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Nxt Discussion => Nxt Technical Discussion => Nxt Core Development => Monetary System => Topic started by: bob_ggg on April 22, 2014, 04:50:30 pm

Title: Creation of equivalent of fiat money in the crypto world
Post by: bob_ggg on April 22, 2014, 04:50:30 pm
The evolution of NxT could support some interesting business cases. I would like to review one of them here. I apologize if it does not fit this topic and please feel free to repost to an appropriate area. Let us start by defining the problem.

Creating a fist currency in the crypto world
As a business owner, I have to pay my bills and salaries to my employees. These payments must be carried out in fiat currency. On the other hand, I would enjoy immensely the benefits offered by crypto currencies, but I can not afford the cost of volatility.
For this reason, I would be interested in theCryptoEUR (or CryptoUSD, for that matter given that Forex markets have almost infinite liquidity and conversion would be trivial....)
How does it work from the business owner standpoint?
I am offered coins that are stably worth 1 Euro. I pay to a Forex service a given amount in Euros and I am credited a number of tokens representing (stably) 1 Euro.
Under the hood
From  financial stand point, the overall mechanism would work as follows:
Starting from this sketchy description, I think that the Nxt ecosystem has (most of) the ingredients:
If anyone is interested, I would like to develop this exercise and see how it is mapped on the existing and future implementation of the NxT environment.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: PoofKnuckle on April 22, 2014, 05:09:09 pm
I would actually move most of my savings into crypto if it weren't so volatile. If I knew I could put in $100, and a few months from now it would still be $100, I would jump on that.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: ChuckOne on April 22, 2014, 05:11:48 pm
So the question is: why do you need to return?
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: PoofKnuckle on April 22, 2014, 05:12:35 pm
So the question is: why do you need to return?

I like to eat.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: bob_ggg on April 22, 2014, 05:15:06 pm
So the question is: why do you need to return?
Prices are set in fiat. It is very difficult, if not impossible, tu manage a business in cryptos.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: PoofKnuckle on April 22, 2014, 05:17:06 pm
So the question is: why do you need to return?

I like to eat.
Slightly more seriously, if I could pay for everything with crypto, there would be no need to come back out into fiat. But I need dollars, since I live in a dollar-based economy.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: ChuckOne on April 22, 2014, 05:26:34 pm
I see.

I think you understand that if you blindly accept facts like ''Prices are set in fiat" to be cast in stone, cryptocurrencies as a concept will never succeed.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: BitVenturerr on April 22, 2014, 05:28:12 pm
This stable cryptocurrency then needs to be backed by the dollar, to be the cryptodollar.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: ChuckOne on April 22, 2014, 05:29:49 pm
I do not think so. The stability of a currency stems from trust.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: PoofKnuckle on April 22, 2014, 05:34:33 pm
I see.

I think you understand that if you blindly accept facts like ''Prices are set in fiat" to be cast in stone, cryptocurrencies as a concept will never succeed.

I think they already have succeeded, for some purposes. I just want to use them for the purpose of saving, which is a challenge as long as 1) cryptos are volatile relative to fiat, or 2) I can't live a normal economic life with just crypto.

I would prefer a solution to the second case, but I'll gladly take a solution to the first. But how to get that level of exchange stability?
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: ChuckOne on April 22, 2014, 05:47:44 pm
Is the solution not obvious? You have named it already.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: PoofKnuckle on April 22, 2014, 06:37:02 pm
Is the solution not obvious?

Not to me.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: ChuckOne on April 22, 2014, 06:42:25 pm
I think they already have succeeded, for some purposes. I just want to use them for the purpose of saving, which is a challenge as long as 1) cryptos are volatile relative to fiat, or 2) I can't live a normal economic life with just crypto.

1) without 2) is not possible.

The stability of a currency stems from trust. Trust of being able to buy things in exchange for that currency.

Furthermore, trust is relative. Currency is not absolutely volatile/stable. It is volatile/stable w.r.t. another currency. The price reflects the relation between the two amounts of trust.

