hop system for store of usd value

8/13/2019 Hop System for Store of USD Value

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Hop

A USD-DenominatedInterest Bearing Cryptocurren

Cunicula

Version19 November 2013


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Outline

I. Inspiration and Ideals

II. How Hop adapts an ideal to the real world

III. Pitfalls and Challenges

IV. Conclusion


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I. Inspiration and Ideals


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Hops Inspiration: Milton Friedma

Algorithmic Monetary Poin favor of abolishing the Frather substitute a compu

http://goo.gl/qJtCoJ

Friedman rule for monetacentral bank should targetequal to the real interest rassets

http://en.wikipedia.org/wiki/Fried
http://goo.gl/qJtCoJhttp://goo.gl/qJtCoJhttp://en.wikipedia.org/wiki/Friedman_rulehttp://en.wikipedia.org/wiki/Friedman_rulehttp://en.wikipedia.org/wiki/Friedman_rulehttp://goo.gl/qJtCoJ


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Can Bitcoin achieve

Friedmans ideal?


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Can Bitcoin achieve

Friedmans ideal?


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Can Bitcoin achieve

Friedmans ideal?

Friedman Rule Policy

1) Deflation

2) Stable Prices


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Can Bitcoin achieve

Friedmans ideal?


1) Deflation

2) Stable Prices

Like Bitcoin!


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Can Bitcoin achieve

Friedmans ideal?


1) Deflation

2) Stable Prices

Like Bitcoin!


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Can Bitcoin achieve

Friedmans ideal?


1) Deflation

2) Stable Prices

Like Bitcoin!

Like the USD!


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Can Bitcoin achieve

Friedmans ideal?

1 out of 2 isn't

bad, but can we

do better???






1) Deflation

2) Stable Prices

Like Bitcoin!

Like the USD!


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Pros and Cons:Gold vs. USD vs. Friedman Ideal

Gold Long-term appreciatio

Near-term value is un

USD Long-term depreciatio

Near-term value is sta

Friedman Ideal Curren Long-term appreciatio

Near-term value is sta

0

1

2

3

4

5

4/19/2001 9/1/2002 1/14/2004 5/28/200510/10/20062/22/2008 7/6/2009 11/18/2010 4/1/2012 8/14/201312/27/2014

Index of Real Purchasing Power of

Gold, USD, and Friedman Ideal Currency(Jan 2003 = 1)

USD Gold Freidman Ideal Currency

The Friedman ideal currency offers the same stability as the USD, but without the inflation t


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II. How Hop adapts an ideto the real world


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Real-world Realities

Bitcoins price will always be volatile (see gold).

Prices and contracts will always be denominated in USD, EU Government like to generate revenue via inflation.

Firms and households require a currency with a stable price.

Intermediaries will always be necessary for most bitcoin pay Middlemen (e.g. bitpay) threaten bitcoins key goals (decentralized

Are these realities compatible with Friedmans ideal?


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Hops like a P2P Paypal

Hops are Paypal shares. HopUSD are Payp

Hops are equities. Their price floats and will be volatile. Just like bitcoins (or gold or shares in paypal) They will offer a high expected return as compensation for risk.

HopUSD are bonds. They pay interest. HopUSD are joint liabilities of all of hops equity holders. Interest rates on HopUSD float. They depend on the markets risk perceptions.

Yields would tend to decline as HopUSD gained wider acceptance.

HopUSD serve as a stable medium of exchange. Like paypalUSD, the face value of 1 HopUSD = 1 USD

They can be used to make USD payments to anyone who accepts them.

Unlike paypalUSD HopUSD are decentralized and can be exchanged without intermediaries HopUSD txn fees depend on competition for blockchain space, not monopoly price goug HopUSD pay out interest directly to their owner (not to a corporation).


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HopUSD aims to be Friedmans Ideal CuBut theres a long road ahead.

HopUSD targets Friedmans vision. Prices are stable since they are pegged to the USD.

Real Yield on HopUSD bonds = Real Interest Rate + Risk Premium

If HopUSD were perceived to be just as safe as US treasuries

risk premium = 0 and hopUSD = Friedmans ideal currency

The risk premium on hopUSD starts extremely high (like a ju As HopUSD gains acceptance, yields would decline to those of a re

corporate bond.

If acceptance was broad enough, yields could fall to a similar leveldeveloped country government debt.

Cross your fingers, thats hops ambition.


