The currency premium of Dashi coin and Decred is compared. By reasonably demonstrating several subsets of bitcoin data and comparing them with the less relevant precious metal market, the relationship model shows up to 95% correlation among different currencies. (Blue Fox Note: S2F refers to Stock-to-Flow, the comparison of stock and output per unit time.)
Fixed supply of encrypted assets market competition is fierce, this type of competitive currency are in the shadow of Bitcoin, because Bitcoin has advantages in influence, liquidity and market dominance. Bitcoin, with its first-mover advantage and hard-core monetary policy, has become a leader in the new era of scarce digital assets. One of the issues that investors have been concerned about is whether competitive currencies with fixed supply have some chance to compete or coexist with Bitcoin. Can these digital assets become sound currencies? Or do these digital assets themselves represent mismatches? According to the S2F relationship proposed by PlanB Research, which is based on historical data of Bitcoin, I will use Bitcoin, Wright coin, and Bitcoin.
As a measure of scarcity, S2F (Stock-to-Flow) has attracted much attention in the encrypted money market of commodities (especially precious metals) and fixed supply. Saifedean Ammous explores this concept in great detail based on the historical evolution of money in The Bitcoin Standard, where scarce assets show a currency premium due to a high S2F ratio. Nick Szabo cleverly elaborates on this idea in the words “unforgettable high cost”, which describes that the production cost of an asset cannot be low in order to obtain a monetary premium.
“What do antiques, time and gold have in common?” What they have in common is that their cost is high, either the original cost is high, or their history is irreproducible and expensive things are difficult to copy. Nick Szabo (2008)
“Precious metals and collections are unforgettable and scarce, due to their high production costs. The value of these assets is largely independent of any credible third party. Nick Szabo (2005) (Notes from Blue Fox Notes: That is to say, because the scarcity of these assets comes from its high production costs, it has a natural threshold against forgery, which gives it intrinsic value. And this intrinsic value will not be affected by third parties.)
Unforgeable high costs
The reason why a thing is unforgettable and expensive is that the actual cost of its production process is very high, or unforgeability.
Here are some examples:
· Banksy’s Balloon Girl has the basic narrative features of artists, social and situational capital, as well as the unique landmark events (uniqueness) in the creative process.
· Establishment and operation of gold mines require a large amount of capital expenditure and operating costs, and a large amount of time and manpower are needed from exploration to production. As an element, gold has very low reserves on the earth because of its atomic properties (very scarce).
· The POW of Bitcoin ensures that the distribution of Bitcoin depends on computing power and power consumption. Nakamoto’s perfect concept captures the unforgettable nature of unique origin stories and creates unparalleled digital scarcity mining physical costs (extremely scarce).
Unforgeable high costs are a prerequisite for achieving a currency premium, which distinguishes hard currency, value storage candidates and currencies created at low cost. Since there is no clear ceiling on the supply of French currency and inflation is controlled almost at zero cost by the central authorities, legal currency is not regarded as a scarce currency. For some encrypted assets, because entities can forge their “expensive nature”, they can not be regarded as scarce assets because of the following characteristics:
· Centralized currencies in which the maximum supply or inflation rate can be controlled by several independent entities.
· There are no rigid criteria for the maximum supply of the currency and no definite issuance plan at the time of its creation, which results in an entity having currency control.
· Through the first issuance of pre-excavated tokens, the production cost of tokens is almost zero.
· Currencies supported by security systems do not require sustained power and power consumption, and their production costs are negligible.
· Currencies with insufficient security can not resist foreign attacks, and the cost of mining is low.
Select several competitive currencies as the object of analysis
Since Nakamoto’s concept of perfection cannot be replicated, a basic assumption in this paper is that encrypted assets must be at least as expensive as Bitcoin’s.
Therefore, in order to assess this issue, I have chosen the following competitive currencies with issuance caps, stable supply and clear issuance plans to assess whether the “unforgettable high cost” characteristics will generate competitive currency premiums. The following table summarizes the high and unforgettable costs of manufacturing each block.
PlanB recently completed a series of studies on the relationship between Bitcoin S2F and network value (market value). It has been determined that there are more than 95% of the relevant factors, and the power law is reasonable, which is similar to the previous metal market. Further analysis shows that the model fitting is robust enough to obtain comparable power-law distributions with multiple data subsets of Bitcoin (considering missing coins, different time scales, etc.).
