What is money?

Money is a transferable IOU from society for past goods and services rendered. This means a person who has one billion dollars is someone we collectively agree has done so much for society that we owe them the equivalent of 17 thousand man-years of labor (assuming $20/hr, 8hrs/day, 365days/year).

What is the point of money?

The point of money is it helps human cooperation to expand beyond our monkeysphere limits. It is one of the technological innovations that allowed trade to expand beyond our normal trust limits, and trade is cooperation.

What are the functions of money?

Money does this by providing the following functions;

1. medium of exchange. Something that can be exchanged for things of value, facilitating trade.
2. unit of account. A scale that can be used to compare the relative value of completely different things.
3. store of value. A way of storing accumulated wealth that can be redeemed for things of value later.

Note these are the functions of current forms of money. There is no reason why we can't change or extend these for a DigitalCurrency to make it even better at expanding human cooperation, which is the point. Why don't we add;

4. distributes value fairly. Accumulates, decays, and distributes value in a way that is considered fair.

What are the Characteristics of money?

Money is variously quoted as having between 4 to 8 characteristics, with the most common 6 being;

1. durability - must not easily deteriorate, disappear, or wear out.
2. portability - it must be easy to store or transport.
3. divisibility - it must be easy to divide it into pieces without loosing value.
4. uniformity - different equal sized pieces must have the same value.
5. limited supply - there can't be too much of it.
6. acceptability - it must be widely accepted.

Note these characteristics contribute to satisfying the accepted functions of money, but not always very directly, and it's not entirely clear how they contribute to expanding human cooperation. It's possible a completely different set of characteristics could do the job better. At the very least durability and limited supply need to be qualified to ensure it provides a stable unit of account, and perhaps so that it is fairly distributed.

Money is not real wealth, it is just a symbolic token for real wealth. It doesn't have value in itself, it simply reflects the value of the real wealth (assets, goods and services) it can buy.

Any currency is actually backed by everything you can buy with it. Backed currencies simply guarantee you can at least "buy" what it is backed by. That you can also buy other things with it means the currency has value beyond what it is backed by, which explains the value of partially backed or even fiat currencies. The more broadly a currency is accepted and used for trading real wealth, the more value the currency reflects.

For a currency to be stable, the amount of money must match the amount of real wealth it can buy. This means the supply must expand and contract to reflect the real wealth available as it is created, distributed and consumed.

How can a DigitalCurrency be better?

The current national currencies and payment systems are actually pretty good, and are working fairly well at supporting global trade. Humans are cooperating on a scale never before seen, and the payment side of trading doesn't feel like much of a problem. Could a digital currency actually be better, and if so in what ways?

I don't think a digital currency can improve things a huge amount, but it could be a little bit better in the following ways.

Wealth lifecycle

Wealth is created, transferred, and consumed. Note that transferring wealth is itself a form of wealth creation, since it moves an asset to where it has more value. We can assume each transaction represents both wealth transferred and created, and that some of that wealth will be consumed.

In a stable non-growing economy, on average the wealth created per transaction will equal the wealth consumed.

Wealth is consumed both directly (food eaten) and through assets aging. We can assume that wealth (and thus the currency that reflects it) is consumed overall at a "depreciation rate". Alternatively we could assume that there is a consumption rate per person, plus an additional depreciation rate for asset aging.

Demurrage taxes

Demurrage rates reflect should correspond to asset depreciation rates, so that storing your wealth in currency is relatively effective as storing it in other assets.

ATO depreciation rates are 37.5% for "low value assets", 30% for "simplified business assets". For most other assets they calculate the depreciation rate as 2/life, where the effective life is between 3~30 years depending on the asset type. Note the "simplified business assets" depreciation rate corresponds with an effective life of 6.666 years. A 10 year rate corresponds to a 20% depreciation rate.

Note increasing the demurrage rate increases the currency "burn" rate and encourages spending, acting as an economic stimulus. This suggests it should maybe be dynamic in response to economic indicators to try and stabilize economic activity. However, making it too volatile undermines the currency's predictability. So if this is made dynamic, it should change very slowly.

Demurrage stimulus effects are implemented in most currencies using inflation rates. The Australian Reserve tries to peg inflation between 2~3% for predictability and to provide enough stimulus. This is significantly less than typical asset depreciation rates, which suggests that it's better to sit on currency than assets. However, this is complicated by banking, interest rates, and the returns for actually using assets. In practice "sitting on currency" actually involves putting it into a bank for interest, and the bank loans it to others who invest it in working assets. So this is equivalent to investing it in "bank assets".

Perhaps a reasonable rate is somewhere between the 2~3% target inflation rate and a 20% asset depreciation rate, or around 10%?

Transaction taxes

Transaction taxes implemented into the currency makes tax avoidance impossible, and discourages wash-trading attacks to create inflated transaction stats.

Wealth being created is a profit. Since transactions represent both wealth being transferred and created, we can assume a percentage of each transaction is profit.

If we assume every transaction represents a 10% profit, a 50% income tax rate would mean a 5% transaction tax rate. Transaction taxes should be taken out of the received value, so a sale for 100.00 hours should net the recipient 95.00 hours.

Note increasing the transaction tax rate increases the currency "burn" rate and increases economic negative feedback. It could be made dynamic in response to economic indicators to try and stabilize wealth distribution. However any change in tax rate represents an immediate change in effective stored value (as prices will probably rise to account for the increased taxes), so its rate of change is effectively another demurrage effect. It can have economic stimulus effects, encouraging people to spend when it's low and save when it's high, but only if it's volatile. If it is too volatile it undermines the currencies predictability. If it is dynamic, it should change very slowly.

