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Z/Yen Group LimitedRisk Reward Managers90 Basinghall StreetLondon EC2V 5AYUnited Kingdomtel: +44 (20) 7562-9562www.zyen.com
Modelling The Economics Of Cryptocurrencies
Long Finance WebinarTuesday, 4 April 2017, 13:00 to 14:00 BST
(presentation starts at 13:02)
@longfinance
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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
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“Cryptocurrency Economics”
Michael MainelliExecutive chairman
Z/Yen Group
Introduction
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♦ 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
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“Money is a matter of functions four:a medium,a measure,a standard,
a store.”
Functions Of Money
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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]
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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.”
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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]
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No Trusted Third Parties
Single Trusted Third Party
Efficient
Inefficient
MasterNode
SupervisorNodes
MajorityNodes
CollectiveNodes
FreeforAllNodes
BitcoinEthereum
Ripple
CentralDatabase
‘Woven’Broadcasting
Mistrust Costs Coins
Paper
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AltCoins: Developing & Improving
[Sou
rce:
http
s://b
itslo
g.w
ordp
ress
.com
/201
4/05
/01/
the-
road
s-to
-inno
vatio
n-in
-cry
ptoc
urre
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s/]
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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
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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
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Questions To Be Considered
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♦ 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
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♦ 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
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“Modelling the Economics of Cryptocurrencies”
Matthew LeitchSenior Researcher
Z/Yen Group
Presentation
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♦ 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
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♦ 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
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♦ 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
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A Single Trial
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♦ 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
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A Simulation
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♦ 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
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Dr. Dionysios DemetisLecturer in Management Systems
University of Hull
Expert Discussion
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Discussion
?
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♦ 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
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Michael MainelliExecutive chairman
Z/Yen Group
Concluding Remarks
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Some Of Z/Yen’s MDL Research
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♦ 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
Next Steps
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♦ 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
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Thank you!
“Get a big picture grip on the details.”Chao Kli Ning