Let us determine what money actually is, first. Money is a kind of social agreement where we use a certain object as payment. For the duration of its use, humanity has used many different kinds of assets as payment, – from animal skins to debentures. Currencies were constantly competing and evolving while the less effective ones would disappear or stay in the background of those in demand. Thus an economic model reflects the condition of the society in which it is used. But, as we know, these models are not set once and for all.
The liquidity of any currency is determined by the level of trust it gains from a society. Unfortunately, problems in our global economy, as well as an unstable political climate, have led to a drop in many people’s confidence in our current economic models. Nowadays, properties of payment processes such as security, anonymity, and confidentiality have become more valuable than ever.
From this point of view, none of modern fiat currencies are reliable. As seen in the progression of history when an existing model becomes inefficient, a new one always appears. As we know, the technology of the distributed ledger has now been invented, offering much more efficient solutions. This invention initiated the migration of values into blockchain assets, in which technologies give birth to the principles of a new digital economy.
It is safe to say that at this point in our history, crypto-currencies have taken a firm position in our world. This can easily be seen by their capitalization. As of the beginning of May 2018, the overall crypto-currency market capitalization is $436.5 billion, of which Bitcoin represents $156.5 billion. The Bitcoin ecosystem is currently ranked 5th as the world’s largest economies. Unfortunately, there is still no crypto-currency that has passed a qualitative milestone large enough to be considered a full-fledged payment instrument.
To explain this, let us imagine that we are buying a cup of coffee. We can pay in dollars or Bitcoins. The next day we can also buy a cup of coffee spending same amount of dollars, but the amount we might pay in Bitcoin is much more difficult to estimate or predict. One of the key points of a full-fledged currency is that its exchange rates have predictability and/or stability. This is something Bitcoin cannot offer at the moment so we still measure it in a dollar equivalent. This turns Bitcoin into a certain “digital gold”, a financial instrument, but not a full-fledged money. Bitcoin could be used to acquire the property, yet it can’t be used to measure its real-world value.
As a result, crypto-currencies are not able to fulfill one of the key requirements of money, which is to be a measure of the value of goods, because using money as we've defined, market participants determine the prices of goods. It is clear that the disadvantages of current solutions inhibit the spread and adoption of blockchain technologies. Looking more closely at these disadvantages allows us to learn from the current financial system.
Let us take emission mechanisms as an example. The fiat money emission is controlled by the central bank of a country. In the case of economic growth and a national currency deficit, the country will accelerate emission so that the exchange rate of its currency does not increase excessively with respect to other currencies. This provides the economy with necessary liquidity. What is important to note is that emission speeds up the economy. This shows us that the emission of fiat currencies is dynamic and is used with regard to the needs of the economy, ensuring its governability.
The current situation in the crypto-currency market is the opposite. It is easy to see that all of the existing and developing blockchain protocols offer a fixed or algorithmically designated emission that is not tied in any way to the real growth of the network or its demands in liquidity. The emission algorithms Satoshi Nakamoto put into the Bitcoin network as well as Vitalik Buterin for Ethereum or Dan Larimer in the case of EOS, are only abstract values which have no correlation to real network growth.
Speaking of fiat emissions, we must also notice that this is all done “manually” by the decision of a country's leadership, as well as the chairmen of central banks, and that this is based on real economic data only indirectly. Furthermore, the principles of distribution are also far from perfect. The deep imperfection of further money distribution as well as unpredictability and a lack of transparency of emission is one of the biggest reasons why the public’s confidence in the current financial system drops.
But now, this problems of the distribution is now solved in a brilliant way. Blockchain technologies allow for the algorithmic distribution of emission, with no intermediaries, directly into the accounts of market participants. But further distribution there also has its problems. Because distribution is made via the miners or stack-holders (in different consensus algorithms) who are rarely active participants in the network in the context of real transactions. These participants mostly adhere to an asset retention strategy with the aim of selling at a higher price later. Miners are also adding additional pressure to rates as they constantly need to pay the often high electricity bills associated with mining,and frequently upgrade their hardware.
Holders do not benefit from using tokens as a payment instrument, and even less so for practical solutions. As a result, they are focused on the speculative aspect of the currency. If the share of real use was more than a speculative component, the rate of the token would be much more stable.
Let's take Bitcoin as an example and find the correlation between network growth and coin rate. As MIT researchers have shown in the article "Are Bitcoin Bubbles Predictable? Сombining a Generalized Metcalfe’s Law and the LPPLS Model", we can see that stock bubbles occur when the market values of the coin begin to outpace the network growth. The recession of the crypto-currency market in February-March 2018 was a direct illustration of this. Both fast growth and the inevitable recession hinder the network development.
Accordingly, on a blockchain, there is no relationship between the emission and the growth of the network on the economic level. This makes tokens extremely impractical to use in everyday life as a payment method and it’s also an obstacle to wide-range adoption and usage.
Fortunately, we still learn from working solutions that we do have and create better technologies to replace existing non-effective ones.
To solve the problem, Gravity Protocol uses a special algorithm of adaptive emission to calculate the rate of emission on the basis of Gravity Network Index that grows according to the growth of the network. After the peak values of the Gravity Network Index are reached, the protocol does not release tokens until the next peak is reached. Tokens are distributed among all users according to their personal Gravity Index, in proportion to their contribution to the network (Stake + Activity).
Token owners will receive the reward not in the form of the deflationary growth of the token rate, but instead, in the form of the increasing number of tokens on their account due to the adaptive emission. This will, in turn, motivate participants to create decentralized applications and businesses. For example, in the sphere of e-commerce, services which accept payment in the form of Gravity tokens, will receive an additional economic stimulus as a benefit of adaptive emission.
This means tokens are only issued to cover the growing needs of the network. The Gravity Index solution protects against a speculative overvaluation of the token at the protocol level and accelerates economic processes and growth of the network with the intention to reduce the token rate fluctuations.
When the network gathers its critical mass and stabilizes, this will lead to the reduction in the base token rate volatility similar to that of fiat currencies. This will also make it a full-fledged payment instrument that would actually be a viable solution to the widespread crypto payment acceptance problem.
Of course, adaptive emission itself does not guarantee the stability of a token, but it does add a mathematical model to the algorithm to bring real market aspects into the coin’s rate.
We combine all of the best aspects from the real- and crypto-economy, and we get both monetary stock, which grows synchronously with the economy, as well as an efficient distribution system without intermediaries. Thus, the network receives additional stimulus for growth as well as a harmonious redistribution of ownership at the protocol level, which contributes to efficiency and sustainability.
by Jahspear
See the previous articles
Gravity Protocol Intro
Gravity Protocol Roadmap
A Deeper Look Into Dan Larimer’s radio
Gravity Protocol initial distribution
Access to private testing
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