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Phase 4: A look at what’s coming

nxt-cryptocurrency-phase4

Group psychologists sometimes describe the dynamics of team formation and evolution in four stages, often dubbed Forming, Storming, Norming and Performing. Looking at the history of Nxt and its community, it’s certainly possible to divide it into three distinct parts, each of which is characterised by its own Zeitgeist – as well as the market’s reflection of that mood. It’s also valid to consider where we are now as being the end of one era and the beginning of the next, with its own challenges and opportunities: Phase 4.

Here’s what we’ve seen so far:

Phase 1: Forming

December 2013 – April 2014. Nxt launches. The market has no way of valuing the new 2.0 platform that promises much but has had no time to prove itself, or even implement many of the promised features. Like most alts, the price spikes – in this case about to around $100 million market cap. The hype inevitably fades, short-term traders exit and the new community forms from the wreckage.

Phase 2: Storming

April – August 2014. It’s a formative stage for Nxt. The community has become established, the Asset Exchange launches, and there is a huge amount of excitement and momentum. There are also an unprecedented number of scams. It’s a tumultuous time, but a case of too much, too soon; optimism evaporates, the bubble bursts and the community is left licking its wounds.

Phase 3: Norming

August 2014 – present. The SuperNET ICO brings a wave of optimism and activity, but over the next 14 months the protracted bear market saps confidence in Nxt (and all the alts) and sees its market cap shrink to less than a tenth of its high. However, behind the scenes there is a huge amount of positive activity, with dozens of new businesses and initiatives getting under way. The downtrend has the effect of funnelling money into the Asset Exchange, as holders seek either to sell or invest their NXT for a better return. Key relationships and reputations become well established. The community consolidates and collectively negotiates a set of tacit rules about how it will operate.

Phase 4: Performing

November 2015 onwards. Those who are going to leave have done so as the price collapses; those who are left have accumulated a larger share of NXT and built strong foundations for the future. A number of key business projects are well underway. The Nxt Foundation is well-established and the Tennessee project fully funded. There are good reasons for optimism.

However, here’s where it necessarily becomes more speculative, it’s always easier to describe the past than predict the future. There are many unknown factors in play. New 2.0 projects such as Ethereum are attracting attention, while the bear market across the alts continues. Bitcoin, meanwhile, is looking healthier than it has for a while, with more and more positive news – though still unresolved issues of its own. These factors will undoubtedly affect Nxt.

In addition, there are some interesting economic effects in play that are unique to Nxt. The bear market went hand-in-hand with an asset boom, arguably a bubble. At historically low prices but with optimism growing, minds are turning to accumulating as much NXT as possible. This naturally means selling assets as well as BTC and other cryptos. Thus there’s a chance that Phase 4 will kick off with an asset crash as traders and holders position themselves to go long on NXT, and that new assets will struggle for liquidity as a result. On the other hand, increasing interest from outside the core community might compensate for that, albeit with a time lag.

These are all issues that will no doubt work themselves out, one way or another and with a few more bumps along the way. What should be obvious at this point is that Year 3 and Phase 4 will be well worth sticking around for.

Egyptianomics, or what the Joseph story has to teach Nxters

It’s a classic tale of sibling rivalry, betrayal and rags to riches, set in the 18th century BC to a rousing soundtrack of show tunes. But the best-known versions of the Joseph story gloss over his shrewd handling of the famine and some of the more dubious details of his management of the Egyptian economy. In fact, almost nothing here is what it seems at first glance – and believe it or not, it has enduring relevance for the health of the Nxt economy, too.

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I’ve recently had cause to revisit the Joseph story, not least because my three-year-old son enjoys singing tunes from the musical. Most people have some grasp of the outlines of the narrative, which you can read in full in Genesis 37-47, but in brief, it goes something like this:

Joseph is his father’s favourite. He reminds his eleven brothers of this on a daily basis by showing off the amazing technicolour robe his father gives him to wear. He dreams that his parents and brothers will bow down to him, and makes the mistake of mentioning this to them. His brothers decide to kill him but relent at the last second. Being good capitalists operating within the light-touch regulatory framework of 18th century BC ancient near eastern shepherd culture, they instead sell him to a bunch of Ishmaelites and pretend he’s been eaten by a wild animal. Jacob, Joseph’s dad, is glum about this but what can you do?

