As Goldwasser and Bellare’s notes attest to, the key components of Bitcoin were already in place during the first wave of internet adoption more than ten years before Bitcoin was eventually launched in January of 2009. “All” Satoshi needed to do was fit them together. We may never know what insights led to the now-famous whitepaper and the subsequent release of Bitcoin. And if they happened inside a crowded lecture hall on an urban campus or in the quiet and solitude of country garden.
The distributed ledger is often referred to as the “single source of truth”, the storehouse of correct data, but in reality, workflow automation pushes the burden of correctness up from the distributed ledger to the smart contract. Blockchains and distributed ledgers are immutable once the data is on the ledger, but they make no guarantees on the quality or veracity of the data inputted. It is the contract that defines how truthful the ledger really is. And this demands a different way of thinking about ledger architecture as a whole.
So why does a longer period average result in a better indicator? Intuitively it makes sense. By definition, the role of Transaction Volume in the NVT denominator is to be a proxy for fundamental utility that users get from using the network. A longer smoothing period helps to get rid of the reflexivity effects described above — spikes in transaction volume that follow sharp price increase. These irregularities are speculation-driven and are bad descriptors of fundamental intrinsic utility of the network. When we remove these irregularities, we end up with a better proxy for fundamental value in NVT denominator, and, as a result, the new NVT ratio becomes a better descriptor of price level.
As can be seen from the chart above, when we move from a 28-day Moving Average to a 90-day Moving Average NVT definition, we get rid of the time lag issue described above. We can also see that every time NVT went to the Yellow or Red zone (autumn 2013, spring 2014, Decem…