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Balance Sheets: Equity and Debt

Value of Company Assets = Value of Equity + Value of LiabilitPaypal

Assets Liabilities Value of

Equity (i.e.

paypal market

cap)

Value ofPaypal

network

OutstandingValue of

PaypalUSD (+

misc. debt)

Value ofPaypal

network

Outstanding

Value of

PaypalUSD (+

misc. debt)

Bitcoin

Assets Liabilities Value of

Equity (i.e.

bitcoin

market cap)

Value ofBitcoin

network

None Value of Bitcoin

network

Assets Liabil

Value ofHop

network

OutstValue

HopU


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Hops Value Proposition:Bitcoin vs. Paypal vs. Hop

Bitcoin Payp

Fixed money supply XCan do equity txns w/o central counterparty risk? X

Nominal fees for equity txns? X

Issues USD denominated debt? X

Can do USD debt txns w/o central counterparty risk? X X

Nominal fees for USD debt txns? X X

Pays interest on holdings of USD denominated debt? X X


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III. Pitfalls and Challenges


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Simple idea

Users convert their hops into hopUSD and their hopUSD into hop These are unilateral conversions at the blockchains exchange rate. Conversions change the total number of hops and hopUSD in circulation

The blockchains exchange rate targets parity of the hopUSD Target outcome: 1 hopUSD 1 USD (as observed on external markets Exchange rate adjusts based on binary votes from PoS miners

1 for a very small movement upwards (i.e. offer more hops for each hopUSD) 0 for a very small movement downwards (i.e. offer fewer hops for each hopUSD

Parity of hopUSD and USD gives the hop network value. Hop equity holders do the PoS mining and benefit from hop networks v Hop equity holders have some financial incentive to vote honestly.


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Design Challenge #1: Blockchains Time

Blockchain must see a vote in a PoS block to adjust conversion p

Blockchain price adjustment inherently slower than real time markets. Design makes it much, much slower to limit power of individual miners.

Conversions could arbitrage this lag at a profit, wasting blockcha

Solution: Require advance commitment to conversion txns. Delaying conversions gives the blockchain time to adjust prices. (see the

Real world price change

occurs.


fully incorporated in

blockchain

Conversion txn included

In block. (commitment)

Time t Time t+1 Time t+2


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Design Challenge #1: Blockchains Time

Blockchain must see a vote in a PoS block to adjust conversion p

Blockchain price adjustment inherently slower than real time markets. Design makes it much, much slower to limit power of individual miners.

Conversions could arbitrage this lag at a profit, wasting blockcha

Solution: Advance commitment to conversion txns -> no arbitrag Delaying conversions gives the blockchain time to adjust prices. (see the


occurs.


fully incorporated in

blockchain

Conversion txn included

In block. (commitment)

Time t Time t+1 Time t+2


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Design Challenge #2: Dishonest Vot

PoS miners can expropriate equity by manipulating the blockchains exchange rate.

But due to their equity stake, PoS miners incur a cost if this disrupts the hop system.

Design minimizes private benefit of manipulation and maximizes systemic cost of di I minimize the price influence of a single PoS voter.

Need very large stake to achieve large price benefit

I maximize effects of price manipulation on other users of the Hop system. Profits from manipulation require long-term deviations from HopUSD parity. (maximal cost of disruption)

Observed long-term deviations allow third parties to enjoy benefits too. (forced to share benefits with spe

2) Some Tangible Design Goals: 1) Honest PoS voting is more frequent than dishonest PoS voting.

This ensures that the blockchain price follows the real world price.

2) Trading profits from dishonest voting are small. Trading profits redistributes equity from honest to dishonest stakeholders. A bit is okay, too much and hon

To game the Hop system you must destroy the Hop system


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Design Challenge #2: Dishonest Vot

To limit influence of an individual PoS miner. Each vote can adjust price by only a very small amount. A dishonest vote subsequent honest vote in the opposite direction.

Price effect is fleeting.

Need large share of stake to achieve a substantial or sustained impact.

To ensure that private gains = big disruption for all users. Recall, conversion txn face a delay before execution. (see challenge #1)

In addition, conversion txn execution is extended across many blocks. Current target is 6 months worth.

The final exchange rate for conversion is an average of the exchange rate for the entire 6

To affect price substantially, you need to disrupt the exchange rate for the entir A day of disruption yields extremely little reward

Price effect achievable in one day is small.

Txn price is averaged over 180 days. One day with a bit disruption has a negligible impact.


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Design Challenge #3:Managing Risks of HopUSD Issuanc

People demand foreign currencies for two reasons:

Use 1: To purchase investment assets priced in these currencies. This includes the currency its Use 2: To purchase goods and services sold using these currencies.

Like bitcoin, HopUSD will be sought after for use 1 long before use 2 becomes a rea Growth of Use 1 lowers txn costs.

Examples of txn cost effects: market depth, bid/ask spread, number/quality of exchanges, info abou

Forget about merchants first task is always attracting speculators.

Growth of Use 2 requires low txn costs to be viable.

Issuance must balance the benefits of liquidity against the risks of excessive leverag Speculators must create, trade, and willingly hold HopUSD before it sees any real use Speculators must not create too many HopUSD or the system will collapse as a Ponzi.

