The demerits of a hashrate standard currency and how to overcome them
by Maryna Trifonova, Head of Content at Jax.Network
Progress is inevitable. The evolution of the way we trade and exchange will certainly influence our daily lives. How can we change the way we live and help our society to grow? By introducing a new form of a unit of value, which is based on the hashrate power. Let’s analyze the pros and cons of such a cryptocurrency and find out whether it has any chance to survive in today’s world.
What is a hashrate standard currency?
As we already mentioned in the previous article, a hashrate standard currency is a currency, whose value is pegged to the cost of producing 1 unit of computing power or, in other words, hashrate. Cryptocurrencies that use a peg as collateral to maintain their stability are called stablecoins. Most of the existing stablecoins are pegged to fiat, commodity, and other cryptocurrencies.
A hashrate-based stablecoin is a quite innovative technology that was first introduced by Jax.Network. Here is a link to our Academic paper, where you can find more detailed information on our research. We developed JAX with an ambition to make it a universal standard for the quantification of economic value. It should become a great alternative for all people looking for a cheaper yet secure day-to-day payment system, not to mention those that live in countries struggling with inflation.
Pros and cons
Let’s take a look at the comparative table of a hashrate standard currency. It outlines the major advantages and disadvantages of our hashrate-pegged cryptocurrency JAX. If you have any questions or suggestions, feel free to leave a comment in the section below.
How JAX addresses these problems
One of the problems we see in the way of a hashrate-based currency development is hyperinflation if coin issuance is not well contained from day one. Even though the currency is pegged to the electricity cost of 1 unit of power and follows the law of supply and demand, there is still a very high chance of hyperinflation, in other words, overprinting. In order to overcome this obstacle, we developed a K-coefficient and an opportunity cost of printing.
K is a conversion coefficient of miners’ work to JAX coins. In Jax.Network, whenever a miner computes a hash in order to find a valid one, the mathematical expectation of JAX coin reward that he gets is equal to K. Hence, the K-coefficient setting regulates the cost of production of JAX coin. Adjustment of K-coefficient may be useful to fix the economics of JAX coins.
Miners will have to decide whether to print JXN+BTC or JAX coins and then send their JXN+BTC coinbase reward to an invalid address. This action prevents the upcoming JXN and BTC coinbase reward coins from being in circulation forever. However, mining JAX by “burning” JXN does not equate to losing or burning value per se. It’s a rational choice for miners to swap their profit earnings from an investment motive (JXN+BTC) towards a transactional motive (JAX). The dollar value of burning JXN+BTC is actually transferred into the creation of JAX coins, and not destroyed. Indeed, miners decide what has more utility and swap between coins that have more expected value to them at time t. By having this opportunity cost of mining, we have an upper bound of money printing, thus avoiding future inflation.
Money laundering and tax evasion
Another problem is money laundering and tax evasion. Frankly, this is the main concern that governments have been expressing towards all cryptocurrencies since they became popular. We have an interesting proposal for governments to satisfy their concern. So, we suggest that governments should set up centralized exchange hubs, where they use JAX as collateral and issue their own derivative in the local fiat. Then they can collect a tax and pay people a UBI for using the system. This way the majority of the people will use it.
Governments can also outlaw direct peer-to-peer networks, so they only allow transactions on their territories to go through their exchange hub and collect a tax there. It will help them keep a precise accounting. After all, blockchain has an immutable record. Everything that gets there, stays there forever. Therefore, we argue that it’s easier to track someone using cryptocurrency rather than cash.
And one last demerit that we have spotted is potential inequality between countries. It may happen that wealthier countries may have more powerful computers and more innovative green energy sectors, so they can mine more coins. That may potentially put the countries that don’t have an infrastructure for cheap renewable energy at a disadvantage.
However, we support competitive meritocracy. It means that such an environment will stimulate less developed countries to create innovative ways for developing new sources of energy and eventually making the world a better place. We believe that this demerit can work out to be a pretty strong advantage for the development of our civilization in the future.
Lack of privacy
Even though cryptocurrencies were designed as a way of transacting funds in a private and encrypted way, they don’t guarantee total anonymity. Most cryptocurrencies, including Bitcoin and JAX, are pseudonymous, meaning that you use a pseudonym (your public key) to send and receive coins. Your legal identity is hidden but only until you reveal it by trying to cash out or in any other way. Thus, all the transactions ever linked to your address can also be traced back to you, as blockchain has an irreversible and immutable source of information.
Unfortunately, pseudonymity is a common flaw of almost all cryptocurrencies. A few have privacy embedded in their protocol such as Monero or ZCash, but that is often at the cost of transaction throughput. JAX is not an exception. We can only guarantee that you will receive and send payments with an acceptable level of privacy as well as any other form of money. Besides, any techniques that are used on Bitcoin to improve privacy such as CoinJoin can be ported on JaxNet.
Cryptocurrencies are digital money, meaning they are non-tangible, so you can’t redeem the amount of electricity you spent on mining these cryptocurrencies. However, it was the case in the 20th century, when the gold standard was still in place. Everybody could go to the bank and replace their banknotes with a certain amount of gold.
As JAX is a hashrate-based coin, it is backed by the electricity cost for its production. Hence, it’s non-redeemable. There is nothing we can do about that. That is the inherent characteristic of all digital currencies. That being said, miners are profit-oriented, and as long as the market exchange rate is below their cost of production, they have no incentive to print the coin. So, even if it’s not redeemable, market forces play a strong role in regulating supply and demand.
Having analyzed a hashrate standard currency, we can conclude that it has a lot of advantages, while disadvantages can be easily handled. Money laundering and tax evasion and potential inequality have already been accounted for in the design of JAX, a native stablecoin of Jax.Network.
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