Meanwhile Joseph is sold on to an Egyptian. It turns out he’s quite good at his job and is put in charge of his master Potiphar’s house. He also catches the eye of Potiphar’s wife, a strumpet who aims to lead him off the straight and narrow and who turns bunny-boiler when he spurns her advances. Joe ends up in jail along with two of Pharaoh’s servants, who are troubled by some odd dreams. If there’s one thing Joe knows it’s dreams, and through a neat blend of Jungian psychoanalysis and divine inspiration he correctly interprets them. Some time later when Pharaoh himself has a bit of a ‘mare about fat cows and thin cows, rumour travels and Joe is hauled out of the clink to do his thing.

Long story short, Joe predicts a nasty famine but the heads-up gives them time to prepare. Pharaoh is impressed and puts him in charge of the kingdom. An emergency 20 percent windfall tax on the harvest and seven years of plenty later, and Egypt has enough food to weather the storm. Joe’s the hero. Then his hungry family turn up looking to buy grain and, after messing with their heads a while, he forgives them for selling him into slavery and invites them to live in Egypt with him. Everyone’s happy.

What this popular version of the story misses is that Joseph was an incredibly astute economist who seized the opportunity posed by the crisis of the crop failure and leveraged it to raise himself and his new master Pharaoh to a position of absolute power. Joseph seems to have grasped the principles of Keynesian economics well before Keynes himself ever came up with them – but instead of using them to smooth out the ups and downs of the economic cycle, he employed his insights to exaggerate the downturn and devastate the Egyptian economy, reducing its entire population to the status of serfs. Hidden within this story are warnings for the cryptocurrency economy, which arguably bears more similarity to Pharaonic Egypt than it does to the fiat economy – especially in the case of Nxt.

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Artificial scarcity and the economics of central planning

One of the chief features of cryptocurrency is its strictly-controlled money supply. Instead of leaving the question of monetary policy to an external party, as NXTer explored in a recent article, crypto coins hardwire the rate of currency creation into the protocol. They may be inflationary, like Dogecoin; include an inflationary period, like bitcoin, before reaching stability; or be designed to be static from the start, like NXT. A coin that has a static money supply is really deflationary, since coins can be burned intentionally or lost in unused accounts. One of the long-term questions about bitcoin is the effect that its limited supply will have on the ecosystem. Unlike the fiat economy, it lacks a central bank with the capacity to adjust monetary policy in reaction to economic events – such as the global financial crisis, which was addressed through interest rate cuts and massive quantitative easing (money creation). For Nxt, I’d argue that the question is even more acute, since supply is limited from the start whilst bitcoin is still in its inflationary stage. In fact, we may be about to experience the impacts of that right now.

Reading the account in Genesis, it becomes clear that Joseph did a bit more than tax-and-spend. He collected a fifth of the harvest from the Egyptians in the good years, and stored it in cities built for the purpose: ostensibly, an eminently sensible policy. Then came the economic shock of the crop failure (in an agrarian economy, a drought is an economic as well as a natural disaster).

At this point, the traditional Keynesian solution would be to spend the money that had been saved in the good years, thereby stimulating the economy. (Grain is as fungible as money, even today, and even more so in Egypt. Moreover grain and money could happily be substituted.) Taking a fifth of the harvest dampens down the economic boom of the seven good years – in which grain must have experienced high inflation, since there was so much of it that its value can only have fallen. Then, in the seven bad years, grain increases in value through scarcity. Joseph could have returned the proceeds of his tax into the economy: an inflationary boost, very much like the effect of reducing interest rates or printing new money. Does he do this? Does he hell.

Centralise like an Egyptian

Joseph has already taxed the Egyptians, but he makes them pay for their grain with the silver that served as their regular currency. Ok, it’s opportunistic, particularly since they hadn’t been expecting the tax in the first place. And yes, technically it’s their own grain they’re buying, though possession is more than nine-tenths of the law when your boss is a dictator whom the rest of the country already worships as god. But it doesn’t stop there.

Joseph keeps the money. He stores it up in Pharaoh’s palace. Keynes, were he to have travelled back in time, would by now be screaming at him to recirculate the money into the economy – to splash out on a few new pyramids, roads, an extra sphinx, whatever vanity project or infrastructure initiative you want, just to get the economy going by pumping all that cash back into the pockets of ordinary people. And that’s exactly what Joseph doesn’t do.

Instead of providing an inflationary boost to the economy, Joseph contrives the opposite. By hoarding the Egyptians’ silver in Pharaoh’s vaults, he reduces the money supply and the velocity of money to near zero by locking it all away with the result that there’s no longer enough money to pay for the goods that are available – namely the grain he himself is selling.

