am continuing to log my thought processes regarding my current project, and whenever I have opportunities to discuss them, as my friend Andrei is always happy to provide, I bounce the ideas and he bounces back his responses and thoughts and it is often very productive.

The question that has been slowly coalescing in my mind, is based on the crazy spikes that pretty much appear on every blockchain currency price curve in their early phases. In fact, so many altcoins exist because new coins produce this crazy price curve, and you can pump and dump it even if it's just purely a rebrand of another coin (with open source code).

So, I made some notes of the ideas that came to me regarding this question, and I am composing an expression of the complex of ideas here.

Last little note: I think that the final ingredient for a killer cryptocurrency is a credit market. This regulates the demand to hold and demand to spend, and allows the economy to handle rapid changes in supply. People will naturally do it, but I think that a blockchain with a monetary token should have a way to deposit it and be paid interest on loans made with it somehow.

Starting from Scratch

Firstly, let's imagine the scenario, where only one witness and account exists on a blockchain. It cannot in fact make any transaction on the Ledger because there is no other account to transfer to. Does the account get an allocation of new currency tokens when it is created?

Well, the Steem Whitepaper puts together a pretty compelling argument towards eliminating transaction fees, by requiring a minimum balance, and by restricting the rate at which accounts can make new transactions, to stop spam. I think mainly the consensus rate limit is all that matters. The losses in the system I think come from an inappropriate issuance rate.

Effects of supply rates of currency and price fluctuations

Without exception, all blockchains operate flat supply curves, though they can be altered by some schedule, such as the biannual halving of mining rewards in Bitcoin. Steem works on a 9.5% annual new token issue rate now, which is a lot better than the old 100%. But probably only because it has been reduced, and it probably should be continuously reduced.

100% new tokens per year from the first year onwards does not actually produce a flat supply curve. If you add 1 token a day, and it really does not matter what number you choose for the daily addition, and it does not matter if you make those issues progressively, say hourly, or every minute, or whatever, by scaling the time versus issue rate, the supply has a curve that can be illustrated in the following number sequence:

Sequence Total
1 1
2 3
3 6
4 10
5 15
6 21
7 28
... (and so on)

The second number plus the first of the next row adds to create the second number on the next row.

While this sequence is kind of interesting, what is important about it is the inverse. The supply of tokens increases by this rate, and conversely, the value (with the price being equal) is that the tokens lose this much value per new issue, by the ratio of the proportion of new versus existing tokens.

A flat issue curve produces a constantly devaluing share of the existing tokens with each new addition.

In fact, to make a true 'flat supply curve', you have to constantly reduce the amount you add to the pool, it can never be truly flat, but the new token issue can easily be overtaken by the rate of adoption - by which I mean the exchange of another token of another monetary system, for a token of this new monetary system. When more tokens are wanted than exist, the price spikes upwards, and vice versa.

Further Limits on Supply

If you conceive of a supply curve as instead of being pegged to time, but rather, pegged to the rate of transactions, you come to a scheme where in this early phase of adoption, when maybe many block schedule timeslots may pass but nobody puts any data into it, why should any new money be issued? And to who? What value did they provide to anyone else?

When trade is sparse, new coins are issued slower. When trade is busy, new coins are issued faster, and in proportion with the number of transactions.

The rule that works here for controlling supply that aims to minimally disrupt the price calculation, and eliminates the bubbling out in both upwards and downwards direction in price far beyond standard deviations, is to peg new issuance to transaction rates. Each transaction, the size, divided by the total supply, multiplied by the 1/x² curve of issuance per size of transaction, will produce a supply increase that closely tracks the interest and activity in the network.

Or in other words, like you see with price/volume relationships, you see that volume is the biggest factor controlling the movement of price. Strong movements on low volumes tend to be far outside of the consensus value, and tend to return to a median level, through an up-and-down swing. If volumes themselves dictated the rate of issue, the new supply would keep close track of the amount of demand for use of the currency, and the price would not fluctuate because of the differential between supply and use.

I believe that a currency issued according to this kind of rule would track very closely with the prices of commodities, because these commodities are traded for the currency, and new currency is only issued as the demand to trade the currency for commodities. So the issuance of new currency should be mathematically correlated to the number and size of transactions, and then the value will tend towards remaining the same against the volume of commodities it is traded for.

Closing Comments

The process of the introduction of a new monetary system is something not well studied as yet, because, simply, not many currencies have really been invented, and it is only since the appearance of Bitcoin that suddenly there is a lot of new currencies and each one has different theories about issuance rates.

So the various coins and their markets and the curves of their prices are very interesting data for discovering recurring patterns that correlate to issuance patterns. I think that every cryptocurrency has that initial pump at the beginning, even Bitcoin did, although it took some time for enough money to come in to bring it to the limitations of the market and the underlying correspondence between that and the natural tendencies of people in marketplaces, for it to come to its first crisis.

Really, this initial flush should be regarded as a sign of distress. It indicates that the market does not adapt smoothly to the supply change that the currency has.

I think that both progressive, and high-resolution reduction of new tokens, that decelerates over time, and the elimination of currency issuance not corresponding with market activity would produce a cryptocurrency that starts working properly the moment two accounts start making transactions with each other.

My hunch is that the rate of transactions gives you a foundation for knowing how much demand there is for money at all (Velocity, in Economics jargon), and that with a blockchain, you can precisely allocate new issuance of currency, in perfect correlation with transactions.

If new money is issued in step with the demand for money, it is far less likely to suddenly change in value and build inertia that leads to price swings. It will tend downwards as the rise in transactions consumes the demand for the money, and upwards as the demand for the currency drops, which will naturally equalise supply and demand for the currency, like an amortiser spring in a car, and that will produce smoother price changes.

This early phase has not been well studied or characterised in existing economics literature. In fact, it is still apparently up for debate whether barter was first and money came after, or if in fact money is a system that lives inside our brains as a ledger of transactions, and gives birth to various ways to increase the trust and decrease the unreliability of the money. But I am quite sure that humans invented money as a way to eliminate mischief in trade as they increased the number of counterparties they dealt with, and this would even start to occur within the size of a village, 100-200 people.

I am very keen to get other people to point out factors in this scheme that counter my conclusion, so if you see an error in the logic of my proposition, please pick at it to your hearts content. I want to understand a little understood element of economics to do with the inception of new moneys, that I believe is behind the pump/dump bonanza of cryptocurrencies up to now.

A currency supply that matches demand better should lead to a currency that tends towards slowly dominating transactions. Adoption is what we all want. How do we make it happen?

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We can't stop here! This is Whale country!

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