On the money multiplication of a cryptocurrencies

Cryptocurrencies are usually heavily criticized that they are not heaving the same characteristic of the traditional monetary systems, namely the money supply multiplication of the bank system. However, that should not necessarily be always that way. 

Let we suppose the following idea: considering an ICO, some tokens will probably reach the necessary success, implying the necessary network effect, price stability and liquidity. That means that these tokens will be probably part of the monetary supply. In this sense a successfully executed  ICO might extend the total monetary crypto supply, as a consequence it works as a crypto multiplication. Actually, in some sense, the system works similarly as the traditional banking system, the money is not multiplicated just for fun, it is used to be given for financing new companies, or new projects. 

The real question if the multiplication can be controlled in centralized or decentralized way based on the token supply and ignoring the such concepts as interest rates for the first run. Let we imagine that the issuance of the new tokens are controlled by some incentives, like with taxes. In this way there is a possibility to control the whole economy, like:

1. In case the economy is overheated, the ICO-s can be made more difficult or highly taxed, decreasing the general demand for new ICO-s and making the increase of the monetary supply less intensive. 

2. In case of depression, the ICO-s can be made more easy to do, like with less taxed, meaning that the demand for new ICO-s will increase among with the general monetary supply. 

Certainly, there are some elements of the model that might be fine-tuned. 

- It is a little bit misleading that the general monetary supply is not only represented by one token but with a several ones. It is a general question if there is a model that assumes only one token. 

- As the general monetary supply can be easily increased, it is more difficult to actually decrease the supply. 

- The model still does not capture the time perspective of a payment, like giving a loan and paying back in a later timepoint. It is actually an open question if it is actually a general problem.    

CBDC (Central Bank Digital Currency) is on the rise

Surprisingly, CBDC (Central Bank Digital Currency) is being taken very seriously by Central Banks. Even if we are probably pretty far from the first working models and they will be probably pretty far from the original concept of decentralized cryptocurrencies, the model is pretty intensively studied. 

It is actually funny that in a conference overwhelmed by people from Central Banks, the usage of words and concepts are a little bit different: 

- Instead of Blockchain, Distributed Ledger Technologies

- Instead of Cryptocurrency, Digital Currency.

- The Satoshi Nakamoto is certainly forbidden. 

...

Notes on the definition of Fintech

Sometimes the concept called Fintech is a little bit misleading. Certainly, it is pretty difficult to define the concept precisely, it can be however pretty well described:

- Fintech is PSD2, fancy banking Apps, innovative Big Data banking applications, or Blockchain and cryptocurrency solutions. The concept means innovative and disruptive solutions that are related to the financial technology and not necessarily to the banking technology. 

- Fintech is definitely not anything that has anything to do with banks and IT. It is certainly not related to the fine-tuning of some old fashioned legacy backbone technologies, even if they are still used transferring money.  

On the corporate communication of Microsoft

The general corporate communication from Microsoft is pretty interesting nowadays. They have two major messages: 

1. The incredibly effort that was taken as an internal transformation of the company. However, my experience is that internal emphasizing transformation actually means that nothing has happen with the markets or products that worth mentioning, so the only thing that remains is internal reorganization.  

2. Massively over-positive psychological communication overall, emphasizing always "awesome" and story-telling. However, such a communication usually means in practice pushing the price high, before selling it (and probably before the price collapses again).

If I consider on top that one of the Microsoft founders, Bill Gates, sold his stocks of the company, I am not sure in which direction is the journey leading.  

Notes on the need of Ethereum privacy

The Ethereum network suffers at the moment from a serious of privacy problem, every transaction is visible to the whole world. Perhaps, it might be an advantage in the direction of simple transaction validation, but it is a huge drawback in the direction of privacy. Even if public keys are not bound to an identity by default, if the identity is confidently leaked, the whole transaction network of an individual will be visible. It is simply not an acceptable. 

On solution might be the introduction of the Bitcoin style HD wallets, that simply creates a new address at each transaction. Certainly, it works well as we need only to transfer Ether or coins, however the situation might be a little be complicated as soon we need general smart contracts and access rights of the contracts . It is an open question how the HD wallet concept can be extended to cover general smart contracts with access rights as well.

A second possibility is to use mixers or similar functionalities. One way might be to use directly mixers as on the top of Ethereum blockchain, the second one is to build mixers indirectly into the protocol. However at both cases the problem is not exactly same as at the Bitcoin blockchain: as we simply transfer ether everything works fine, however as soon we have more complicated use-cases and general smart contracts, the model will be again difficult.