Condition for Solvency:

Value of Hop network > value of outstanding HopUSD

The Danger of excess issuance:Excess HopUSD + Drop in USD Price of Hop Equity Insolvency HopUSD trades for less than 1 USD Whole


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Design Challenge #3:Managing Risks of HopUSD Issuanc

Where does investment demand come from?

1 HopUSD wait wait 1 year has passed 1+ HopUSD

HopUSD are interest bearing bonds. They pay out at a variabinterest rate, call it . determines demand.

If seems high people convert Hop equity to HopUSD debt If seems low people convert HopUSD debt to Hop equity

The Hop system adjusts to target a constant debt to equit


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Design Challenge #3:Risk management = arbitrary design de

Hop targets a debt to equity ratio of 0.05. (I explain how nex This fully insures HopUSD holders against up to a 21-fold drop in the price

The graph considers a busts effects on debt and equity holders

Hops target ratio of 0.05 implies

1) HopUSD very safe (bitcoins price drops have never been large enough

2) Hop Equity just slightly more risky/volatile than bitcoin.

-100%

-80%

-60%

-40%

-20%

0%

0 0.050.10.15 0.2 0.250.30.35 0.4 0.450.50.55 0.6 0.650.70.75 0.8 0.850.90.95 1 1.051.11.15 1.2 1.251.31.35 1.4 1.451.51.55 1.6 1.651.71.75 1.8 1.851.9

Starting Ratio of Debt to Equity

Risk of Holding Debt Depends on Debt to Equity Ratio

% Loss on Equity Investment (50% Decline in Network Value) % Loss on Debt Investment (50% Decline in Network Value)

% Loss on Equity Investment (90% Decline in Network Value) % Loss on Debt Investment (90% Decline in Network Value)


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Design Challenge #3:

Interest Rate Determined by Debt Equity

Investors will demand more HopUSD if it offers an above market expereturn after adjustment for risk (condition shown below)

>

And will want to sell HopUSD if

<

I allow to vary as a function of leverage, between a lower bound ofan upper bound of +100% per annum.

The higher the debt equity ratio, the lower the interest rate on hopUSD.

This encourages investors to Convert their HopUSD debt to Hop equity when leverage is too high.

Convert their Hop equity to HopUSD debt when leverage is too low. (implying no sup


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HopUSD Interest Rate vs.HopUSD Debt as % of Total Network V

-100%-95%-90%-85%-80%-75%-70%-65%-60%-55%-50%-45%-40%-35%-30%-25%-20%-15%-10%

-5%0%5%

10%15%20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%

100%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 26%

Value of Debt as a Percentage of Total Network Value

Annual Interest Rate on HopUSD as a Function of Leverage

Target Range of

Debt IssuanceFailing to Convert Debt

To Equity Imposes Large Losses

Debt

Offers

Very

High

Return


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How are the debt ratio andinterest calculated?

There are four types of assets. Mature Hop equity and Hop equity committed to conversion to HopUSD

Mature HopUSD and HopUSD committed to conversion to Hop equity.

Only Mature HopUSD earn interest (or pay out negative interest).

The total USD value of the network is calculated as HopUSD committed to conversion to Hop equity

(Mature Hop equity )

The ratio of debt to total value is calculated as

+

Rapid neutralization of interest rate changes caused by price movements Price of equity increases Debt ratio falls interest rate increases equity converted to debt inter

Price of equity falls Debt ratio rises interest rate falls debt converted to equity interest rate ris

Forward-looking interest rate adjustment interest rate does not change b/c of random pric Essential feature to maintain parity of HopUSD in the face of price fluctuations


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Pitfalls of a Pegged Cryptocurrenc

There are lots of poorly understood design challenges. Maintaining a peg to the USD Creating sustained investment demand and thus adequate liquidit

Preventing excessive investment demand and consequent instabil

Preventing gaming of the system for profit

Average user will say: The aim is to sustain a USD peg. Like

So is hop like #$#$@#? No!

Success requires overcoming all design challenges simultane Hop anticipates and tries to address all the challenges listed above

#$#$@# stops at maintaining a peg to the USD and ignores the re


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IV. Conclusion

H i bi i k i


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Hop is an ambitious work in progreYou can help with the progress par

If Hop achieves its design goals, it could mean the death of But thats a good thing!

Hop is more decentralized and more useful than bitcoin!

Your input is needed! Does Hop make sense to you? If not, whats confusing about Hop?

Do you see problems with Hops design? What are they?

Suggestions for fixing them?


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Conclusion

I hope you learned Why I want to create Hop.

The basic design features of Hop.

Why design of a USD peg is challenging and finicky.

I know that Many details are missing.

You still have questions.

In the future Ill fill in all the details (mostly achieved already in the whitepaper

Answer all your questions (just ask!)

hop system for store of usd value

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