These analyses confirm that scarcity (through S2F) greatly affects human perception of value and is expressed through price.
The power law is rare but important. It is usually used to describe natural phenomena such as the distribution of earthquake magnitude with occurrence frequency, the variation of planetary orbit velocity with distance, and the distribution of biological variance. The power law can also be used to describe human behavior, population and population density, and even to describe the distribution of financial wealth.
(Modeling for Bitcoin S2F and Market Value Power Rule)
Bitcoin is one of the most dynamic free market assets in the world. In less than 10 years, its market value has grown from zero to $320 billion. Bitcoin is valuable because it provides people with useful services, and its stability as a currency is driven by its growing scarcity (the rising S2F ratio).
Its adoption is not mandatory, but the result of free choice.
In this Information-Free era, Bitcoin has successfully attracted the attention and investment of millions of people. Therefore, we should have reason to assume that Bitcoin enables humans to recognize its value by understanding scarcity.
Bitcoin is a natural phenomenon when compared with other scarce assets. (Note from Blue Fox Notes: That is to say, Bitcoin is formed by people’s natural choice. It is bottom-up, not top-down.)
Competitive Currency and Currency Premium
The craze for encrypted money markets in 2017 is largely an unrealistic pursuit of the next Bitcoin, possibly because of this craze (such as speculation, liquidity events, etc.), the valuation of these assets deviates from their basic value. In addition, there are many competing currency data whose life cycle is not long enough to assess the correlation between a relationship and competing currency data.
Therefore, I think the relationship between S2F and market value is sensitive and dynamic, but this relationship is not only determined by the data of competing currencies. PlanB study finds that it is not feasible to use individual competitive currency data to establish the value relationship of S2F, which is considered to be low correlation.
However, I find a more convincing view to compare the relationship between the original S2F of each competing currency and market value data with the “center of gravity” of Bitcoin. Compared with the power rule of Bitcoin, competitive currencies with good performance are more likely to generate currency premiums. On the contrary, underperforming competitive currencies are not favored by the free market, and their unforgettable high characteristics may not be sufficient to sustain the sustained growth of demand.
For these fixed supply competing currencies, I established the S2F ratio based on measurable supply data and market value data. Considering the change of hash rate and other natural anomalies, I used the average of 28 days to calculate the S2F ratio in order to get a clearer and more intuitive effect (except when the data points appear in the parallel horizontal area at half-time, the observed values obtained by this method are almost undistorted).
(28-day average S2F ratio, data source coinmetrics)
What’s interesting about this data set is that it determines the S2F ratio and recorded market capitalization based entirely on the daily calculated issuance rate (expected to last 365 days). No other assumptions are considered.
From this study, we can observe that the data points and Fractals of each competing currency are compared with the “center of gravity” (i.e. the white line):
· Bitcoin’s “center of gravity” does seem to be a baseline, and almost all digital assets have been convergent or trying to converge.
· Bitcoin oscillates around the “center of gravity” in each market cycle, matching the line at half-time. The volatility of these data points is dynamic and jumping, indicating the discovery of natural prices.
· The Wright coin also oscillates around this line (though less convincing), and similar to Bitcoin, the Wright coin is close to the “center of gravity” when it is halved. It is worth noting that the vitality of the Wright coin is far worse than that of Bitcoin, and the price is mostly affected by discrete “events”, so the data fluctuates vertically rather than comprehensively as that of Bitcoin.
· The monetary premium of Bitcoin cash seems to have fallen sharply, and the spread of S2F indicates that the hash rate is unstable, leading to irregular issuance.
· Darcy’s currency premium is relatively low, with only a few valuations touching this line. There are also obvious anomalies in the Dashi coin data, because the monthly payment block of the primary node has been erased by the 28-day average. Considering a smoother distribution plan without a halving mechanism, the Dashi currency’s data point flow is more intensive than the Bitcoin, Wright and Bitcoin cash flows.
· Compared with other competing currencies in this study, Decred’s currency premium has largely exceeded its focus over a long period of time (relative to its life cycle). Because of the smooth distribution curve, these data points also seem to be dense. As of 2019, Decred had been below the average. This is probably due to the continuing demand for PoS voting rights, which provide Decred’s governance system with participation rights and rights pledge incentives.
