As often happens, when I think about the next blog post I would like to write, I come across an article that helps explain my point. In one way, this is really great because it encourages us to find out about emerging cryptographic currencies, and on the other, it proves that many of us are on the same page about what we want these currencies to be able to do, in this case, to craft an inclusive economy based on personally-issued credit within a distributed cryptographic currency system.
NEM/New Economy Movement is a new alt-coin that builds on the concepts implemented in NXT, but takes the proof one step further than Proof-of-Stake by implementing what they term a Proof-of-Importance algorithm.
Proof-of-Importance adds a reputation indicator to the blockchain, which is very useful in preventing Sybil attacks. It also motivates people to become more involved in the NEM Economy.
This connects to the previous generation of complementary currencies which calculated Turnover, the sum of transactions in and out, to determine a user’s creditworthiness. Complementary Currency systems, unlike Cryptographic Currency systems, are systems that allow each member to issue themselves the credit needed in order to complete a transaction, as long as they are willing to accept this credit others have issued to themselves in return.
But this may be about to change. As Blockchain 2.0 currencies use lighter, faster proofs than Bitcoin’s Proof-of-Work algorithm, we inch closer to being able to issue Cryptographic Credit. What would this look like?
Firstly, it would not be centrally-issued credit. For decades, Complementary Currency Systems have allowed their members the right to issue themselves credit in order to, and only in order to purchase items within the system, if you did not already have an existing balance. This allowed people who did not have money, the opportunity to enter into the economy and understand the importance of balanced reciprocal obligation. You can’t just print your own money and add it to your bank account; but if you need to buy something with it, it is available.
Next, there would be algorithmically-defined limits. Complementary Currency systems, using the Mutual Credit model, allow the system’s creator to decide whether there are limits, or preferably no limits. Setting limits arbitrarily comes from and creates an atmosphere of distrust. As long as the seller knows the Turnover (= Trust Level) of the person who wishes to buy from them, there doesn’t need to be a limit.
However, in a Cryptographic Credit Currency System, one’s access to credit would be determined by their Proof-of-Importance or transaction reputation within the system. It’s like starting with the basic card, and upgrading to the platinum card as you participate more in the system. The more you offer and are willing to accept, the higher your rating rises, and the more money you can issue personally.
Thirdly, it would look more Mutual than Hierarchical. Allowing people to issue themselves credit in the course of a transaction means changing the economy from being exclusive, to being inclusive. To date, nearly all cryptographic currencies are exclusive economies, where people need to purchase the digital currency in order to be able to join the system to participate. As mentioned in the above-linked articles, this creates a hierarchy where the top 5% hold the vast majority of the currency.
Fourthly, it would Interest-Free. In ancient times, interest was not charged between friends, family or community members. It was only charged to mitigate risk in non-local, long-distance transactions. Similarly, as the currency is being issued and spent into an economic community, and in a decentralized way, there would be no need for the charging of interest.
Fiftly, all accounts would belong to humans and have identifiable owners. In order to determine reputation, accounts would need to have identifiable human owners. A tool like OneName points in this direction.
Sixthly, there may be a circulation incentive, known as Demurrage. The only cryptographic currency with demurrage is Freicoin. This method of taxing unspent balances ensures that any excess credit slowly circulates back into the system, which prevents hoarding and hierarchicalization, the process by which social hierarchies are created.
Lead Developer Makoto states this very well in his interview with CoinTelegraph:
Coin Telegraph: Why did you start making another cryptocurrency? Do you see any problems in bitcoin?
Makoto: NEM was started to rectify some of the problems with not only the world economy, but also with other cryptocurrencies. One of the problems is of course distribution of wealth. In fiat-based economies, the richest 1% will soon own more wealth than the other 99% of people. In crypto currencies like Bitcoin, wealth is concentrated to such an extent so as to be an existential threat, and other crypto currencies have been similarly criticized.
Some level of inequality is not necessarily a bad thing, and indeed people have significant individual differences, but it can be a bad thing when it hampers equality of opportunity. If one person can dump and destroy an entire currency, then that reduces the opportunity of others.
With NEM, we really want to bring the focus of money back to the people. The world today is one where money is controlled by powerful elites, banks, and governments; at NEM we want to empower regular people and that is why our motto is, “A new economy starts with you.”
There is a similar system that started several years ago, Ripple’s Web of Trust.
Seventhly, the currency would be stable. In order to issue credit into an economy, the currency and its valuation would have to be known, and therefore stable. In previous generation community currency systems, the currency would be pegged to the national currency. In a cryptographic currency, this could be based on a Basket of Commodities such as with Bernard Lietaer’s Terra currency, or another way of maintaining a relatively stable value.
A Step Towards a Cryptographic Currency System
Taking the concepts from Ripple Classic, Ripple, Web of Trust, and Ripple’s Proof of Consensus together with NEM’s Proof of Importance, we can foresee the possibility of issuing credit in an inclusive Cryptographic Credit Currency system.
We may find that more indicators of trust and reputation are needed, so perhaps apps built on the Ethereum or Blockstream platforms with Demurrage will provide the final pieces of the puzzle that will make Cryptographic Currencies essential in our daily lives in the future.
* I look forward to hearing your comments.