The narrative is quite clear at this point. The Egyptians’ money has run out. They don’t seem to appreciate why, which is understandable since Joseph is millennia ahead of contemporary economic theory. So what do they do? They barter. First their livestock, then their land, and then themselves. They voluntarily enter servitude, working the land they used to own and paying a fifth of the resulting harvest to Pharaoh – not just for the seven years of famine, but forever. With a few cunning moves, Joseph has trapped the whole population of Egypt (barring the priesthood, who had their own allotment of grain) in debt servitude for all time. It’s a brilliant piece of economic manipulation – warfare, even, with the added bonus that the Egyptians don’t even know what he’s done to them.

The crypto bear market

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What is the relevance of all this for Nxt? It can hardly have escaped anyone’s notice that bitcoin has been in a long bear market that has lasted for 18 months and even now has not yet conclusively ended. At around $240, it’s roughly a fifth of its all-time high. Nxt, like all alts, is pegged to bitcoin, meaning that any movements on its own terms are superimposed onto bitcoin’s ups and downs. Since Nxt has also experienced its own bear market, going from 0.00014 BTC a year ago down to below 0.00004 today, that makes for painful total falls in value. NXT stands at less than 10% of its all-time high.

Bitcoin, of course, is solely a currency. Nxt is a complete economic system, with its own network of businesses represented within the Asset Exchange. Over the last year, that ecosystem has thrived. New businesses have set up, raised funds and generated dividends. On the surface of it, this is quite counter-intuitive in what has been a pretty brutal downtrend for Nxt overall.

A little further reflection suggests that perhaps the opposite is true. NXT’s supply is – like the Egyptians’ silver and unlike bitcoin or the fiat money supply – static. In normal times it would be a deflationary currency. Unlike bitcoin, there are no miners and no daily addition of 3,600 coins to be absorbed by the markets to pay electricity bills. Left to its own devices, all things being equal NXT will naturally rise in value. As that happens, people will naturally hoard NXT because they want to experience that increase. They will pull money out of assets and keep it as NXT. Something similar happens every time bitcoin spikes upwards: altcoins are sold for BTC to catch the lift.

In a recession, governments reduce interest rates to encourage savers to start spending. Inflation encourages economic activity (rather than saving) because people know their savings will be worth less tomorrow than they are today and prefer to spend them on something useful or tangible instead. Nxt’s long downtrend has effectively been badly inflationary: its value is less than it was in the past.

That falling value has arguably encouraged people to put their NXT into revenue-generating assets. It has kept the Asset Exchange alive and kicking. The bitcoin bear market has been tough on NXT holders. Stakeholders dumping their coins by the million has caused dismay. Loss of confidence by day traders has compounded the misery. What we may not have appreciated is that the lower and lower prices these have brought about may have been the salvation of Nxt. All of these factors – and especially stakeholders releasing millions of NXT – has acted like a massive injection of liquidity into the markets, Nxt’s own Quantitative Easing programme.

BitPay recently released their figures for last year. Transaction volumes have roughly doubled and average payment size roughly halved. The narrative has been that bitcoin is transitioning from a speculative instrument into a real currency, and that the reason for the bear market has been that people have been cashing out by spending coins rather than hoarding them in the hope of another rise. This is exactly wrong: people have spent coins because their value has decreased. The flow of money out of bitcoin was a natural result of an overheated market culminating in 2013’s huge speculative bubble. As the price of bitcoin fell, holders were encouraged to sell or spend them to lock in some of the remaining value. The bear market was a form of inflation for bitcoin, and it was good for the overall economy. The same can be argued for NXT’s downtrend. Without it, we could be in real trouble right now.

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The warning

There’s a final warning for Nxt in the Joseph story. Hoarding is not productive. Nxt is already a deflationary currency. Joseph’s mistake, or stroke of genius, was to prevent money from circulating back into the economy, causing activity to grind to a halt.

Nxt has spent the last year building some solid foundations, both on the development side and in the businesses that have sprung up on the Asset Exchange. In all likelihood they have thrived not despite the downtrend, but because of it. At some point – possibly already – the downtrend will be over. The value of NXT against fiat and against BTC will rise. At that point, the temptation will be to hoard NXT: to lock it away in untouched accounts, choking off funds to the businesses that operate on the AE. This deflationary tendency paves the way for Nxt’s own credit crunch and the next downturn.

The good news is that Nxt is not a closed system. It’s a tiny $9 million economy with plenty of room for growth. Money will doubtless flow from outside into Nxt in order to invest in the assets that perform well due to their decentralised structure and low overheads. But we should bear in mind that the more NXT looks attractive as a currency and a speculative play, the greater impact that is likely to have on other elements of the system.

