in this document I plan to outline how all the problems associated with the 3 vectors that were outlined by Prof David Yermack, were primarily solved by the Quark Crypto economic protocol.
I’m a self declared (possibly worlds first) “decentralized economist” my name is Kolin Evans.
“Decentralized economics” is just a mix of monetary mechanics, Austrian economics and all the decentralized aspects of crypto currency distribution mechanics and how they generally effect the first two fields.
I don’t presently have a long list of PhD, perhaps when I’m proven correct someone can give me a bunch? (i will get the frames made up in preparation) ; )
The core of the 3 vectors were covered in an interview that can be found here on you tube : https://www.youtube.com/watch?v=XqH26KMFoAU
however the story was quoted by Coin Telegraph here : http://cointelegraph.com/news/112462/finance-professor-david-yermack-argues-that-bitcoin-should-not-be-considered-as-money
Finance Professor David Yermack Argues that Bitcoin Should Not Be Considered as Money
….and correctly so, but lets outline the why around each aspect, also lets look at how the Quark protocol economics went about fixing those problems.
A store of value
“There’s a lot of basic financial data that suggests that, in terms of being a store of value for instance, Bitcoin is very volatile on a day to day price,” argued Yermack.
The professor noted that Bitcoin was probably more volatile than any other financial assets, adding that the digital currency tented to fall almost 10% on a given day, which makes it much more volatile than any other currencies that are being traded on the markets around the world, as well as gold and shares of stock.
Thus, Yermack said Bitcoin was “risky”, a characteristic which we would not usually associate with money.
Why is Bitcoin volatile? the answer is because the market can not price it, lets explore that….
Bitcoin is a “supply side monopoly” this is due to it having a complete and dominant mining monopoly, why this idea is difficult for some economists to get their head around, is because the mechanics of such a global monopoly have not existed before on earth, so we could say the whole idea is alien to human thought.
But I have fortunately found a way to explain it, it goes like this:
Welcome to planet Crypto Currency. (explaining difficulty monopoly)
On this planet lets say there is a particular element, lets call it “liquid Gold” and it is only available in a fixed amount on the entire planet;
But there is an important difference – if one tries to mine this element it affects all the other parts of the element, so in effect all mining locations have a relationship, in reality all the “liquid Gold” is linked all across the planet.
So lets say on our planet we have two mines:
- Location A you have a “liquid gold” mine.
- location B another Mine on the other side of the planet.
But the difference is on this planet (remember) all of the “liquid gold” mines on the planet are linked together and have a relationship with each other.
The miners at location A start to mine the “liquid Gold” and also the miners at location B.
But due to advances in technology the miners at location A can extract 100% more than the miners at B now remembering that all mines have a relationship on this planet (because “liquid Gold” is linked all across the planet) this in effect makes mining more difficult for the mine at location B because “liquid Gold” is now harder to extract in proportion to how much better the miner at location A can mine it.
Furthermore the hardware and advance of technology is unavailable to many on the planet(its rare), and the initial sales of the “liquid Gold” allows the miners at location A to keep this technology monopoly.
The net result is that as long as “liquid Gold” is still purchased by the market (confidence) the miners at mine A can continue to increase their technology monopoly and drive the other mines effectively out of business. (or at least out of any profitability)
Bitcoin mining monopoly.
This is in effect the Bitcoin story, the net result is that the market of Bitcoin producers is very small in numbers terms of people, many people talk about “Network hash-rate” or “power consumed” this is a complete misrepresentation of participation.
More power and hash rate does not equal more participants in fact it equals less net participants, it equals better technology that fewer people have.
but because of the increase in “hash power”; “Computing hash power”, this drives difficulty out of reach for the majority of the market (just like our example. )
^ The above Bitcoin difficulty chart shows the “difficulty nuclear arms race” as different monopolies compete to own the monopoly on production.
A Store of value :
Any economist knows that if something has a near complete distribution monopoly and a fixed cap the distributor(s) can just “choose” (a very human thing) not to sell it into the market and create effective price manipulation.
