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Modelling The Economics Of Cryptocurrencies

Long Finance WebinarTuesday, 4 April 2017, 13:00 to 14:00 BST

(presentation starts at 13:02)

@longfinance

Agenda

13:00-13:0513:05-13:25

13:25-13:35

13:35-13:40

13:40-13:55

13:55-14:00

WelcomeIntroduction “Cryptocurrency Economics”–Michael Mainelli, Z/Yen GroupPresentation “Modelling the Economics of Cryptocurrencies” – Matthew Leitch, Z/Yen Group

Expert discussion – Dr Dionysios Demetis, University of Hull

General discussion, Q&AsClosing remarks

“Cryptocurrency Economics”

Michael MainelliExecutive chairman

Z/Yen Group

Introduction

♦ Special – City of London’s leading commercial think-tank♦ Services – projects, strategy, expertise on demand,

coaching, research, analytics, modern systems♦ Sectors – technology, finance, voluntary, professional

services, outsourcing

Ø Independent Publisher Book Awards Finance, Investment & Economics Gold Prize 2012 for The Price of Fish

Ø British Computer Society IT Director of the Year 2004 for PropheZy and VizZy

Ø DTI Smart Award 2003 for PropheZyØ Sunday Times Book of the Week, Clean Business CuisineØ £1.9M Foresight Challenge Award for Financial £aboratory

visualising financial risk 1997

Z/Yen

“Money is a matter of functions four:a medium,a measure,a standard,

a store.”

Functions Of Money

Self-referential system upon which all our analysis is based:

♦ What does GDP mean?♦ Are competing

currencies good or bad?♦ Should money be a long

term store of value?

The Eternal Coin

[Source: http://illusionsetc.blogspot.com/2005/08/moving-mobius-strip.html]

Money As Technology

Money

Fiatcurrency

Commontender

Backed

Unbacked

Commoditymoney

Composite

Baskets- currencies

- commodities

Representativemoney

“Tokens of indebtedness are social desires frozen at a point in time –

tokens depend on the future persistence of the community and

its values.”

“Money is a technology communities use

to trade debts across space and time.”

Digital CurrenciesPrivate Digital Currencies ♦ Combine new payments

systems with new currencies that are not issued by a central bank

♦ Cryptocurrencies decentralised and require competitive cryptographic proof of work (or of stake) to add blocks (of transactions) to the ledger (blockchain)

♦ Examples: Bitcoin but also Ripple, Litecoin, now DasCoin

Central Bank-Issued Digital Currencies ♦ Central bank granting

universal, electronic, 24x7, national-currency-denominated and interest-bearing access to its balance sheet, using distributed ledger technology

♦ Examples: none yet, Bank of England is considering the possibility

[Source: Bank of England]

No Trusted Third Parties

Single Trusted Third Party

Efficient

Inefficient

MasterNode

SupervisorNodes

MajorityNodes

CollectiveNodes

FreeforAllNodes

BitcoinEthereum

Ripple

CentralDatabase

‘Woven’Broadcasting

Mistrust Costs Coins

Paper

AltCoins: Developing & Improving

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♦ A convertible store of value unit within a digital asset system

♦ Key featuresØ From fiat currency or Bitcoins > Cycles > DasCoin (no

pre-mining or pre-distribution of coins)Ø Authentication through licensing and KYCØ Cycles can be used to purchase products within the

ecosystem e.g. payment system, app, exchange services etc.

Ø Supply of DasCoin is capped (c. 8.5 billion units)♦ Hybrid features

Ø Permissioned blockchain (to be independently audited)Ø Centralised emission of coins, yet distributed network,

decentralised ecosystem

DasCoin

DasCoin

USER

License(differentlevels)

VaultAccount(incl.User

information)

BuyswithEuros orBitcoins

AuthenticationKYC

CYCLES

DASCOIN

Digitalproducts&servicesincl.

tradingexchange,payment

solutions,appdevelopment,

authenticationetc

Use?

Yes

No

DasCoin:stepbystepprocess

WalletAccount

EXCHANGE

Questions To Be Considered

♦ Equilibrium assumption – it can be modelled

♦ Using existing economic activity rates to set exchange rates

Theoretical Basis For Modelling

Timeframe BalanceSheetand/orIS-LM

ExchangeRate Quantity TheoryofMoney

Short Statisticalcorrelation

Simple rate MVT =S (p. q)=pTqplus‘distribution’

Medium Econometric Inflationary andinterest-rateexpectations,termstructure

Monetarypolicy

Long Politicaleconomy

Purchasingpowerparity Politicaleconomy,gametheory

♦ Purchasing power parityØAdvertised prices

♦ Money supplyØ InflationØ Interest rates

♦ Significance of money markets♦ Resource efficiency as a payment method

ØCryptocurrencies: computing effort and competitive ‘make work’ associated with block validation

♦ Methods of estimating exchange ratesØFisher equationØSimulated currency exchange

Theoretical Considerations

“Modelling the Economics of Cryptocurrencies”

Matthew LeitchSenior Researcher

Z/Yen Group

Presentation

♦ Agent based♦ Discrete time steps♦ Implemented in R♦ Designed to address the huge uncertainties

involvedØMultiple runs to allow Monte Carlo simulationØSystematic experiments varying parameters

Prototype Model Design

♦ A set of merchants♦ A set of customers♦ A currency exchange between the crypto-

currency and Euros.♦ Also, a set of goods, offered by merchants and

bought by customers♦ With prices, always in Euros and sometimes

also in the crypto-currency

The Agents

♦ Merchants decide if they will offer crypto-currency prices and set them

♦ Customers make purchases, choosing the best price for a good where there is a choice of currency

♦ Everyone decides how much crypto-currency they want to hold and buys/sells on the currency exchange

♦ The currency exchange adjusts the price of the crypto-currency for the next day

The Daily Cycle Of Activity

A Single Trial

♦ Trial: A sequence of days representing one possible future

♦ Simulation: Multiple trials done to get a distribution of results (i.e. Monte Carlo simulation)

♦ Experiment: Multiple simulations to compare results of manipulating parameters systematically

Multiple Trials

A Simulation

♦ Even with the crude prototype it is easy to see that:ØThe extent to which people decide to

participate is crucialØThe extent to which they wish to hold stocks of

crypto-currency is crucialØAdvertised prices in the crypto-currency

influence behaviour and crypto-currency value

Early Observations

Dr. Dionysios DemetisLecturer in Management Systems

University of Hull

Expert Discussion

Discussion

?

♦ In what ways do you think that valuing cryptocurrencies is different from valuing fiat currencies?

♦ Are there other theoretical approaches worth considering?

♦ What questions should this model answer (that have not yet been considered)?

Discussion

Michael MainelliExecutive chairman

Z/Yen Group

Concluding Remarks

Some Of Z/Yen’s MDL Research

♦ Slides to become available on event page♦ White Paper to be published in May ♦ Conference “Governance and Auditing of

Distributed Ledgers/Blockchain Systems”, London, 23 May 2017ØFor more information, contact Simon Mills

(simon_mills@zyen.com)

Next Steps

♦ On this project - http://www.longfinance.net/lf-research.html?id=1071

♦ DasCoin - http://dascoin.com and http://dascoinexplorer.com

♦ Z/Yen’s work on MDL -http://www.zyen.com/what-we-do/mutual-distributed-ledgers.html

♦ Long Finance - http://www.longfinance.net

More Information

Thank you!

“Get a big picture grip on the details.”Chao Kli Ning