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Behavioral vs. Mechanical: Ideas to Evaluate Cryptocurrencies

Behavioral vs. Mechanical: Ideas to Evaluate Cryptocurrencies

It's easy to fall into the trap of seeing the crypto space within a mechanical framework. After all, Bitcoin and blockchain is just an amalgam of code, maintained on a decentralized network, and supported through a literal army of machines permeating across the globe. The architecture and design of crypto and blockchain matter a lot. However, it is easy to get lost in the engineering of this nascent technology and lose out on the bigger picture of actual utility and function. No matter if this peer to peer cash system is seen as a currency by some or as a store of value by others, one thing is evident: people buy, sell, and use Bitcoin for different reasons.

As the cryptocurrency ecosystem continues to mature, more and more players in the traditional finance space have latched on. With Wall Street execs observing and commenting and even bankers, researchers, analysts, and economists making their presence known, imparting their thoughts and speculation, nearly everyone has an opinion on digital currencies. They have their own perspectives, and those perspectives are much older, built upon decades of our time’s best economic minds, like Friedman, Hayek and Keynes. After all, money has existed far longer than the digital currency boom of 2009 and will continue to exist long after. That means, like good cryptography, these ideas have withstood the test of time, and as a result, we should carry the weight of their expertise with us when re-envisioning our economic ecosystem

In crypto circles, the current breakdown of cryptocurrencies is structured mechanically. In the case of stablecoins, they fall  into three neat categories which will help us understand their functions better:  

1. Fiat-collateralized (Centralized)
2. Crypto-collateralized (Decentralized)
3. Non-collateralized (Algorithmic)

However, these 3 mechanical classifications only tell you part of the narrative, and from an investment standpoint, a very small and potentially unremarkable part. For example, knowing that TrueUSD or Tether simply collateralizes fiat (US Dollars) and puts dollars on the blockchain doesn’t tell you very much as an investor. The mechanical component really leaves something to be desired when you want to know how a market might receive a coin, let alone behave once it’s released into that market.

A look at Tether ($USDT) showcases this. Tether recently had a period of heavily negative news. The news was inescapable and it focused on the fact that Tether was not being fully backed by US Dollars (USD). Mechanically, Tether stated that every 1 USDT would be backed by 1 USD. But when it was revealed that this 1:1 backing was not true, what happened? The price of Tether stayed the same. Why? Let’s look at what users care about when using Tether:

They could buy at $1
They could sell at $1
They had confidence they could do this whenever they wanted

In short, what makes Tether useful for investors is not whether it’s actually, mechanically backed 1:1 with the dollar. What matters is liquidity. This is behavioral and it’s how the coin behaves that caused it to retain it’s usefulness and therefore value.

Let’s key in on that word: Behave. It just so happens that a very valuable framework stems from how things behave. Instead of using a mechanical filter, what would happen if we used a behavioral classification. How would it be received if we put coins into behavioral buckets instead of mechanical ones? Let’s apply a few ideas and see how new buckets might provide us with additional, important information.

Inside vs. Outside Money

To start, let’s look at the fundamental differences between inside vs. outside money. Understanding whether a coin is an inside or an outside money can tell us about how the coin functions and behaves. For example, fiat-collateralized digital assets are inside money. You have an inside money anytime an asset is backed by a form of private credit (an “IOU”). Simply stated, inside money is collateralized. TrueUSD, for example, is an inside money. For every 1 TrueUSD, there is a corresponding liability of 1 actual US Dollar, assuming the system is working correctly.

Bitcoin on the other hand is an outside money. Ampleforth’s Amples (AMPL) are also an outside money. Outside money is not collateralized. Outside money is also a net asset for the private sector. There are different performance characteristics between outside money and inside money, with some being advantageous at times and harmful in other instances. That's why it's critical to understand if a digital asset is an inside money or an outside money, much like its crucial to know what a layer 1 protocols consensus mechanism is - PoW or PoS for example.

Rules vs. Discretion

Another view which can shed light on the behavioral side of things surrounds rules vs. discretion, with advantages and disadvantages to each approach. To outline some potential disadvantages, discretionary policies have the vulnerability to have subjective applications, which can introduce errors in terms of subjective timing, scope and participation. Discretion in the traditional finance world is often regulated to give protection to consumers. An example of this could be transparency about how an interest rate can change and by how much. In the decentralized world with no strong authorities, there's no guaranteed regulation except for rules-based code. Contrastly, rules-based policies can have the potential disadvantage of being too rigid, not allowing for unique action in times of full blown crisis.

