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Ponzify Devcoin!

(This article has to be read as a theoretical work about Devcoin, than as a call to action)

Devcoin is a cryptocurrency different from the others because it involves something like a human proof of work in the generation scheme1). Unfortunately, maybe, the human proof of work is not involved in the deep structure of coin mining, as is the computational proof of work for Bitcoin, because its functioning is not decentralized, but, from a strictly economic point of view, it does not matter a lot. We can compare the Devcoin generation program ‘s economics to Bitcoin mining, characterized by a certain development of investments, incentives and return.

1 proof of work as a source of value: since Bitcoin requires energy and hardware consumption, one should expect the miners to hoard the coins if the price falls under their production cost. Similarly we should expect devtome writers to hoard the coins if the returns on devtome writing falls under a reasonable market price for internet content, which, unfortunately, is at present very low.

2 acceptance: I would like to distinguish between “pure” acceptance and speculative interest. If Bitcoin’s main driver of acceptance is its decentralized nature and payment functionality, it seems me that the Devcoin's principal driver is the pleasure to write an to publish, and, on the demand side, the ethical inspiration of the currency. I think these are really valuable drivers, that give Devcoin some stability and investment appeal. Ethical inspiration is a use value (utility) that can be very low in itself, but still exists in an universally recognizable way, and that is enough if combined with speculative interest.

3 speculative interest: this is a Ponzi like reasoning. Every speculator buys if he sees a growing trend of adoption of a limited resource, in the hope to sell for a higher price to a greater fool. The speculative interest is driven by the rate of adoption, which is itself driven purely by acceptance.

In Devcoin’s case it holds that, given a certain bound on supply relying on the above production cost argument, the greater the rate of increase of writers, the greater the speculative appeal: if a speculator sees a rapid increase in writers, he should bet on the coin, because the use value of a single coin is going to grow, given the increasing difficulty of generation. We have to remember that speculators are especially focused on the time rate of increase. So, if we want the value of Devcoin to grow, we first of all need the number of writers exploding.

What we do not want to see is the number of writers shrinking because of low market prices or difficulty increments. Is there a way to have a stable trend in both price and difficulty?

4 competition/concentration: let’s consider again a comparison to Bitcoin mining. We saw that the price rose with the adoption of asics. I do not think everyone, maybe most of people, shares my opinion on this issue, but I think this explains the real deep x factor that contributed to Bitcoin’s success: if dollar price rises, difficulty increases, but if dollar price falls, difficulty should fall as well. What did give stability to the trend? Competition and differences in mining efficiency: for every price the most efficient miner gets a big reward on investment, that’s what induces an unidirectional arm race.

The average miner has, at present, a negative return on investment, but because most efficient miners have a big return there is always an incentive for new efficient players to step in, driving the difficulty and the acceptance, and so vitalizing the speculation. This can be seen as a concentration of wealth from weak miners to strong ones, but as the adoption rises this scheme ultimately benefits all the players that simply hoard their coins under production cost.

From this point of view there is a big flaw in the present devcoin generation: it‘s very expensive to check the quality of articles, so the “mining efficiency” is adverse to the quality of submissions.

One might say it is indeed the same scheme of efficient Bitcoin miners dumping their coins at expenses of a “greater fool”. It is however not exactly the same, because there is no upper limit to Bitcoin efficiency improvement, whereas for devcoin there is a limit on the possible human productivity. So:

1 if it is true that the miner dumps his coins, he also buys new equipment (probably in coins!) increasing the difficulty and solidifying the system acceptance.

2 (maybe most important) everyone expects new higly capitalized miners to step in. This, unfortunately, cannot happen with devtome.

By investing in mining he is a participating in “a proof of work Ponzi scheme”, he knows that difficulty will increase and “buys” the coins with a lesser proof of work than it would be in the future. Because of this visible direction, hoarding is encouraged and the demand follows the trend.

Ponzify devtome!

It would be useful to add a proof of stake. It can be done NOW, manually and with a very low administrator’s effort. It should greatly, immediately benefit everybody. Every month the writers should submit on their page the balance of their generation wallets (which is already public and testable). If an author hoards coins, his rating should increase, if he spends all the coins earned remain stable, and if spends previously earned coins, his rating should go down to the previous levels. Everyone can freely choose his option, but hoarders, who presumably can afford it, could help the Devcoin economics by taking the risk of hoarding: the more coins are stuck in their accounts, the more writers who need a quick reward enjoy higher exchange rates. Here you have a simple introduction about proof of stake in Peercoins, for the reasons described above it seems that a mixed model proof of work/stake fits perfectly with Devcoin's mining (writing)peculiarities: http://www.reddit.com/r/peercoin/comments/1twavl/proof_of_stake_explained_sort_of/

When an author spends coins he burns daycoins (in the sense of Peercoin) and so lowers his mining efficiency.

