USD Cryptocurrency The fundamental issues

Cunicula

Overview
USD Cryptocurrency Basic macroeconomics on the issue Applications: Ponzi Schemes
Pirateat40 V1.0
for marks who didnt listen to me its already too late

Pirateat40 V2.0
Bitshares Ponzi scheme Dont be an idiot, you can still escape this one.

USD Cryptocurrency
The ability to exchange units of USD via a bitcon client is just sexy.
USD are familiar and easy. Global economy prices stuff in USD.
Adoption happens when you come to them, not ask them to join a revolution.

Trojan Horse: Basic properties of bitcoin can still hold

Cheap Decentralized Trustless Bankless But it sounds orthodox!

How?
To make a USD Cryptocurrency we need to peg a digital asset to a fixed real world price.
How do we do this?

This is textbook macroeconomics.

Lots of governments peg their currencies to someone elses currency.
Its sustainable as long they are not irresponsible, but Well sometimes governments are responsible, it does happen.

Lets just copy the responsible behavior, but drop the government.
Hopefully we can make a system of incentives encouraging responsible decisions.

How not?
Knowing what cant be done is just as important.
People claiming to do the impossible are scamming you.

Understanding some basic macroeconomics can help you spot the scammers.
So bear with an equation or two please

Interest Parity Condition

It is a simplified model.
Aim is to clarify the absolute #1 most important issue in foreign exchange markets. I ignore stuff like risk and liquidity premia because they dont change anything. Investors put money in assets that yield the highest rate of expected return. If your assets dont yield a competitive rate of return, then why the hell would you hold on to them?

This is an arbitrage condition.

Lesson:

if an asset yields a great payoff next year, then everyone buys it, driving up the price and driving down the return. If an asset yields a crappy return everyone sells it, driving down the price and driving down the return. If you want to keep prices constant, rates of return have to be equal across assets.

Interest Parity Condition Learn more at http://en.wikipedia.org/wiki/Interest_rate_parity

Uncovered interest parity: currency A and currency B must offer equal expected returns in USD 1 + = (1 + )
is the annual interest rate on USD deposits (close to 0 now). is the interest rate offered on bitUSD. (for bitcoin this is 0). S is the current market price of our bitUSD in terms of USD. be the expected exchange rate next year.

Say I invest 1 USD, in whatever currency yields the highest expected return.
Left hand side of equation shows my return in USD. Right hand side shows my return if I convert to bitUSD
1) Today, I take my 1 USD and trade it for bitUSD 2) In one year I have
1 1

(1 + ) bitUSD

3) The future exchange rate is uncertain, but on average when I convert back to USD I get

(1 + )

If the left hand side is greater than the right hand side, everyone should sell off bitUSD, decreasing S. If the right hand side is greater than the left hand side, everyone should sell USD, increasing S. In equilibrium, the equation holds with equality.

Application: Pirateat40 V1.0

The bitcoin community remembers pirateat40
Pirates marks interpreted the equation like this. (recall is just 0) 1 + < (1 + )

So they converted their bitcoin into bitcoinwithpirate in huge volume. S = 1. Intitially, 1 bitcoin sent to pirate could sell for 1 bitcoin.

In reality we must have, (ignoring pirates personal take) 1 + =

(1 + )

What does this tells us?

= 1 + 1 A fraction x of people faced = 1 A fraction 1-x of people faced = 0

1 + 1 0 1 + 1 As the equations shows, the higher interest rates pirate offered, the fewer people could expect to be paid back.
1= = 1 1 +

Application: Pirateat40 V2.0

The new pirates will be more sophisticated.
Pirate wiped out absolute idiots. Expect the new scams to target people who are just not too clever.

Classic Ponzi Scheme Characteristics

Promises above market returns (V2.0 expect less outrageous claims) Claims to have magic system or technology (V2.0 expect better back story) Magic System / Technology = impossible say experts (V2.0 need experts)

The Bitshares Ponzi

Read up on bitshares press communications here:
http://www.coindesk.com/bitshares-p2p-trading-platform-to-offer-dividendson-bitcoins/ They have Chinese VC backing. Would Chinese VCs would back a scam

Summary
Speculators use bitUSD for something we dont need to understand Savers hold bitUSD.
They get free mining rewards and txn fees for doing this! Who needs an ASIC?

bitUSD always trade for ~1 USD, so there is minimal risk

There might be some small random fluctuations, but on average they trade for 1 USD.
Clever. A clear example of a V2.0 claim.

bitBTC work just the same way. Lets use them to stay close in spirit to pirate.

Application: Bitshares Ponzi

Bitshares want to sell you bitBTC
Bitsharess marks will interpreted the equation like this. (recall is just 0)
1 + < So they will convert their bitcoin into bitBTC in huge volume. S = 1. Bitshares will happily sell you a bitBTC for 1 bitcoin. (1 + )

The interest parity condition tells us that wemust have, (ignoring bitshares personal take) 1 + = (1 + ) What does this tells us?
If > 0 , then <
Translation: Once they get your money, there is no way you can expect to sell your bitBTC for 1 BTC ever again. It will be worth less and less and less Good news: Ponzi is decentralized. You can mine bitshares, create bitBTC, and sell them for 1 bitcoin too.

Lets say it is discrete like pirate. (i.e. they just disappear at some point) Everything is the same so = 1 1 +

The higher the interest rate, the more people will face a complete loss.

Bitshares Ponzi; CryptoUSD Ponzi

This doesnt have to be a scam. Fundamental condition for sustainability is =
Not exact, you also have to allow for risk and liquidity premia, too, but this condition describes 99% of the issue.

You cant control . The FED does that. Anyone who wants to make will have to allow for to adjust with . You need to have a market based adjustment of , so that if changes, then will change with it. The next set of slides will explain how hop enables this.

You cant just dole out mining rewards randomly and expect these two to match up.

Hint: Interest/Demurrage rates for hopUSD change in response to market demand.