One last thing: it wasn’t a multicolour coat. That’s a mistranslation from the Septuagint, the Greek version of the Hebrew Bible. The Hebrew itself suggests a long-sleeved robe. That would have needled his brothers just as much because only those who didn’t have to do manual work wore long sleeves – everyone else had short sleeves to stop them getting tangled and caught. Jacob let Joseph off the hard work and so the robe was a reminder to his brothers that he was the favourite. Maybe the moral here is that no one likes a show off, and that hard work is the only way to get the job done. On the other hand, Joseph ended up being the second most powerful man in the world, so maybe looking good and being talented doesn’t hurt after all. Take your pick.

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Shareholders Meeting via Blockchain

It seems we are witnessing a revolution in the corporate world caused by blockchain technologies. We’re moving quickly towards a new business ecosystem of virtual corporations, distributed autonomous corporations, smart contracts, new models of funding and so on. This article is about the exciting possibility of having distributed shareholders’ meetings where results are public and counted in a trustless way.

Since late April last year, I’ve been working on the NXT cryptocurrency as a core developer. NXT is a 100% proof-of-stake cryptocurrency aiming “to transform a cryptocurrency into a decentralised financial platform that supports a thriving and fast-growing digital economy” (unlike hybrid Ripple’s approach which isn’t fully decentralized).

Since 12 May, NXT has had the Asset Exchange (NXT AE) as a core feature. Anyone can now issue assets on this totally decentralized and uncontrolled exchange and trade them.

You can monitor your Nxt asset purchases either via your client or via a number of independent web sites: NextBlocks, NXTReporting and SecureAE  (where you can also purchase Nxt and issue assets).

Read the asset descriptions and you’ll quickly gain an appreciation of the wide range of different applications and services that have already been built on top of the Nxt platform and they’re just the beginning; the start of what is set to evolve into an entire financial and economic ecosystem.

The key feature of the NXT AE for businesspeople is that they can fund their business via asset issuance, getting money from anyone (not just angels/VCs, as with KickStarter), and they can do so from day one and for a low fee.

Imagine getting funding directly from a community needing your product. And, wouldn’t it also be awesome to get feedback and community-powered decisions?

With the voting system I have finished recently that will all be possible. The voting system will be introduced in NRS (NXT Reference Software) 1.5. The latest release version is 1.4.16, so voting API & GUI is already accessible. I can share some API details right now as they will likely remain unchanged.

Also see: Nxt Voting Teaser video (GUI and functionality)

Consider the example of an indy developer making a game. First, he got some funds via the asset exchange. Then he made a promising v.1 of the game. Both the concept and its implementation are still raw but the fans are excited! So he wants to ask the community whether he should polish v.1 or instead build v.2 on the basis of a better concept, or… Having decided on the different options, he starts the poll:

    val question = "Further directions in game development. "
    val description = "I got some great reviews. I have 10000 NXTs left. How should I spend them?"

    val finishBlockHeight = Nxt.getBlockchain.getHeight + 1440 // ~= 1 day
    val options = Array("Improve graphics and release it ASAP", "Start to work on v.2 to get funds for it's development", "Better ask experts, e.g. attend GameDev Conference", "Game is abortive. Stop working on it.")

    val optionModel = Poll.OPTION_MODEL_CHOICE
    val votingModel = Poll.VOTING_MODEL_ASSET

    val pb = new PollBuilder(question, desc, options, finishBlockHeight, optionModel, votingModel)
    val assetId: Long =  // assetId here
    pb.assetId(ai)
    pb.optionsNumRange(1, 1) // only 1 option to choose

    issueTxToGodId(new Attachment.MessagingPollCreation(pb), phrase1)

A vote could be sent with following code:

    val poll = Poll.getByName(question).head
    val vote = Array(0.toByte, 1.toByte, 0.toByte, 0.toByte)
    val attachment = new Attachment.MessagingVoteCasting(poll.getId, vote)
    issueTxToGodId(attachment, phrase2) 

1440 blocks after starting the poll we can get and print to console poll results (where 1 asset=1 vote):

    val pr = PollResults.get(poll.getId).get
    pr match {
        case cpr: nxt.PollResults#Choice =
            val m = cpr.getResults.toMap
            println(m)      
    }

So, we are soon going to have fair, cheap, public and distributed shareholders voting! Just imagine how that could change the world of business.

Notes:

1. This blog post (as revised) was first released by Kushti on 2. The minimum fee to issue an asset on the NXT AE is 1000 NXT. The transaction fee is currently 1 NXT.