The Case For Permanent Limited Supply

Cryptocurrencies are pushing the world forward these days, they’re way beyond the point of “just some punks playing with toy money”. There are a few caveats, though, some of them very subtle, and I decided to write about one of them today, as part of my 365 days writing challenge. For some, this post may be a bit too technical. You’ve been warned.

Crypto-currencies And Nation-Issued Digital Money

The first and most important distinction when we’re talking about crypto currencies is the difference between de-centralized (or “permissionless”) blockchains, like Bitcoin or Ethereum, and centralized (or “permissioned”) blockchains, like China’s digital Yuan. The most important part of this difference is that in a de-centralized blockchain the tokens supply is transparent and cannot be modified from a single point, or by a single actor. Whereas in a centralized blockchain, the supply (as many other characteristics of the “money”) can be modified from a singe point, or a single actor (which is usually “the owner” of the blockchain).

It’s important to have this distinction in mind, because centralized entities will try to mimic de-centralized structures, in order to give a false sense of openness, or democracy. Or simply to take advantage of the tech.

The most popular nation-issued digital money is China’s digital Yuan experiment, a project in which the currency was actually released by using a lottery, and the “winners” had actual digital Yuans in their wallets and they could spend them at approved merchants.

But, during its experiment with a digital Yuan, China added a little bit of spiciness to the project: namely it made some of the supply to expire, in order to boost spending. Like, you know, in the “hot potato” game, where you really have to get rid of something, until it blows up, only in this case you had to get rid of those tokens, because they were no good after a certain time limit. More details here.

And with that we get to the topic of today’s article.

Expiring Money Is Natural, It’s The Centralized Decision Which Is Debatable

Let’s stop for a while to think about this “expiring” characteristic of money. Just like supply, the “expiration date” is one of the variables that can be coded into programmable money. But is it also the case in fiat currencies? Does fiat currencies expire?

My answer to this tends to be “yes”. If you have a big enough time window, all money expire. First, we had shells. Then we had metal coins. Then we had notes. And between these we had many other variations.

Does the metal coin from 500 years ago holds some value? If you would go buy a coffee with it, probably not. But if you would go at a numismatic event, hell yeah, it will hold a lot of value.

Every token value is bounded by a certain context. Even more, every token is fungible only in a certain context. These two characteristics, (store of) value and fungibility, are fluidly overlapping, but they are never 100% identically overlapping.

If a token distances itself too much from its designed context, its fungibility will decrease. By “distancing”, I understand increase of distance in both space and time. A coin from a distant country, but contemporary with me, would have less fungibility in my country. And a coin from a distant past, but from my same country, will also have less fungibility now.

Both these tokens, though, will still hold some value in my current space-time context. We already have a name for that type of value. It’s NFT. Or, in technical terms, Non Fungible Tokens. In layman terms, collectibles.

So, to put it all together, if we want to increase fungibility of a token, we need to always adjust it to the current context.

I call this Permanent Limited Supply (and I wrote about it for the first time here, if you’re curious about the context). It’s a “limited” supply, because it will never be more than a certain number, in absolute terms. For instance, if we talk abut Bitcoin, it will still have always only 21 million tokens in circulation. But it will be “permanent” because old tokens will expire and new tokens will be minted. To continue the Bitcoin example, tokens minted in the Satoshi era will slowly be discarded, while the blockchain will continue to mint new tokens to replenish the discarded ones. At any given moment, we will still have 21 million tokens in circulation, but tokens, let’ say, more than 5 years old, will expire, and new tokens will be minted. We will have a 5 years window in which we will always have only 21 million tokens.

There are a few advantages to this.

First, we will be sure that fungibility will remain constant. If the time window will be kept narrow, then the token will be well “adapted” to this part of the context.

Second, the “hodl” mantra, which ties more to an NFT, or collectible mindset, in which what’s old is valuable intrinsically, will diminish, more tokens will be in circulation (if only to invest in other tokens, but money will circulate) and the store of value will increase.

Third, the scarcity part will still be enforced, there will always be only 21 million Bitcoin, but the trick is that they will be in a certain time window.

Now, back to the digital Yuan experiment. If the context is adjusted arbitrarily by a single actor, then the whole construction collapses. Instead of becoming an agile, useful, unbreakable currency, the crypto token, expired at will by a central authority, will serve a centralized policy (which may, or may not be effective, that’s another story).

Strongly Coupling Fungibility And Value

Of course, there might be speculation involved, but we already have this now. There might be different strategies, like spending the token early, like a hot potato, and investing in limited context tokens, like NFTs, but that’s just natural, if you want store of value. If you want fungibility, or frictionless circulation of the supply, then the token must be adjusted constantly to the context.

Or let’s say people won’t care about their expiring tokens and they will let them burn, because there will always be some more minted, to keep the balance equal. Those getting the freshly minted tokens (being them miners, or whatever distribution form there will be) will accumulate more. But even if they have more, they will also have to spend it at some point, because the tokens will expire.

The most important detail in this construction is the time window. I gave 5 years as an example, but I believe this would be very small. I’m thinking more of something tied to our biological capability of reproduction, something tied to generations, probably 20-25 years. The time window needs to have enough room to maneuver so people will buy long term goods, like real estate, but it needs to be small enough so the time context doesn’t get diluted.

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