COINZ Official

Citizens Online Income New Zealand

Month: July, 2014

Limitations on Cryptocurrency Pegs

It is tempting to believe that a peg between a digital currency and fiat one can be set arbitrary. At the same time, the novel nature of the Kiwicoin project means there is a substantial lack of relevant real world data. While similar projects like Peercoin and Gold Backed Coin can offer antecedents, we are traveling in uncharted territory.

Since the Kiwicoin is intended for New Zealand, many of the cryptocurrency exchanges here are registered as Financial Service Providers, and have limits on how much they can deposit per month. Our initial peg was devised after reviewing these limits, but also with other considerations: to allow for divisibility of our currency, to make a meaningful impact financially, to allow for extra space on both sides of the decimal point, and so on. We also have reserves that we will maintain in case of operational issues.

A peg, in the long term, many not necessarily be required, but at we are going to be deploying it as long as we can for the foreseeable future. Likewise, other countries and regions can learn from our implementation, and to adjust accordingly. We would advise any would be collaborators to mind things like their own country’s financial laws (especially among individual states in the EU and US), the existing cryptocurrency market, potential for misuse, and ways the system could fail. To understand a thing is to know how it can be destroyed, as well as how to repair it.

Of Dynamic Pegs and Digital Politics

A digital currency pegged to a fiat one sounds simple, but in practice can be very complex. For example, the Bitcoin and proof-of-work style communities are very decentralized and prone to volatility compared with other commodities. One of the issues with this is the 51% attack, when a single actor has control of 51% of the processing power of a network. As such, pegs would have to be agreed upon by all actors, something the decentralized network makes unlikely.

Proof-of-stake currencies (such as Peercoin), however, offer alternatives based on “stakeholders” of the currency itself. Interestingly, there is also proof-of-activity, a somewhat hybridized approach of the two. A 51% attack there is difficult and perhaps self destructive, and costlier than the proof-of-work concept. As far as a peg goes, the issue comes with finding people to uphold this, even when selling to each other (also highly unlikely).

The dynamic proof-of-stake structure proposed here offers some advantages. For one, we have a reserve account that represents a fixed portion of all currency of in circulation, updated on a regular basis. If something happens to one address corresponding to the reserve, the reserve simply shifts down the list. Our goal is that the reserve cannot be touched, save by software. If addresses become inactive, they are removed. If new addresses are added, they are accounted for each time the reserve updates.

The Kiwicoin project was built entirely around the idea of an exchange that automatically pegs itself at a particular rate to a fiat currency. A government could print more money to devalue it (and indeed, much devaluation has been going on), but an “inflation gage” program could estimate and try accounting for this. For our basic income initiative, the size of the payout could be adjusted in this case.

Beyond basic income, we are adding another reason to purchase our digital currency. Holders of said currency would be able to hold stake in directly democratic elections, including submitting ideas or proposals. Those elections would determine how to best spend (or save) a fixed portion of the reserves that are converted to cash each month.

The system is essentially an alternative legislature and financial model independent of party politics, arguably a type of consensus based model instead of a representative one. If it can be done for one fiat currency, it can easily be done for others.

Basic Income as Economic Security

Most national economies are indirectly affected by factors beyond control, such as dependence on natural resources (which may or may not be present in said nation in significant quantities), foreign industries, and foreign consumer demand. Whenever a significant economic crisis or vulnerability affects one nation, it can ripple through the region and world at large. Many key and strategic domestic industries may be closed down due to being unprofitable.

That is why a basic income is another level of economic security. It allows an economy to compensate for the lack of external demand, to focus on internal and local demand. “National resource” countries (such as Saudi oil or Australian minerals) depend upon manufacturing countries (such as China) to buy their goods. But if the larger manufacturing economies have no one to export to, the resource economies can slow down. A basic income means that the unemployment that results instead can become another level of security. Instead of turning to crime or radicalism, the newly unemployed could try building entirely new industries.

Dynamic Proof-of-Stake Overview

Bitcoin and many of the so-called altcoins use the proof-of-work concept to generate new units of currency (a process called mining). One of the issues with this, however, is the vulnerability to the “selfish miner” or the 51% attack. Typically, new units of digital currency go to whomever contributes the most processing power to a network.