To further formalize these observations, I calculated the number of days in which the market value of each currency exceeded the “center of gravity” to determine its life cycle ratio of holding an additional currency premium. I will also use the maximum and minimum deviations of this line as an indicator of “currency volatility”, that is, the ability of each currency to maintain its currency premium over time. This is similar to the multiple measurement of the S2F ratio of PlanB.
(deviating from the “center of gravity” mapping to the S2F ratio)
(Compare the number of days in which the S2F ratio of each competing currency exceeds the power-law mean of the Bitcoin currency premium)
Both Darcy and Bitcoin cash have fallen below average, suggesting that they cannot maintain a stable currency premium for a long time. So far, Bitcoin cash has performed poorly, only 36% higher than the average. It can be argued that Bitcoin cash can reasonably be discounted as assets without a currency premium, so it is not attractive enough as a scarce fixed supply currency.
During the bear market, the average prices of Bitcoins and Wright coins fluctuated from – 1000% to – 2000%, similar to other currencies (excluding Bitcoin cash), with an upward premium of 90% above the average. Given the expected volatility of fixed supply and new encrypted assets, I think this is a reasonable benchmark, especially considering the dominance of Bitcoin.
In this study, Decred was the most prominent performer. Decred maintained a currency premium more than twice as long (relative to its life cycle) as Bitcoin, which it maintained for most of the bear market in 2018, with a maximum negative deviation of – 226%. Decred’s monetary premium fell by 10 times compared with the typical – 2000% deviation of the bitcoin.
This shows that among the currencies studied, Decred has the highest monetary premium. This may be due to the potential demand for POS and participation in the Decred governance system, which will soon account for 50% of the existing Decred supply. This provides another way to verify that the demand for ticket rights (the need for agreement ownership and participation rights) is a reliable source of purchase support and has a great impact on the scarcity of DCR.
This is an interesting contrast with Dashi coin, which uses the master node governance system, which needs to lock 1000 Dashi coins to participate (at the time of writing, it is worth 160,000 US dollars, Bluefox Notes: Currently about 100,000 US dollars, that is to say, according to the current price, at least 100,000 US dollars can participate in the master node). This is not an easy task for most people, especially compared with Decred’s voting rights system, which currently requires about 120-130DCR ($3,600-3,900, Bluefox Notes: $1200-1300), and Decred’s voting rights mechanism can also increase the voting rights of retail investors. Further research on the driving factors of token demand and perceived scarcity may reveal the reasons for the different premiums of these different currencies.
The study hypothesizes that Bitcoin’s dynamic growth and more convincing signals have found a “center of gravity” for the relationship between the S2F ratio (i.e., scarcity) and human value perception (expressed through price). Therefore, Bitcoin should be regarded as a benchmark to measure the currency premium of all encrypted assets.
The upsurge of competitive currencies in 2017 and its relatively short life cycle may cause data distortion to some extent, so it may not be representative to study the S2F ratio relationship of each currency separately. With the emergence of additional market cycles, this assumption must be reviewed periodically.
Through the data of encrypted assets with five fixed supply quantities of Bitcoin, Wright, Bitcoin Cash, Darcy and Decred, we can reasonably infer whether the currency premium of competitive currency has begun to take shape relative to the “center of gravity” of Bitcoin.
It can be reasonably concluded that Bitcoin has by far the most natural and important currency premium, which can be said to be the same as other financial assets.
Based on this study, the performance of Wright coin is similar to that of Bitcoin, but its credibility is low. It remains to be seen whether this premium can be maintained in the future. On this basis, holding Wright instead of Bitcoin can only be regarded as speculation.
Similarly, given the sharp downturn in the market and the overall sustainability below the power law line, I am still not sure whether Darcy is suitable as a value storage tool. Further study on the issuance mechanism and incentive structure of Dashi coin, which are the driving factors of scarcity, may help to understand the performance of the currency premium of Dashi coin.
Decred’s ability to maintain a long-term monetary premium is remarkable. Most importantly, Decred performed well in all the indicators assessed in this study, which may be a meaningful entry point for assessing potential storage value candidates.