This is not a market price, it’s a decided price,it is at best a “trust of distributors” , and the crashes (volatility) are due to a few in the “trust” cashing out then waiting for the market of buyers to buy in again. (at their price)
Even fiat debt money has more of a market aspect to it than this situation, the system is very close to a system similar to the following;
If gold could never be found past a fixed amount anywhere in the universe, but only 1 or 2 groups had a total global/universal monopoly on mining gold, (but then advertising that as currency) ( a pretty silly situation no doubt)
this whole effect is multiplied by the very “relatively” small number of Bitcoin that will ever exist.
The Quark protocol fixed these problems by doing this:
An initial 246~ million units were distributed into the free market by CPU devices primarily over just a 6 months period, this meant that no single entity could get control of a huge % of those units.
A hard one to explain for new to crypto but; Quark used algorithm complexity so that no single entity could get a “trust” on mining it uses Six (6) algorithms (like Quark flavors) making it very hard to specialize.
A further trickle amount of “inflation” <.05% will continue to be released moving forward this is called an “EQ reward” and aims to keep the Currency supply “fixed”
The primary amount of units that are distributed are now in the market and purchased, bid and sold at a market price, Quark is free of mining monopoly and thus free of price manipulation.
The “trickle inflation” the EQ rewards is very important and is somewhat revolutionary in its design as its mechanics are not just “inflation” but a reward and incentive for miners to keep the system functional.
The EQ reward can be a small number and still be functional the theory behind this is the divisible nature of Crypto currency but it also provides that no single party (or group) can gain terminal monopoly on the entity.
What’s the result? ( keep in mind here Quark is just now 12 months old so only 6 months from this initial distribution. )
Link to the live chart is here – http://coinmarketcap.com/currencies/quark/
So all indications suggest that moving forward price volatility will stabilize and trend in relation to other free market systems, and as there is a tickle inflation the distribution into the market can only get better as time moves forward, so in theory this graph should become more smooth and start to trend, I don’t discount volatility in the short term that could be driven by outside economic influences , i.e a fiat paper money loss of confidence, but those vectors would be relative.
Thus i can conclude that the Quark economic protocol should be an effective store of value, all things being equal.
A medium of exchange
Yermack pointed out the low number of merchants actually accepting the cryptocurrency, adding: “The numbers are said to be growing but there are many parts of the world where Bitcoin has no presence at all.”
The professor noted that even in metropolitans and big cities, only a few merchants accepted Bitcoin, qualifying the numbers as “infinitesimal”.
“Calling it a medium of exchange is exaggerated,” said Yermack, stressing that searching of those merchants required a lot of legwork, traveling and researches.
How very true – and here is where a Bitcoin distribution monopoly will not help Bitcoin but a full distribution such as the Quark protocol is more inclined to be spent into he market.
The Bitcoin monopoly problem causes something I termed as the “Use/Collapse” paradox I outlined it here :
And Citi analysts outlined it here (although said that it was due to miners costs) – :
The summary of which is, in a monopoly situation where valuation is kept artificially high, when merchants trade BTC back to fiat (USD or others) , that simple action can in effect crash the fragile (faked) price , so in essence when the “distribution trust” “uses” the entity to try to make it a “medium of exchange” that “collapses” the artificial price. this is the use/collapse monopoly paradox.
And we are seeing that occur right now, the obvious answer is to not have a monopoly in/on production and let the market price the entity ( As per the Quark protocol.)
Its early days for Crypto, there are a number of factors that can and will contribute to easier access and security I will outline them in the summary.
The Quark protocol has a much better chance of adopting a medium of exchange, as it has no major vectors stopping it, I think Face to Face direct crypto transactions will be the end point not the start point for Crypto adoption.
I suggest the path for a crypto should follow along a simple economic protocol outline such as this:
Primary Distribution. ( or elastic supply distribution)
Market exchange value establishment period (let the market price the entity)
I have to pause you here and highlight this point if the market can not find a market price NOTHING else can happen (related to adoption) because merchants can not see the entity as a stable store of value.
integration and proliferation in new and existing businesses. (primarily online)
Integration and proliferation in face to face businesses in a simplified manner.
