Digital Notes: The Evolution of Tokens to Proxy Coins
Synthchain WP (2)
Cryptocurrencies began with the creation of Bitcoin in 2009 by a pseudonymous programmer named Satoshi Nakomoto. All cryptocurrencies from the time of Bitcoin up until the Ethereum Virtual Machine went live in 2015 were referred to as digital coins. When Ethereum was invented, the creator Vitalik Buterin proposed a method of digital currency manufacture on top of its protocol whereby tokens could be constructed by entering a few lines of code into the Ethereum Blockchain and paying the miners in ETH, the network’s local currency, for verifying the creation of the tokens. In economic terms, token money is money where the unit’s face value exceeds the cost of production of the unit.
Nearly all money today in circulation can be considered token money. Blockchain Tokens bear a remarkably similar relationship to digital coins in that with the minting of a digital coin, the face value may exceed the cost of production according to the market but it is still in part determined by the electricity cost in producing it. With digital tokens, cost of production is so negligible that sale price is always greater than production cost no matter what. Given that Blockchain is now one decade into its evolution as a financial technology (albeit it even if it is not yet one adopted by the major part of society), it becomes only logical to ask — what are the characteristics, the functions and what is the utility of digital notes?
A digital note ideally ought to answer a question commonly asked since the gold standard was abolished by President Nixon in 1972 and one which you hear commonly asked on Blockchain today. That question is: what is the real value property of a unit of currency?
Given that notes began life as promissory paper, we can easily simulate such a scenario without necessarily securitising the product by enabling a re-exchange of the token for its original unit of purchase as a result of the smart contract’s ability to escrow sums of payment for extended period of time. For example, if someone pays 1 ETH for a token we create on the Ethereum network, we can extract a fee for the manufacturing process and innovation of the token and subsequently we can allow the remaining portion of the ETH to be held securely in the token’s smart contract until a certain date in the future when it can be re-exchanged for the token that it was first used to purchase.
If we alter the algorithm between issuance of the tokens and re-exchange of the tokens with the ETH in the smart contract, for instance by progressively issuing less tokens per ETH entered into the smart contract at point of issuance and then equalising all re-exchanges of tokens and underlying cryptocurrency in the smart contract on a fixed like-for-like basis, the result is one whereby a leverage effect in terms of the price of the initial unit of digital currency used to pay for it is created by the holder commonly getting back more ETH than they submitted initially. It was on this basis that we first created Futereum in January 2018. Thus, Futereum can be considered the world’s first digital note.
At heart, a digital note is nothing more than a proxy digital coin, or a proxy digital token, being the unit of token money value that is employed in temporarily representing the digital coins in the token’s smart contract prior to re-exchange. Because digital notes represent actual cryptocurrencies that they are in some sense categorically themselves, as opposed to an alternate form of value such as when a paper note represented a pound of silver, the effect is one whereby digital notes are able to be employed in leveraging and artificially magnifying potential investment returns for digital currency investors across a broad range of digital assets, and employing a whole series of highly-imaginative cost-of-sale formulas that ultimately affect the price of the notes themselves. In this way, we are the first to have identified how to engineer not just utility but also value on the Blockchain.
To summarise, a digital coin is a unit of cryptocurrency attached to the creation of a specific Blockchain. A digital note is a smart contract utility-enhanced token where the token is used by way of being ascribed a proxy value for the underlying value that is stored inside the smart contract for which the token is ultimately re-exchanged.