Can you see the solution now?
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: PoofKnuckle on April 22, 2014, 07:12:45 pm
I think they already have succeeded, for some purposes. I just want to use them for the purpose of saving, which is a challenge as long as 1) cryptos are volatile relative to fiat, or 2) I can't live a normal economic life with just crypto.

1) without 2) is not possible.

The stability of a currency stems from trust. Trust of being able to buy things in exchange for that currency.

Furthermore, trust is relative. Currency is not absolutely volatile/stable. It is volatile/stable w.r.t. another currency. The price reflects the relation between the two amounts of trust.

Can you see the solution now?

Nope.

I mean, I think I see what you're getting at. I think that if cryptos are someday widely used, we can expect more stability against other currencies, and they become a savings instrument in their own right when they can be widely used.

But I don't know that 2 is necessary for 1. I am kind of taking out of my ass at this point, but I have the gut feeling that there is some clever way to make this possible without waiting for the rest of the world to catch up with us early adopters. I don't know what that would be though, and I know I might be completely wrong.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: ChuckOne on April 22, 2014, 07:28:04 pm
Currencies (again no matter if fiat, crypto or whatever scheme you might come up with) do not become widely used someday just because.

They become widely used someday because people can buy things in exchange for it; especially things that you require daily (you have named it already: food).

If you can buy the same thing in two currencies, it will stabilize the forex price. If not, it will destabilize the forex price (because it is not clear what the price for the goods would be in the other currency).

So, to solve your problem, you need services utilizing Nxt in one way or another to add real-world value to it.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: ChuckOne on April 22, 2014, 07:30:08 pm
Well, btw. that would be the long-term solution to your problem.

Short-term solution: place huge buy and sell orders.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: ChuckOne on April 22, 2014, 07:37:18 pm
Both solutions are actually not that different.

Somebody A building a service on top on it have expenditures and takes a risk to loose his stake.
Somebody B placing huge sell and buy orders looses as well.

A is investing. B hopes that somebody else will do the job if he is interested in Nxt long term.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: bob_ggg on April 22, 2014, 10:04:51 pm
The problem I suggested is very simple in the financial world. If you trust your financial institution, there are synthetic contracts that have exactly the behavior I proposed.
So, it is not a matter of "how" (relatively simple financial engineering, we can discuss about it if anybody is interested), but rather to understand if the contracts and the other tools that will be available in Nnt will provide support for this level of (financial) engineering without trusting any institution. BTW,  the only source of liquidity is currently BTC. Forget about using Nxt as the primary currency.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: jl777 on April 22, 2014, 10:24:47 pm
The problem I suggested is very simple in the financial world. If you trust your financial institution, there are synthetic contracts that have exactly the behavior I proposed.
So, it is not a matter of "how" (relatively simple financial engineering, we can discuss about it if anybody is interested), but rather to understand if the contracts and the other tools that will be available in Nnt will provide support for this level of (financial) engineering without trusting any institution. BTW,  the only source of liquidity is currently BTC. Forget about using Nxt as the primary currency.
What are the fundamental "contracts and other tools" that you would need?
I am about to experiment with creating linked NXT transactions. It can be for NXT or NXT assets

Once we can create txA <-> txB, in a trustless way, I think we can implement most of these "contracts". I will make a page where you can put in transaction details for your transaction and for the counter-transaction. The other party does the same (mirrored), both click a button and the respective transactions will occur.

At least that is the plan

James
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: jl777 on April 22, 2014, 10:26:24 pm
With the upcoming monetary system, it will be possible to create a BTC with a put option (in NXT). Not sure if this is of any help, but the value would be the greater of BTC or the set amount of NXT. I think that has to be less volatile than either alone.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: bob_ggg on April 23, 2014, 01:32:50 pm
A put option is an expensive way to obtain this result. In this way, you are keeping the benefits of an upside move of the BTC while being protected against its drop. IMO, all contracts should have the possibility to be paid in BCT, as this is the only currency providing enough liquidity.