The important take-away in either event is to understand what type of digital asset you are dealing with, which will provide you with an indication of how the asset might perform in a given scenario. As an investor, you may achieve a  more predictable performance out of a rules-based digital asset than a discretion-based digital asset.  

Maker DAO is in the news as a result of their discretionary policy. According to a Coindesk report borrowers are unhappy with exponentially increasing stability fees (basically, interest rates) in extremely short time frames. These stability fees are set via a vote, and the people casting votes are arbitrarily doing so based on their own discretion. They have passed rates that are 40X higher than they were mere months ago in order to prevent a negative outcome for their token. However, the outcome is increasingly negative despite their best efforts. The uncertainty surrounding how the chosen few will vote only adds to the problem.

This information is  - necessary - for an investor to know.

A discretion-based system may fail to act when action is needed, and may act when inaction is best. A rules-based system will act exactly when the rules dictate, irrespective of whether or not action is prudent. In a discretionary system, additional, sometimes unpredictable variables are added in the form of subjectivity, which are eliminated in a rules-based system.

It becomes increasingly important to know how digital assets behave. Be sure to understand if a digital asset is rules-based or discretionary if you want a full picture of that digital asset.

Tying It All Together: A More Complete Picture

Having a complete awareness and knowledge of asset classification and behavior provides a more useful, fuller picture of a digital asset.

Framing a digital asset under the lens of behavior and mechanics helps guide one to ask better questions to determine if the digital asset is the right one to invest in. For example, with the right behavioral lense, you can better understand the impact of how coins enter or leave the system. You have an idea of what to ask- are new coins entering through minting/selling? Buy-back and burn? Collateralized Debt Position (CDP)? If it’s through CDP we can apply another lens to determine another question we need answered- If it is CDP how is demand for CDP and stablecoin balanced?

Additionally, taking into account behavioral characteristics helps you to question other important ideas, such as what assumptions about the underlying economy does the protocol of a digital asset rely on? For example, if a project relies on bonds, there must be a long-term underlying growth for that bond market to make sense. Other questions will arise as well, such as what information is propagated into supply, if any? If that’s not the case, is supply scheduled deterministically? If it is scheduled deterministically, what might that mean for the future of the digital asset? Mechanically, that answer is simple - you know for example that Bitcoin will only have 21 million coins ever. Behaviorally, how will a fixed supply affect the price and performance of that digital asset? Clearly, the behavioral characteristics of a digital asset are important to consider.

Hopefully this has provided you with a few new ideas and additional lenses with which to view digital assets. Knowledge and information are powerful, so I hope this additional framework helps you in the future while evaluating digital assets.

/ Bitcoin

Don't Roll Your Own Econ

Don't Roll Your Own Econ

Don't Roll Your Own Crypto Econ

Decentralization was always an interesting thought, largely unachievable at scale until the advent of the digital world and peer to peer (p2p) technologies. These p2p technologies opened the door for a new digital revolution in Bitcoin. Since Bitcoin was created tens of thousands of individual blockchain projects, Dapps, and tokens are currently being developed. Every day more and more of these projects are launched, live and functioning. Like most burgeoning industries, there will be an extremely high attrition rate, and many projects will fail. Some of the mistakes that cause projects to end in bitter failure are easily avoided. Although digital assets are new and cryptocurrencies, including Bitcoin, are at the bleeding edge of technology, we can look to the past for some time tested lessons and concepts that can help us avoid simple mistakes.

One of those time tested ideas was pointed out in an article from late 2017 by Ethereum developer Nick Johnson.The article is a phenomenal read, and certainly a strong piece for anyone who may be interested in cryptocurrencies and cryptography. In the article Nick pointed out very serious concerns he had at the time with IOTA’s viability as a cryptocurrency. One of the most important lessons from the piece was what Nick states as rule 1 of cryptography - don’t roll your own crypto. It’s enticing for some teams to think they are beyond the blocking and tackling of basic rules like this as they aim to innovate and push the envelope of current technology. However, the lesson can not be ignored, and teams should not fly in the face of battle hardened and time tested cryptography. Read more in the article, but a grossly inappropriate TL;DR explanation would be that cryptography is under constant attack, and only crypto that has been mercilessly pressure tested and held its ground can serve as secure crypto you can depend on.

