Hidden Inflation - Unqualified Opinions

supply distribution is the only "fundamental" metric in crypto

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Crypto Inflation - Maybe the only fundamental metric that matters in 2019.

One of my favorite parts of Bitcoin (now crypto) has always been its experimentation with new monetary models. We’ve tried an annual 2% inflation target in the US for the last 100 years, with intermittent success, while many other countries have failed catastrophically at managing their currencies.

Yet with a rapidly rising debt load, here and abroad, maybe it’s time we tried something else. You know, just in case the existing system blows up.

[TBI Note: That idea is what got me into this industry for sure.]

Bitcoin blew the space of monetary experimentation wide open, much to the horror of Keynesian economists the world over. But let’s get specific, what currency issuance models have we seen arise so far in crypto? There are many nuances, but a few broad strokes. Here are a few:

  1. Algorithmic Supply (aka Basic Rewards)

This is bitcoin’s key innovation; the thing that has never existed in human history before: a credibly transparent money supply and monetary policy. We know with certainty what bitcoin’s supply will be on any specific date in the future. Or at least, what the supply will be at any given block height.

(Don’t @ me about forking to low inflation - no one will call that fork “bitcoin”.)

Whatever you may think of the wisdom of fixed supply, no other monetary system has ever had this credible transparency property. In crypto, we’ve seen many coins imitate bitcoin’s algorithmic model. You may have noticed that we just added “Current Inflation Rate” to OnChainFx for many coins:

Custom OnChainFx Dashboard: https://messari.io/onchainfx/view/340B7D0D

These inflation rates are the annualized rate of inflation calculated by looking at the last 24hrs worth of new on-blockchain supply issuance. As you can see, there’s a huge range. It would be amazing to see a list of central banks’ post similar details!

At first glance, the inflation of a fledgling asset like ZCash may look pretty extreme (48%!), but that’s a blip on the radar compared to other hidden inflation in pre-minted coins/tokens.

  1. Managed Supply (aka Hidden Inflation)

There are many ICO projects running pseudo-monetary networks where new currency is released over time at a token creator’s discretion.

Projects may have *technically* issued 100% of their token’s total eventual supply up front, but merely released a fraction of that into the market. Large chunks - often well over half - may be tied up under vesting schedules (that may or may not be public) and will therefore hit the market in significant cliffs over time. We have yet to see how this inflation-is-zero-until-suddenly-it’s-not model impacts operational networks.

If this information is sufficiently transparent and widely known, we should see the market price it in. But bottom line: there is much less certainty and transparency than in the algorithmic model. Teams with large managed supplies almost always do well when they burn or provably lock-up large portions of their supply for long-term vesting schedules.

See Numerai last week, which cut 10mm NMR from its reserves, and then cheekily added this week, that the goal was to be “decentralized as f*ck.

See also Ripple last year, which skyrocketed after the company announced its intention to escrow 55% of the total money supply:

Chart from Ripple

  1. Community Governed Supply (aka Crypto Cartels?)

Finally, there’s the “we’ll figure it out as we go!” camp.

Ethereum is of course the key example of an asset whose monetary model is in flux by design. From relatively early on, the Ethereum community decided to let the network evolve, and to do ongoing research on economic design in order to, in theory, arrive at a more optimal model long term. Perhaps that will be the case in the end, perhaps not, but anecdotally there seems to be more discussion of the wisdom or carelessness of not having a monetary model well defined up front.

Any cryptoassets which prioritize on-chain governance effectively have this “we’ll figure it out” property as well. When protocol-level upgrades are an explicit design feature, the ‘upgradeability’ of new monetary models falls into that category, too.

We’ll see how the market ultimately rewards flexibility or certainty in crypto monetary models. And how liquidity (or lack thereof) impacts the various tokens with algorithmic, discretionary, and community governed supply schedules.

The punch line to me is that humanity is no longer subject almost exclusively to the century-old status quo.


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News & Analyses

Messari Compression Algorithm

Content and thoughts from around the web as summarized by the Messari team.

🔎 [Analysis] The growing focus on blockchain governance – Chris McCoy

Without a clear, articulated governance structure, crypto protocols suffer from delayed decision-making and implementation as well as contentiousness around the validity of those decisions. Today, a number of forces are increasing the broader crypto communities focus on governance, with implications not only for protocols but the developers, investors and communities that surround them. There are three reasons for the growing focus:

  • The efficacy of the “governance-by-default” approach of Bitcoin and Ethereum is being tested

  • A set of newly live protocols including EOS, Tezos, Dfinity and Decred are putting the governance conversation front and center by offering different versions of on-chain governance that they argue are superior to the off-chain approaches of the other protocols

  • Growing institutional engagement with crypto assets means the importance of governance models is growing

While the problems with today’s governance models are numerous, a few stand out: efficacy and finality in “1.0” off-chain governance models, and plutocracy and populism in emerging “2.0” on-chain models. (Messari | Source)

🤺 [Analysis] Long-tail cryptocurrency is 51% attacked: Vertcoin edition – The Block

While hash rate may go up in absolute terms due to improved ASIC efficiency, hash rate is just a proxy for network security. The key metric to note is security spend, quantifying how much money is spent on mining opex and capex to secure the network.

Websites like Crypto51 track the theoretical cost of attack, while they often don’t reflect real-world constraints of attack, they serve as a useful barometer; particularly with smaller networks that use the same hashing algorithm as larger networks. (Messari| Source)

Quick Bits (Don't read that, I read it for you)

Choke Points (Exchange News)

  • 🏦 Poloniex has announced the opening of trading services for institutional clients. The company, which was acquired by payments firm Circle earlier this year, said Tuesday that it will begin offering institutional accounts, with support for different crypto trading pairs and API interfaces. (Messari | Source)

  • 💰 Crypto trading platform ErisX has closed a Series B funding round that raised $27.5 million, the company said Tuesday. Bitmain, ConsenSys, Fidelity Investments, Nasdaq Ventures and Monex Group participated in the funding round. (Messari | Source)

Startup Signals (ICOs, Cryptos, and Startups)

  • 💁 State Street, one the largest institutional custodians, said there is currently no sense of urgency from clients for the firm to move into safeguarding crypto assets. Despite a high level of interest, none of its clients are looking for the firm to safeguard crypto assets at the moment, according to managing director Jay Biancamano. (Messari | Source)

  • 🤑 Switzerland’s Financial Market Supervisory Authority (FINMA) has introduced a new fintech license with “relaxed” requirements that is applicable to blockchain and cryptocurrency-based firms. The new license allows approved “innovative financial companies” to accept public deposits of up to 100 million Swiss francs, provided the funds are not invested and no interest is paid on them. (Messari | Source)

The Powers That Be (Legal/Reg/Policy)

  • 📝  Leaders from the Group of 20 nations reiterated their pledge to regulate “crypto-assets” as part of a communique released Sunday after a meeting in Buenos Aires. Regulation will focus on money laundering and the financing of terrorism. (Messari | Source)

  • 🚨 Iranian bitcoin trader Mohammad Ghorbaniyan says he’s been wrongfully blacklisted, as he was not aware of the origin of his bitcoin. He was among the wallet holders whose names and blockchain addresses were added to the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) sanctions list last week. (Messari | Source)

Did I miss something?

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Podcast Recap

🎧 ICYMI on the Messari podcast, This week, Katherine sat down with Messari’s own Dan McArdle to talk about the recent downturn in crypto markets. Dan shared his thoughts on what is now the fourth "crypto recession" for him, and where he thinks things might head in the short to medium term.

Listen and subscribe to all of our podcasts— on Apple Podcasts here, Spotify here, and Google play here.

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