This is the first part in a five-part series of posts that lay out the basics of what we are trying to build with Catallax. The series will follow the following schedule and I’ll update the list with links as the articles go live:
Demurrage, Catch Up, and Pref Dividends
Natural money is ‘natural’ because it decays like all kinds of real capital. Historically, this kind of money was implemented using stamped money. With stamped money you would have to buy a stamp(say for 1 cents) and affix it to your physical $1 bill once a month(thus having a 12% decay rate). At the end of each year, all bills would be turned in for new bills. Stamps are a bit impractical in the real world and we are able to do away with them because of the blockchain. Instead of charging for a stamp, we just track the decay rate and make sure that each account that uses the system pays the correct fee before they are able to transfer money. We call this the Catch-Up. I’ve laid out a simple way to do this in solidity in a dev log post.
This is a decent system for accelerating the flow of cash through an economy. If you cash is going to decay you want to quickly find a place to spend/invest it so that someone else takes on the burden of paying the decay fee. You will typically find people willing to pay the fee in exchange for reducing risk elsewhere. As a result, your cash ends up being more efficient as a liquidity tool.
Implementing a decaying currency is all well and good, but what to do with the decay? Other blockchains have tried allocating this a miner reward friecoin. In other stamped money systems the decay fee was used to provide government services and treated like a tax. We are going to do something different with our decay fees. We are going to treat the blockchain as a time machine and pass the decay backward through the blockchain to the people that paid into an account. We call these Pref Dividends. By doing this we not only incentivise the application of cash so one does not have to pay the decay fee, but we incentivise the application of cash to destinations that the cash holder anticipates will be good at attracting more cash in the future.
Let's take a look at a couple of examples of how this system would work.
Scenario 1 - The Wine Heiress:
A wine merchant produces a bottle of stunning wine. I think this bottle of wine is worth $20 and the merchant agrees. This is her first catallaxian transaction so when I give her $20 for the wine, I get 20 pref shares in her account. I own 100% of the pref shares at this point. The next day she finds out that a Catallaxian great uncle has passed away and she has inherited a cool $1 million. She idles the day away dreaming of what she is going to spend this money on. When she goes to start spending it the next day she has to ‘Catch Up’. She held $1,000,020 for 1 day at a 12% per year decay rate. Her first transaction will have a $328 decay fee tacked onto it. That $328 will go straight into my account because I’m the only one who has ever put cash into her account. Not a bad return on spending $20...and I get to keep the wine.
This is a far-fetched scenario, but it shows the power of betting right.
Scenario 2: The Established Merchant.
Like the last scenario, I’m going to buy a bottle of wine for $20. But this time I’m buying it from a wine merchant who has been growing their operation for a while and is established in the business. I get the same 20 pref points in the account, but in this scenario, the merchant has already had revenues of $3,000,000 over the course of her operation. As a result, my $20 only makes up 0.00000666666 of the total 3,000,020 prefs. If this merchant likes to keep $100,000 in their account to mitigate risk, my one day's worth of pref payments(at a 12% decay rate) would only be $0.0002. What a tiny sum! Over a year that is only $.073 cents.
From this scenario, we learn that one shouldn’t expect grand riches from this setup, but if one were to buy a bottle of wine a week for 20 years you’d end up with a stipend of $75 / year for your participation in the Wine Economy. (This is a rough calculation and doesn’t take into account reduction in percentage of the wine merchant's account). This is not a great ROI, but don’t forget, you still have all that wine.
The moral of these two stories is that over a lifetime of spending money with accounts that range in return between these two scenarios one can build up a nice recurring pref payment that can act as a form of earned basic income.
In addition, we have some new levers on the economy that we can pull to try to accelerate the velocity of money, combat inflation, and increase redistribution of wealth while maintaining the market incentives of capitalism.
One principle must be put in place for this all to work properly and that is the principle of the inalienable right to pref ownership. This means that you cannot sell your prefs anymore than you can sell yourself into slavery. I propose the concept of statutory theft as a legal guiding principle of how handle scams and inappropriate attempts to confiscate the value of future pref payments. This is a difficult thing to implement in code and will be an important reason that we will need to look at rule of law in relation to deploying the Catallax system.
You can read more and explore the economic model I’ve built showing how this system can lead to increases in GDP and reduction in poverty in one of my other articles: http://catallax.info/news/2015/4/19/a-published-model-of-hypercapitalism
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