It also acts as a kind of "backlash/damping against currency trading volatility. Since trading the currency costs, it's only worth trading if the value gained is greater than that cost.

Transaction fees

A per transaction fee represents the cost of performing/recording the transaction and discourages transaction-spam attacks using a huge number of small value transactions. Note that these fees effectively limit how small micro-transactions can be, as transactions below a certain size become too costly. A transaction fee of 1 second means transactions for less than 1 second cost more than 50% in fees. Transaction fees should be paid by the source of the payment to discourage them from making payments using many small transactions.

If arbitrary sized data can be stored with transactions (like receipt details, etc), then it probably makes sense to make the transaction fees a function of the transaction data size to better reflect the transaction cost.

Basic Income

New currency should be injected into circulation using a basic-income style distribution to all "people". This represents both a "tax rebate" to redistribute taxes paid, and a universal dividend based on the overall economy's growth.

The amount distributed should be varied to ensure that currency in circulation reflects the available real wealth, and thus stabilizes the currency. It should be distributed per person as a rate over time, where the rate is dynamically adjusted in response to economic indicators to stabilize the currency.

Note a high basic income rate increases the currency "spawn" rate and increases economic negative feedback. In a system where the net wealth is constant it should match this:

I = (D * C + T*V + F*t) / P

Where:

I is income per year per person
D is the demurrage rate
C is the total currency in circulation
T is the transaction tax rate
F is the transaction fee
V is the annual transaction volume
t is the number of transactions
P is the number of people

Which if we assume the transaction fees are negligable works out as:

I = D*w + T*v

Where:

w is the average currency per person
v is the average transaction volume per person.

For an economy that is stable (not growing or shrinking), the average transaction volume will be equal to the average income (including basic income) minus demurrage taxes, which means the basic income will be:

I = D*w + T*(i - D*w)

where:

i is the annual income (including basic income)

If we assume peoples average currency held is small (say <1/12, or one month of income) compared to their annual income, the basic income will tend towards T*i. So if T is 5%, then the basic income will be 5% of the average income.

It might be more accurate to assume on average people have accumulated 1 years average income worth of real wealth, and since all currency must reflect all wealth, we must have w=i. This gives I = (D + T - TD)*i, so basic income will approach T+D of the average income, which for T=5% and D=10% is 15%.

In Australia the average income is $80K, and newstart unemployment benefits are around $15K, or ~19%. So to achieve a more realistically fair basic income, perhaps the transaction tax should be 10%?

Currency stability

Rates/taxes/fees reduce the amount of currency in circulation. Basic Income increases the amount of currency in circulation.

New currency needs to be created and distributed to reflect new wealth is being created and currency "burned" taxes/fees.

Account types?

Should all accounts be treated equal, with all accounts paying transaction taxes and getting basic income? Should some accounts be exempt from basic income? Should transfers between some accounts be exempt from transfer taxes?

Should we support a difference between identities and accounts? So only "people" get basic income into their nominated account. Should transfers between accounts owned by the same person be exempt from transfer-taxes?

What about people with multiple accounts for managing their wealth and safety using "cold wallets"?

What about shared accounts for families with multiple access?

What about shared accounts for companies that require multiple signatures?

What about "bank" accounts? Do we even need such a thing?

Identities and Sybil attacks

How do we even know if someone is really a "person"? Should we even care? What if an individual with multiple aliases really does contribute multiple identities worth of economic activity? How do we protect against Sybil attacks doing "identity farming" to game the system? Note high transaction taxes/fees make identity farming less profitable... can we make identities "cost neutral" somehow? Can we somehow make basic income scale relative to "economic contribution" and/or trust networks to identify "people". Interesting reading;

• A Review of Proof of Personhood protocols compares lots of protocols/implementations for identities.
• Circles: A decentralised Universal Basic Income platform based on personal currencies Uses per-identity currencies and trust statements with value-limits to implement riple-style transitive payments via this trust network. This means every identity mints its own currency at a controlled (and inflating!) rate, but can only spend as much as its trust network allows. So sybils mint as much money as everyone else, but cannot spend it. Uses inflation for a demurrage effect with no feedback from the market, so it's value tends to be deflationary but is unstable, so it fails the "more stable" objective.

Global vs Local markets and trust

Trust is relative; an individual's level of trustworthiness can be different for different people. If trust is used to identify "people" eligible for basic income, and we want a globally agreed distribution to each account, then we need a globally agreed level of trust. How do you calculate that if trust is relative? A trust network's protection against Sybil attacks depends on flows of trust from trusted sources... how do we globally decide what sources are trusted?

Do we really want a globally agreed balance/value/etc? Sometimes market partitions exist for a reason, and reflect regional differences in market conditions. Should we allow markets to naturally partition and differentiate along trust boundaries? Should these be hard boundaries agreed on by each market's members, or soft boundaries with trust gradients that vary relative to each individual's viewpoint. If the currency's demurrage, transaction, and basic income all dynamically vary according to market economic indicators, and the market boundaries vary for each individual's viewpoint, then the currency attributes all vary with each individuals viewpoint. This means every balance varies from every viewpoint.

Is this too much variability to work at all? If the point of a currency is to achieve global cooperation, then perhaps we really do need global agreements on values and balances.