A cheaper option would be based on the following ingredients:
These are just the basic ingredients that would allow you to create such a "currency".  If we agree that these steps are OK and we not missing some obvious info, I propose that we examine in full detail each one of these steps.
BTW, if you have this mechanism in place, you can obviously have coins representing anything of value that is currently traded.
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: bob_ggg on April 24, 2014, 08:49:26 am
James, here is the structure of a contract that would fit the purpose.
For simplicity sake, I use the concept of Contract for difference (CFD) as defined for instance here http://en.wikipedia.org/wiki/Contract_for_difference

The contract could be formalized in this way:

CFD (amount, oracle, long/short, expiration, margin_start, margin_minimum)

The meaning of the parameters is the following:
This is the way I would use to cover some of the actions required to create a fiat currency within the crypto domain.
An essential assumption is that the assets involved in the contract are in some way locked. If this were not possible, I do not know how to handle the counterparty risk without a third, trusted party.
Is this doable? Is it doable without introducing the complexity of smart contracts?
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: jl777 on April 24, 2014, 10:08:46 am
James, here is the structure of a contract that would fit the purpose.
For simplicity sake, I use the concept of Contract for difference (CFD) as defined for instance here http://en.wikipedia.org/wiki/Contract_for_difference

The contract could be formalized in this way:

CFD (amount, oracle, long/short, expiration, margin_start, margin_minimum)

The meaning of the parameters is the following:
  • amount is the number of units that the seller want to trade
  • oracle    is the data source that provides the information about the price of the asset that is traded 
  • long/short defines if the contract issuer opens a long or short position
  • expiration sets the date when the contract expires; if zero, no expiration is set and the parties can resolve the contract at any time by paying the due difference
  • margin_start is the amount of units of value that will be locked until contract expiration
  • margin_minimum is the minimum amount of units of value required to keep the contract in place; if passed, then the defaulting party undergoes a liquidation of its position and the proceeds are transferred to the other party according to the value published by the oracle
This is the way I would use to cover some of the actions required to create a fiat currency within the crypto domain.
  • Alice wants to transform 10 BCT in Euro, without selling them; she understands that the contract that will be proposed to her will be in the same currency she already has (e.g. BCT) and that when she decides to get back her money this money will be again in BTC. However, the exchange rate vs. Euro, her local currency is now stable;
  • the issuer, bob_ggg, receives the 10 BTC and immediately issues the tokes to Alice and creates a contract for difference based on the value of the asset pair as published by coindesk.com
  • the contract issued is as follows: CFD (10 (e.g. the number of units of value), http://www.coindesk.com/price/ (the address of the oracle; a better choice is to have the value of the unit written in the block chain) , short (here the issuer of the contract says that it wants to create a short position in BCT), 0 (no expiration is specified), 0.3 ( the margin required to the parties to start the contract), 0.1 (the minimum margin required to keep the contract in place; liquidation of the loosing position would be activated by transferring the assets of the loosing position to the winning party)
An essential assumption is that the assets involved in the contract are in some way locked. If this were not possible, I do not know how to handle the counterparty risk without a third, trusted party.
Is this doable? Is it doable without introducing the complexity of smart contracts?
The building blocks I have (or will have soon) are:
NXTsubatomic: crypto <-> crypto trustless exchange
NXTatomic: any NXT tx <-> any other NXT tx
NXT <-> BTC atomic exchange is something I am very close to solving

Peer verified data can create a trusted dataset into the blockchain, I already have some early prototypes for this, but currently it is cost prohibitive at 1NXT per AM. I would like to publish new data every minute.

Enforcing the contract is where I see the difficulty. I can lockup any crypto asset for specific periods of time, but if the final distribution is based on the dataset in the blockchain, then unless the dataset itself somehow directly controlled the disbursement of funds, the party that is losing money can just bail out and avoid the loss.

I have an idea. It will only work for short term instruments and there wont be a 100% guarantee of completion,but both parties will be able to monitor each other in realtime and so as soon as one of them defaults, the other can terminate the deal. The loss of reputation might be enough to prevent most defaults. It will be implemented via software running 24/7, so loss of internet becomes an issue.

Thank you for your post,the more details I have, the better chance of a creative solution.

James
Title: Re: Creation of equivalent of fiat money in the crypto world
Post by: bob_ggg on April 24, 2014, 10:47:23 am
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