Value Cash (& Why It’s Important)
Background: In 2009, a pseudonymous Russian mathematician and programmer named Satoshi Nakomoto proposed an online technology to solve the double-spending problem associated with manufacturing and presenting digital cash products. The proposed innovation worked by implementing a proof of work protocol. The protocol was packaged in the form of specially-configured mining hardware that was able to present evidence of discovery of the authenticity of a digital unit of cash being employed in a transaction via solving an equation. This form of digital currency was called Bitcoin by the technology’s inventor and the application was called the Blockchain.
In 2014, Vitalik Buterin, another Russian computer scientist, offered an extension to this basic transactional technology in the form of an enhancement that would allow anyone with a simple page of code to produce their own unforgeable units of currency called tokens. Buterin’s innovation worked by annexing the Bitcoin Blockchain and utilising a new digital currency called Ether to pay for token-manufacturing and token sending-and-receiving costs. Since then, almost all new digital currencies have been presented on the Ethereum Blockchain. There are variants of proof of stake digital currencies in circulation too, which utilise digital wallets in which the currencies are held to manufacture additional units of digital currency, but these are by and large experimental technologies with no proven value operability. Mining hardware for proof of work protocols manufactures a much greater number of units of the currency initially and then far less as more units of the digital currency are put into circulation. As a result, in the past decade, the cost of proof of work currencies such as Bitcoin has mostly risen very sharply as a result of the increased cost of putting new units of proof of work currency in circulation.
Trending Cryptocurrency Hub Articles:
1. Decentraland’s Virtual LAND Sale Stats
2. Three best blockchain stocks investors should watch out for
Present: Server farms have been set up to take advantage of low electricity costs and reduced labour prices. These server farms are mostly in China and the Philippines but elsewhere where electricity is cheap too (such as in Seattle). The incrementally rising cost of digital coins that are put into circulation as a result of proof of work protocols being employed by external hardware that manufactures less of it makes such farms lucrative businesses as costs of the digital assets rise sharply in line with costs of production. Many owners are currently recouping start-up costs in under a year’s operations. Other than the cost of production, however, proof of work digital currencies have little in the way of any base value to support their exponential growth going forward. The problem is that while increased supply at higher cost may have been what has supported the rising prices of digital assets in the past, the continuity of new supply introduction will begin to be reduced by default of the difficulty of the currency’s manufacturing capacity. The reduction in supply at higher costs of manufacturing will erode the value of digital assets over time as the market reaches a point of maturity.
Problem: In other words, Bitcoin gets more expensive to produce the more of it that is put in circulation. The effect of this is to increase the cost of circulation of new units and hence to improve the price of the asset over time until production ceases. At the same time, just as production of new Bitcoin is slowing, tokens are being created in exponential quantities at zero cost of production. The combination of the introduction of so many zero-cost assets and less supply of assets with high cost of production quotas means that as time goes on Blockchain assets are likely to wane, dragging on increasingly fragmented market volumes until the whole industry deflates. Needless to say, this would have a very negative impact on the growth of digital asset markets.
Solution: The best way to counter this effect of future price erosion among digital assets is to harness their present transactional values and to allow such values to cushion some form of base value for Blockchain assets as a whole. Further to this, we can introduce external asset values as additional mechanisms of price support into the digital asset market and thus provide an entryway of real value implementation to enhance digital transactional utility. Without monetary price inflation, economies struggle. A major reason for the rise in US national debt and a surge in deficits is the increased production of currency units at little-to-no cost. The situation is one where the country is almost singularly dependant on the production and sale of new cash instruments in order to subsist its present-day economy. As a result, manufacturing and other forms of industrial productivity have dived in recent years while a few very large investors and conglomerates are stockpiling exponential levels of uninvested cash. The effect is one of a clotting of the money supply which reduces overall growth to a standstill. As a nascent industry, Blockchain innovation will likely not withstand such an effect and will simply die before it has a chance to evolve.
Proposal: At the company I co-founded with Craig Vallis, Dunaton, we propose a virtual shopping mall of assets we label digital notes. These are cryptocurrencies with referenced values external to the value created by their own mechanism of production and/or transaction. While transacting such assets may contribute to their base values, their base values will reference other, more supportive values that allow them to continue to rise in price even as their cost of production effectively remains at zero. Digital notes will therefore allow Blockchain markets to evolve and attract additional participants without undergoing the sort of price erosion that currently threatens industry growth. The proposed digital notes can be considered value cash; this is cash that is supported by outside value.
Case: Alan buys a share of Berkshire Hathaway for $300,000. Alan puts this share into an SPV and splits it up into 300,000 SPV shares. Alan makes a token and calls it BUF. BUF has 300,000 indistinguishable units. Its utility is to purchase 100% of his SPV. Thus, his SPV has a value of $300,000 (the value of the Berkshire share inside it) and his currency has an intrinsic purchasing value now of $300,000 combined units, or $1 per BUF. Grandpa John is suddenly excited about potentially owning a fraction of Mr Buffet’s expensive company. He buys, and so does his neighbour, Uncle Ernest. And so on. Now, BUFs are beginning to trade against the dollar at a premium to the value of Berkshire shares as a result of this compounded purchasing on limited supply product, but NEVER below the value of it (or someone would simply snap up Alan’s BUF tokens, purchase the Berkshire SPV with the tokens and then sell the Berkshire share inside the SPV and make a profit). Alan notices that there is a 10% premium bump per allotment of 37,500 tokens sold, resulting in a roughly $2 token premium after 8 consecutive sales of tokens. The token premium when staggered represents a net profit of $128,845. Now Alan uses the original $300,000 investment and purchases another Berkshire share and adds it to the SPV and the price of the 300,000 BUFs double, netting an additional $120,000 profit on the remaining 60,000 BUFs left.
There are two principle effects in our Case. The first effect is that by purchasing a securitised asset such as a share of Berkshire, the investor is able to realise a greater and faster profit on the back of the securitised asset as a result of creating a form of value cash. The second thing that happens is that the purchaser of the value cash instrument is also realising a greater and faster profit as a result of this value cash instrument holding than is the case when holding the underlying asset. Imagine for a moment that the first investor of 37,500 BUF at $1 holds until the point when Alan purchases another Berkshire asset and adds it to the pool, thereafter dispensing with the remaining 60,000 BUF. By this point, using a compounded 10% cumulative premium, the investor’s tokens would be approximately $5 or higher. In fact, even without Alan adding in another Berkshire share to the asset pool, but rather dividing his sales up into 70 different 4,000-token-per-lot issuances, all staggered at a 10% premium over the top of one another, an investor would be able to purchase an entire share of Berkshire himself by the end of the round. This suggests that value cash has the potential to be a much more significant form of savings cash than sovereign currency, which die to its overall stability can remain useful for making purchases. For very long-term savings securities can be a useful resource then, but almost always buffered by — or serving as prospective sale items for — higher price inflation units in the form of short-to-medium-term value cash instruments. Simply, the rate of appreciation of value against the potential securities-for-purchase is sufficiently aggressive to warrant very near-term almost entirely self-managed portfolio value revolutions.
Originally published at medium.com on May 7, 2018.