I tested a suitable function that should fulfill the needs of this policy: simply subtract the shares spent from the shares earned each round and divide it by the cumulative sum of shares earned (and spent) by the generation wallet. Since the shares earned each round have a limit (both by devtome rules and practically) the increase of the rating converges to 0 in the long term. An example:

Let’s fix the Devcoin generation (we’ll discuss it later) at 1 coin per word, let’s say I have “hoarder rating” one a previous balance of 0 coins and this month I earn 1000 coins without spending:

Rating increment=(Earned 1000-spent 0)/ balance1000= 1

Now my hoarding rating that was 1 is: 1+1=2.

Next month, all other things being equal, I gain 2000 coins for 1000 words, thanks to my new rating:

Rating increment=(Earned 2000-spent 0)/ balance 3000= 0,666

So my new “hoarder rating” is=2+0,666=2,666

These increments are way too fast, so let’s reduce by a 4 factor:

First round: 1,25, second round 1,3889…13th round 1,88 and 50th round just 2,26. The series converges nicely.

A comparison with Peercoin's proof of stake shows that the returns on hoarding are here digressive, because it would be not desirable to make Devcoin mining as capital intensive as Peercoin mining: here the proof of work is human production.

An additional remark: since the reward of one share changes depending on devtome participation, it would be useful to consider track record of the shares for these calculations, so if one gains one share of 2000 devocoin on ton the present round and one share of 1000 devcoin next round if he spends 1000 devcoin that would count as an half share, so his balance increment for that round should be 0,5 shares, and his hoarder rating increment = (1 share earned-0.5 share spent)/ balance in shares 2= 0,25 (reduced by a factor of 4). I propose to adopt the First In First Out method for computing the devcoin/shares equivalence.

Schedule for rating given a constant hoarding and word count

round words balance spent cumulative balance gain rating
1 1000 1.000 1.000 1.000 1,25
2 1000 2.250 2.250 1.250 1,39
3 1000 3.639 3.639 1.389 1,48
4 1000 5.123 5.123 1.484 1,56
5 1000 6.680 6.680 1.557 1,62
6 1000 8.295 8.295 1.615 1,66
7 1000 9.959 9.959 1.664 1,71
8 1000 11.664 11.664 1.705 1,74
9 1000 13.406 13.406 1.742 1,77
10 1000 15.181 15.181 1.774 1,80
11 1000 16.984 16.984 1.804 1,83
12 1000 18.814 18.814 1.830 1,85
13 1000 20.669 20.669 1.855 1,88
14 1000 22.546 22.546 1.877 1,90
15 1000 24.444 24.444 1.898 1,92
16 1000 26.359 26.361 1.917 1,94
17 1000 28.294 28.296 1.935 1,95
18 1000 30.247 30.249 1.952 1,97
19 1000 216 32.000 32.218 1.969 1,74
20 1000 1.951 33.953 1.736 1,75

The Excel formula to paste in H3 (1,25) is: =H2+(F3-D3)/E3/4. . The round ID 1 is in the cell A3 and the column titles are in the raw 1, so there is a blank raw between the titles and the data where, in H2, you have to type the base rating which is 1. To add more spice one can test different reduction factors, instead of 4 one can try 3 or 3.5. I'd go with something between 3.5 and 4.2)

Different hoarding behaviors

i.imgur.com_adtsq0g.jpg

User 1 always writes the same word amount an dumps all his balance every 2-4 months, note that he dumps also on the first month and his rating is stable at 1: He enjoys an average hoarder rating of 1,3

User2 and 3 always write for the same word count, they hoard most of the time, user 2 dumps all on month 5, user 3 dumps all two times.

When one dumps more than what he gained in that round the rating diminishes, if one dumps exactly what he gained his rating stops increasing, but in this way he misses his train, because given the past balance includes all the coins spent after one year it’s very difficult to increase the rating as fast as before.

User 4, the super hoarder, never spends coins and increase word count by one share every round. It can be seen that such extreme behavior doesn’t lead to a very large rating spread.

The perfectly rational user

Assuming a constant word count, the perfect users bases his hoarding decision on his preferred expectations on dollar interest rates: when the prospective rating increment in the long term corresponds to this interest rate, he starts to dump his gains of the month. Let's consider 10% percent on 5 years duration of the planned investment. Here the perfect user is user1:

i.imgur.com_d7mhas3.jpg

Note that the super- hoarder-perfect- rational-user 4 beats him, reaching the 2,5 level, but he has to multiply 40X his word count.

