Basic Income¶
Universal Basic Income (UBI) is a popular term and commonly linked to technological developments which may eventually lead to mass unemployment.
A cryptocurrency could in principle be used as for UBI through a number of means:
airdrop
splitting the coinbase
splitting the transaction fee
but all of these only increase supply, not demand. Hence, none of these will work unless there is simultaneously a setup which provides demand for the coin.
An airdrop could be implemented through a premine, but experience to date suggests that this is not a very good idea (Auroracoin, Smileycoin) and it would be better to use the coinbase+fees for this purpose.
Several cryptocurrency-based UBI projects are listed at https://bitcointalk.org/index.php?topic=3242065.0
Solving UBI implementation issues: delivery and demand¶
In addition to problems with a premine, the coinbase alone is unlikely to be enough (exercise: test the increase in supply and demand needed to make this work for Iceland with e.g. 100,000 recipients of a UBI equivalent of 100,000 ISK per month).
If a coin is set up such that the UBI recipient are active parts of the community through
sending the UBI to other addresses (generating a fee)
putting a service or object up for sale
then a UBI might be feasible.
Supply would mostly be through the transaction fees.
Demand would be generated by the users themselves.
Examples¶
Consider 100,000 recipients of a UBI equivalent of 100,000 ISK per month and suppose this has to come out of the coinbase.
The coinbase of 10,000 new coins are generated in each block, every 3 minutes. With 20 blocks per hour, 480 blocks are generated per day, or 14,400 blocks per month. The total coinbase is therefore 144 million SMLY per month.
For the above UBI, this coinbase of 144 million SMLY has to be worth 10,000 million ISK per month, so each SMLY needs to be worth 10000/144 or 69 ISK.
There are currently almost 30 bn SMLY in circulation (30 10^9) so for the above to work, the market value of all SmileyCoin in circulation needs to be over 2 thousand billion ISK (2 10^12). For comparison, the amount of money in Iceland (as measured by M0) is about 40 bn. Even taking into account money in savings accounts etc (M3), the market value of SMLY needs to be far too high compared to a typical economy, if the UBI is to be generated from the coinbase alone.
Of course in a typical economy, wages are not paid by printing money. Once paid, wages are first used to pay income taxes and then purchase goods, resulting in sales taxes. These taxes are subsequently used to pay wages again. A crypto-based UBI needs to mimic this circular behaviour of wages and taxes.