The problem is Bitcoin is stuck back at #2. it is not primarily distributed and has a hard cap and can not be priced by the market #3, this is due to its very debilitating mining monopoly, this is a flaw in the protocol.
Quark has found and is still finding its market base value. #3 also is getting some penetration into #4. because it fixed this flaw in that protocol.
A unit of account
With Bitcoin’s price at about 500 USD, Yermack said that day-to-day transactions involved dealing with decimals, stating, “people aren’t too good with working with decimals”. For instance, he said that “a cup of coffee may cost you 0.01 BTC,” which makes it difficult to make price comparisons.
Yermack said that technological improvements were required to reach global acceptance. He stated that digital wallets were difficult to use and that Bitcoin developers should work on making softwares and applications that “regular people [that are] not confortable with computers would be able to install, maybe on their mobile phone, and use easily.”
The professor also noted that security was a real concern and that developers should add more security in their products:
Key points for the Quark protocol :
- Has a higher total initial cap 245 (more likley to be a whole number or a simplified fraction. 1/4 or 1/2 etc.
- has a trickle inflation of <.05 so there will be around 300 million in our life times (assuming humans live normal lives periods)
- the price in relation to some fiat systems that are numbered in the “trillions” could still mean that say a Coffee is moved into the negative.
- I think the market will adjust this and add new pricing symbols to it – this would rely on a relatively stable price structure.
In summary the Quark protocol having a trickle inflation and full primary distribution means it is a much better unit of account, and I think humans will adapt new symbols to represent new market prices in the future based on a stabilized exchange rate system, let me give an example, Ecuador is issuing a digital currency, not a lot of details at the moment on this, but if that Coffee in the example was sold in Ecuador but was being priced against the Ecuadorian price of a Coffee in its own digital currency what would that unit of account look like?
So exchange rate symbols become relative you see, at the moment we “think in paper fiat” if we change that, the symbols can change. (some would argue it’s a large change, but i don’t think its out of the bounds of resolvability)
I will talk about the Hacking / confidence issues in the summary.
Bitcoin has some problems, but they relate more specifically to the :
- Hard cap of 21 million (obvious flaw)
- The monopoly on production due to its “flawed” algorithm.
- The long distributions that uses spaced out “Halving” i.e the Rewards starts at 50 then halves to 25 , then halves to 12.5
none of these things are an effective way to distribute “money” all other issues are fairly secondary to these main distribution issues because if the entity is not viable to start with there is no reason to be talking about fixing / tinkering with the edges , however “Crypto currency” the entity is very innovative and its decentralized open source systems have solved a lot of these problems.
it’s all about confidence, in a market of free flowing information, a provable centralized monopoly will never hold confidence because that goes against all the features of a “decentralized” “trust-less” system.
How will “Hacking” be solved.
The NSA already told us in their 1996 white paper http://groups.csail.mit.edu/mac/classes/6.805/articles/money/nsamint/nsamint.htm#Introduction
it will be primarily done with Hardware wallets, these custom pieces of hardware that use open source code and in some cases custom hardware are very hard to “hack” maybe large Banking institutions (or their agents) have a chance but it’s very difficult.
Frozen Bit is a company that will be supporting multiple amounts of crypto including Quark they will use “multi signatures”..
what is a multi signature wallet system?
all this means is that when you want to make a transaction there is an extra verification step. in essence an extra signature needs to go on your “digital check book”
so just like two factor authorization;
like for example:
Bob wants to buy a coffee so he goes to his totally accessible FrozenBit account app on his mobile device and moves Quark (or other) crypto to this “spending account” when he does this the third signature requires that it sends him a Txt message to his same phone (or a different one) he verifies the transaction by putting in a code the TXT sends him (or similar) and the “third signature is signed”, he moves enough Crypto to his spending account for that day, week , month etc.
for convenience, this account can be made to use instant transactions, its more “at risk” for convenience but holds much less. (this helps both buyer and seller)
These and many other innovation mean that Crypto is still in its early stages, there are a number of protocols that will compete in the future but the ones with the fundamental structure, I believe will ultimately be adopted in a supranational free market manner.
To learn more about Frozen Bit : https://bitcointalk.org/index.php?topic=673533.0