The ex- perfect- user 2 dumps all his balance at the same time the perfect user 1 decides to simply dump his monthly gains. Doing so implies a 10% rating loss, quite affordable.

Remember that because of the first in first out method, if on round 1 one share amounts 200.000 coins and if when he dumps, on round 13 or so, 1 share equals 100.000 coins he can actually spend more coins than what he is earning, that's relaxing.

If we try different preferred interest rates, given a fixed duration of the investment, the perfect users' behaviour doesn't change a lot: for 10% he dumps at rating 1.90, for 5% at 2.01. (That would be different on very long durations)

Basically we should expect that who can afford hoarding, will contribute for one year without converting in btc, but will be rewarded for risk taking. Remember that it benefits quick dumpers! that's a teamwork effect.

This actually inverts the present Ponzi scheme, where people dump to speculators who carry the risk, in exchange of a Work-value-proof-of-work Ponzi scheme where the hoarders get more shares of the collective work in exchange of the same effort.

Implementation

The writers just report their generation wallet's balance on the users page, it should be very easy to program the database for the calculations.

Only writers who submit balance will be entitled in the paying round, illicit reporting will be fined.

The hoarding rating multiplier is applied to the existing multipliers. The already existing balances do not count for the cumulative balance in the calculation formula. It could be pointed out that it advantages previous hoarders, who can freely spend their old coins while the rating increases. Yes it does, but it's fair since everyone has the chance to start hoarding from now.

Developers should have a devtome account to post balances, every bounty should be subject to an individual multiplier.

That would greatly benefit both the rise of difficulty and price momentum, reward the quality writers and long term investors, even without addressing content evaluation3).

Disambiguation

It seems there is some ambiguity on the purpose of the proposal, as a recent response4) seems to have misunderstood the practical effects of the operation. This is not going to “punish” dumping in any way:

Let's think that everyday the speculators arriving on devcoin market have 1 Btc to spend, if they find 1000 devcoins to buy at 0,001 they will buy exactly 1000 devcoins, if they find 2000 coins they will get the price halved. If there are 100 writers who need the Btc (or dollars) immediately, they will get exactly the same amount of $ or Btcs regardless of devcoin number.

The point here is that coins are not a good, like a horse or a house, but just a number whose value is driven only by the rate of new speculators arriving/the offer size. They do not care about the price because they cannot rationally evaluate any attribute of Devcoin, like one can do about Yahoo stock or Apple's, but just the price momentum: an embrional currency is not an asset, but a self-fulfilling profecy.

The speculators arrive for two reasons:

1 Bitcoin's rising popularity makes them check altcoins and they can find Devcoin's ethical profile intriguing .

2 Devcoin price momentum (which we can boost if we encourage hoarding)

by encouraging speculation, the principal aim of the proposal is indeed to boost the earnings for the writers that dump all their balance, and in a big way.

Those writers who need cash now are not defrauded in anything but the future value of devcoin when, hopefully, it will substitute all currencies on earth, BUT if they were able to wait they would become hoarders, and so get the hoarders reward!

The only category “damaged” here, are the speculators-deep-believers who get less share of the future, hopefully, whole earth's currency for the same dollar/btc amount. To internal hoarders' profit. The ordinary speculators enjoy a rapid rise in the price and than sell, happy of the time/return ratio which is the soul of finance.

Let's suppose a community where every writer dumps his coins in real time: when the reward in coins will reach the equilibrium with content writing market prices, there will be no new writer stepping in, and the difficulty will become stable. With a stable difficulty Bitcoin would never have become what it is now.

Such community cannot be seen as “bad” people, who do not believe in open source, but simply people who cannot afford to believe or is not conveniently rewarded for doing it. With the hoarding incentive scheme who can afford it ultimately protects the dumpers.

If we introduce a proper delay, we will have always people (hoarders) working for free and increasing acceptance in a virtuous circle. When eventually all humanity (or the potential worldwide target) will be an opensource producer, the Ponzi scheme will cease to be a Ponzi, because speculators and the community are the same persons sharing the same currency in a new economic model.

Further explanations with a brief recall of the Demand/Supply Law

“Answering that question of what motivates people to buy Devcoins is fundamental and the only way to begin an analysis.”

I start with modeling demand has a fixed percentage of people stepping in the crypto space and becoming aware of Devcoin proposition. Of course the marketing effort can vary this percentage, but that's a parallel issue. I model the demand of a cryptocurrency as rigid with respect to the price, if I want to donate 1 btc in charity it doesn't matter if a get 1 or 1.25 devcoins. That's just a number. In a rigid demand environment if the supply's quantity is lower, the price adjusts more than proportionally.