That processing power is used to verify and encrypt other transactions. Theoretically, if someone contributing a majority of processing power in an altcoin network (say, 51%), they’d be able to start messing with the integrity of other transactions. This recently happened with Bitcoin itself, in fact. The word of the body (the mining pool) contributing that processing power is all the rest of the community really had to go on.

Another issue with standard Bitcoin derivatives is the electricity costs of mining can be rather inefficient. While this has been rectified in some newer altcoins, the standard method of mining can be rather inefficient.

An alternative to this is the proof-of-stake currency, where all (if not most) of the units are generated at first. Peercoin is an example of a proof-of-stake digital currency. This implementation makes a 51% nearly impossible, but is also vulnerable to someone monopolizing the supply.

Enter the dynamic proof-of-stake. The dynamic proof of stake is a slightly different animal, how we intend to implement the Kiwicoin. The main issue is the Kiwicoin is intended to possess a software managed “reserve” account, dependent upon the roster of registered recipients. This registry is perhaps the structure weak point, as well as the reserve (potentially).

The primary idea, however, is that the reserve constantly increases (or even potentially decreases) relative to the total Kiwicoins in circulation. This means a monopoly attack is much harder. The reserve cannot be accessed, save by automated monthly payments. No matter how many are in circulation, the reserve will always be a fixed percent of all the Kiwicoins in circulation.

The Kiwicoin is intended as a basic income vehicle, rather than a conventional digital currency. Despite this, we believe the dynamic proof-of-stake idea can be a contribution the rest of the digital currency community can make use of.

The Geopolitical Strategies of Basic Income

When the concept of “basic income” is introduced, it almost always has to do with discussion of a government-backed program. While COINZ is trying a cryptocurrency inspired program as an alternative, there is a discussion that is largely missing from the basic income blogosphere: the wider geopolitical applications of a basic income. I believe that a basic income is not only a useful tool for stabilizing and equalizing a highly-stratified economy, but also a formidable weapon in fourth generation warfare.
Fourth generation warfare (4GW) focuses on strategies used by swarms of weaker individual entities to achieve aims against more powerful opponents. Given the costs (human, political, economic, and otherwise) of conventional military action, I believe that 4GW tactics will be increasingly adopted by the Great Powers. The Cold War and War on Terror merely accelerated this adoption.

For example, one can see the Middle East and Ukraine as proxy-wars that have escalated beyond control. Many of the questionable groups used as proxies often have aims of their own incompatible with their opportunistic sponsors, but geopolitical actors continue such support in the off-chance that their perceived enemy is reeling.
I believe that such Cold War logic yields only mutually harmful escalation, disruption, and increasing threats to all parties involved. That also begs the question: Is it possible for a Great Power (or other geopolitical or economic actor) to achieve their aims in a mutually stabilizing way?

The basic income has such strategic applications. Imagine if one nation or entity were to (overtly or covertly) create a digital currency and peg it to a neighbor’s fiat currency at a fixed rate. Personally, I think a dynamic proof-of-stake currency would be ideal for the job. This would allow the nation that initiated it to gain economic and political leverage over their neighbors. By funding a neighbor’s citizenry, you’d gain a market with demand for your products and services (one favorable to you), the chance of their government obeying your interests, and lastly, the ability to disrupt that stability (but ceasing payments or adjusting the peg) if said government was not to your liking.

Just be sure you do the same to your own citizens before someone else does. Even if it’s not a government, per say, it could be a nonprofit, corporation, or even a standard false front (such as a GONGO).

I can imagine a number of such scenarios that such a program could be advantageous:
-The United States could use such a program to retain stability in key foreign markets, independently of the dollar’s status as a world reserve currency.

-Russia could use this to leverage and create demand for its natural resources by doing this in China or Europe.

-Singapore could do this on neighboring southeast Asian states to ensure it remains a regional financial sector and create new opportunities for its businesses.

The list goes on, but the basic principle is sound. Such investment was previously done with fiat currency to line the pockets of various politicians or warlords/dictators, but regimes can be quite fragile in an era of 4GW. The basic income approach allows you to literally bribe every citizen in the country for something akin to a few thousand dollars on your part (to initialize software and servers). You gain stability and prosperity, and wrap the world economy around your finger.