Let’s not get it confused, innovation in blockchain is one of the things that makes it great and the future of digital assets so bright. We need teams to innovate and invent in order to usher in advancement and better tech. However, there are areas that are ripe for innovation, and there are areas that are solid. Just like cryptography, sound economic principles are foolish to mess with. Just like the relentless attacks that proven cryptography has endured, economic principles have weathered many storms over long periods of time. Economic principles that work have survived and flourished with changes in administrations, changes in bull and bear markets and even changes in dominant government systems.

At Ampleforth, we’re innovating and creating, and we’re doing it with strong base principles in place. When it comes to economics we’ve sought out a team of advisors with the expertise and experience to not only avoid pitfalls, but truly innovate. Among the group of top level minds we're lucky to consult with are the Hoover Institution’s Niall Feguson and Manuel Rincon Cruz. We’ve also brought in the guidance of experts from Pantera Capital such as Paul Veradittakit and Joey Krug. Joey’s insights from his work at Pantera and Augur help us bridge the blockchain world with the business world in a way that few can. Our team takes a responsible and balanced approach to the creation of our technology by leveraging decades of experience in several fields and the result is a protocol that is proving to be one of the most unique projects created to date.

Reliable and established principles in economics and technology are the foundation of what we are building at Ampleforth. For more detail on the Ampleforth protocol and the innovations we’re making with synthetic commodities and ideal money, please check out our website and whitepaper, and stay up to date by following our Twitter!

/ Economics

Great Economists: Milton Friedman

Great Economists: Milton Friedman

Milton Friedman was called "the most influential economist of the second half of the 20th century ... possibly of all of it" by The Economist. This is for very good reasons, as he challenged many of the policies that our nation held dear and made us question exactly what we were doing. Often times he would hold public seminars and challenged people’s beliefs. He had a knack for breaking things down to their simplest elements so that everyone could understand. His ability to be understood by people from all walks of life made him loved, respected and admired by many.

Among Milton Friedman’s many accomplishments he was awarded a Nobel Prize in Economics for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy. Friedman also helped shape the future of the nation by mentoring renowned economists such as Gary Becker, Robert Fogel, Thomas Sowell and Robert Lucas Jr. Friedman taught at the University of Chicago where he was able to educate and shape the lives of thousands of students.

Milton often promoted an alternative macroeconomic viewpoint known as "monetarism" and argued that a steady, small expansion of the money supply was the preferred policy. As a result of his works on monetary policy, taxation, privatization, and deregulation the 1980’s saw an economic boom. During that time Friedman was advising global policy makers Ronald Reagan and Margaret Thatcher. Friedman’s positive influence didn’t end in the 1980’s. Immediately following the global financial crisis in 2008 the Federal Reserve was influenced by his monetary theory to achieve recovery.

Over his lifetime Friedman wrote many books, papers, and columns. He also appeared in many lectures across the country and open debates. Perhaps most of all, Milton is remembered for his engaging televised lectures where he advocated for responsible monetary policy. Those lectures and television broadcasts still live on today, as you can see in this video where Milton Friedman discusses inflation (click image above to view video).

Time tested and proven principles such as those discussed by great economists such as Milton Friedman are what shaped our technology at Ampleforth. For more detail on the Ampleforth protocol please check out our website and whitepaper, and stay up to date by following our Twitter!

/ FA Hayek

Friedrich August Hayek Predicting Bitcoin and Cryptocurrencies

Friedrich August Hayek Predicting Bitcoin and Cryptocurrencies

For those of you who are not familiar with Friedrich Hayek we think this is a great video to introduce you to him. FA Hayek was an economist and philosopher who had the honor of sharing the 1974 Nobel Prize in Economics with Gunnar Myrdal. The duo were awarded the Nobel Prize for their work in the theory of money. Hayek had some truly ground breaking ideas that set the stage for our current day digital asset ecosystem.

In this video FA Hayek discusses that law, language and money, the three paradigms of spontaneous government institutions have had very different life cycles. While law and language were allowed to develop from their initial forms into their current states, money was halted and frozen in its most primitive, original form. Money was initially formed as physical coins, a form of money that we still use  today. At the time of this recording, Bitcoin and cryptocurrencies did not exist. Hayek goes on to predict the way in which he felt money would need to be experimented with in order to develop. That prediction turned out to be incredibly accurate, from the idea of creating and "opening accounts in something" to the "sly, roundabout way" Bitcoin was able to be introduced to the world in a way that can not be stopped.

Great economists like FA Hayek provided the time tested concepts that underpin the work we're doing at Ampleforth. To dig deeper into our protocol please consider checking out our website and whitepaper. Stay up to date by following our Twitter or joining our Telegram!