The third option might be to generally change the open style of the platform to a more private one. A simple solution might be to use Ethereum in a consortium Blockchain scenario. A more complicated is perhaps to build zero knowledge proof into the platform and consensus algorithm itself, implying more privacy by default. Certainly, the way of doing this is pretty difficult not only from a practical but a theoretical one as well.

Notes on digital transformation

Digital transformation used to have a useful meaning and a couple of techniques and tools to deliver meaningful change into the society or business making. 

However, as the word "digital transformation" become popular outside the hard-core technology area, mostly in sales, marketing and consulting, it has been lost its meaning. Nowadays "digital transformation" is mostly a marketing buzzword to sell every piece of shit that has somehow something to do with IT.

Micro-economical considerations of the cryptocurrency mining

Cryptocurrency mining especially proof of work can be analysed from a pure micro-economical point of view. First of all, the market is about transaction validation. The mining economy is split into two parts: the miners provide the supply for transaction validation. Other actors, like users, merchants, exchange services that send transaction into the system provide the demand for transactions. 

It started somehow in a way that everyone could  run mining on a simple laptop, implying practically a perfect competition between suppliers with minimal fix costs and entry barriers. As the hardware requirements developed further the fix costs of the miners were getting bigger and bigger, implying centralization efforts which was manifested for example in the appearance of mining pools. It means that the transaction validation market moved from the perfect competition to the monopoly direction, having at the moment somewhere at the stage of oligopoly. 

In this sense we might as well define centralization and decentralization in the sense of market structure, meaning that in a total decentralized application the transactions of the application are executed on a supplier market that is globally distributed and is in the state of perfect competition.    

The rebirth of classical numerical economic theories at cryptoecomomics

Classical numerical economic theories, like microeconomics or game theory were once vital elements of every economic analysis. However in the meantime, even if these theories are part of the general university education, they seem to be less popular comparing to more "human-oriented" areas, like behavior based models. However, it is foreseen that these theories will have a rebirth in the area of public Blockchain and other distributed ledger technologies, implying the theoretical area as cryptoeconomics. 

In this area, we can actually work pretty well with the homo-economicus assumptions: we basically dealt with actors that are either humans, or simply computer algorithms, that do not know and do not trust each other, so the major motivation of the cooperation is simply the profit maximization.   

Supply demand analysis of the Bitcoin transaction fee

Recent events showed an extreme increase in the bitcoin price especially at the end of summer, implying situation in which the transaction fee itself was sometimes bigger than the amount to be transferred. Certainly with the SegWit and SegWit2x activations, the situation will be better, however the basic problem will not be solved. 

Transaction fees are basically priced on the market based on supply and demand (Figure 1). Demand curve seem to be relative simple, if the transaction fee is high, people tend to send as little amount of transactions as possible. If the price is low however, than a big number of microtransactions can be carried out without a huge cost implication. Supply curve however is a little bit special. On on hand, it might make sense to carry out transactions even if the transaction fee is zero or negative, because the miners reward is not only based on the transaction fees, but on a block reward as well. On the other hand, because of the block limit, the possible number of transactions is limited to around 7, meaning that the supply curve will change to vertical at this point, meaning that the supply is perfectly inelastic.     

Figure 1, supply demand curve for the Bitcoin transaction fee.

Figure 1, shows that cause of the fast increase of the transaction fee pretty well. As Bitcoin is slowly reaching the mainstream adaptation,  the demand curve will generally increase, slipping to right and high. As soon as the demand curve reaches the vertical part of the supply curve, even a small amount of change in the demand results a huge increase in the transaction fee.

The situation will be better, but actually will not be solved by the SegWit activation, as the vertical point of the supply curve will only be at a higher value but do not disappear totally. As a consequence, we will face with the same problem probably in a year as the general demand for Bitcoin transaction increases. 

What is the difference between a real estate and a cryptocurrency

This was actually a general question in of of the community blog, however it is interesting generally, so I try to answer it generally.

Both cryptocurrencies and real estates are assets. The only difference is that a cryptocurrency is digital asset meaning the ownership is guaranteed by network protocols and cryptography. On the other hand, a real estate is a physical asset, meaning that even if they are administrated by a Blockchain protocol, the value of the ownership of the asset is guaranteed by the government.   

It is important to note however, that in both cases only the ownership of the asset is guaranteed, the value itself is not guaranteed. In both cases the value of the asset is based on pure market mechanism, namely on supply and demand. It is certainly true that at the moment the price volatility of a real estate is much smaller than at a cryptocurrency, however this might change on a long run because of the network effect, as cryptocurrencies will be reaching mainstream adaptation.