This charts illustrate the classic analysis of the Demand/Supply's Law and the concept of rigid demand

i.imgur.com_ss9sikv.jpg

The price is determined by the intersection of Demand and Supply curve and it determines how much quantity is sold. If we lower the quantity we shift the supply curve to the left. Here the first quantity is 2.500 or so, and the second quantity is 2000. What happens to the price? When a demand is “rigid” it means that the demand curve (red) has a slope of more than 45° with the base, so the yellow line will be shorter than the light blue. The price is up a full 50% (from 40 to 60) whereas the quantity is down just 20% (from 2500 to 2000).

If charity in itself can account for 1% of the general income, there are several ways to boost charities' revenues. For example charity lotteries. By this shift charity enters the much bigger space of gambling… In fact an ethical currency with a limited supply (the hard cap doesn't matter when we have a decreasing inflation programmed as in devcoin) already adds speculative appeal to charity. When a speculator analyzes a crypto, he evaluates the currency design, for example a decreasing supply (as in bitcoin) objectively adds some interest: if one models a linear growth of adoption and a stable production cost decreasing supply is a plus. Satoshi, a smart guy, was not unaware of it when he opted for this design.

If one adopts a stable supply he has to model a more than linear increase in demand to preview a price increase (or at least a positive delta in the slopes) Of course a decreasing supply does have some drawbacks that i will not address here, but that another very smart guy, Sunny King, remarked it when he launched Peercoin.

As a speculator (as well as an ethical person) I can describe here my reasoning when I bought Devcoins (at much higher prices, indeed): 1 this is going to have a S shaped adoption curve, because of it's appeal+ viral awareness 2 the number of writers will always increase and they will never sell the coins under a hourly earning of 10+ dollars, given the fixed generation of coins the work needed for one coin will always increase. 3 who already bought the coins will hoard it until the price is over his base price, because, first of all, he believes in point 1 (increasing demand, by pure acceptation) 4 in the long term the supply by writers will never disrupt the price because of the lower bound. 5 the price will follow the difficulty

I think that everybody had a similar line of reasoning, we need two hypothesis to determine the price: point one answers to the demand problem, point 2 3 4 5 to the supply problem.

Speculative appeal + pure acceptance merge themselves in total appeal that depends on the number of people sharing similar ideas. And, again, it can be modeled of a certain percentage of people entering the cryptocoin space. Devcoin fights in this evironment only thanks to this total appeal.

Now we can see that the demand is not exactly rigid with respect to the price, but it is rigid with respect to the coin/wordcount ratio. So if a dumper happens to get less coin for word, because the number of writers increases, on average he will always find a speculator who pays him a market hourly wage, or more, upon a simple condition, I'll call it the unidirectionality criterion:

if and only if the speculator has reason to think that the writers number, or the difficulty, will always increase at least in line with the growth of demand.

should the difficulty increase too slowly he is going to overpay for the coins he will have at a lesser price from needy dumpers when they will eventually arrive because market forces point to the equilibrium with internet content market. From the supply side we know that writers will not bother writing if the dollar/word ratio, unless they can gain something from hoarding for the next month That's why hoarding rating would mean a more stable environment, for each round!

It seems me that the chart does follow this pattern There is a rock bottom at 10-20 dollars per share…. The present architecture can be improved with respect to unidirectionality by the means of a proof of stake and that it would contribute to the stability of the price trend. That roughly means that the rock bottom will shift upwards on a clear diagonal trendline. Such trendline wil be parallel to a stable difficulty increase.

Investors do like visible trendlines, you can ask a sort of premium for stability: this is going to greatly stimulate the demand and for this reason you might expect that the price will stay well over the present lower bound per share most of the time.

The whole reasoning of the speculator is reinforced because the Unidirectionality criterion is clearly met, and the demand rises further.

Last remark: who are exactly the hoarders? in a proof of stake system like peercoin you can buy as much coins as you want, hoard it for a while and then, when you mine you get an efficiency premium burning “coindays”: in my model it is more or less the same, BUT with a very important adaptation, You can increase hoarder rating (and so your mining efficiency) only with your own work. It' s' very important to not alter the fundamental purpose of human production. Hoarders are definitely high value content writers who simply cannot sell extensively researched content until difficulty (and price) rises at a proper level.

The aim of accounting the past balance of coins spent is just to limit to earned coins hoarding interest. I proposed to check the balance manually to not bother developers, but it should be done with a bot, exactly as one matures coindays on peercoin wallets.

The record of past balances makes the function digressive, this is what subsistutes the “burning of coindays” you experience when mining (minting) Peercoins. By “using” hoarders rating you burn it: it would be unfair to mature enormous ratings discouraging newcomers.

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Devtome | Devcoin| Bitcoin| Economics

2) chart for 3,5:
3) i'd like to addres this topic in an upcoming article

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