I
am returning to a business concept I have been working on for many months, and
which I have provisionally labelled ‘Energy Ponds’. All that thinking
about new economic solutions for a world haunted by insidious pathogens – no,
not selfie sticks, I am talking about the other one, COVID-19 – pushed me to
revisit fundamentally the concept of Energy Ponds, and you, my readers, you are
my rubber duck.
The
rubber duck (Latin: anas flexilis), also known as bath duck (anas
balneum) is a special semi-aquatic avian species, whose valour I know from
my son, IT engineer by profession. Every now and then, he says, on the phone: ‘Dad,
focus, you are going to be my rubber duck’. The rubber duck is an imaginary
animal. It feeds on discursive waters. You talk to it in order to get your own
thoughts straight. When I am my son’s rubber duck, he explains me some
programming problems and solutions, he checks if I understand what he says, and
when I test positive, it means that he can get the message across to any
moderately educated hominid.
I
am going to proceed along the path of discursive equilibrium, in a cycle made
of three steps. First, I will try to describe my idea in 1 – 2 sentences, in a
simple and intelligible way. Then, I develop on that short description, with
technical details. In the third step, I look for gaps and holes in the
so-presented concept, and then I go again: short description, development,
critical look etc. I think I will repeat the cycle until I reach the Subjective
Feeling of Having Exhausted the Matter. Nelson Goodman and John Rawls proposed
something slightly similar (Goodman
1955[1];
Rawls
1999[2]):
when I talk long enough to myself, and to an imaginary audience, my concepts
sharpen.
Here
I go. First attempt. I synthesize. The concept of ‘Energy Ponds’ consists in
ram-pumping water from rivers into retentive, semi-natural wetlands, so as to
maximize the retention of water, and, in the same time, in using the elevation
created through ram-pumping so as to generate hydroelectricity. At the present
stage of conceptual development, ‘Energy Ponds’ require optimization at two
levels, namely that of adequately choosing and using the exact geographical
location, and that of making the technology of ram-pumping economically viable.
I
develop. We are increasingly exposed to hydrological effects of climate change,
namely to recurrent floods and droughts, and it starts being a real pain in the
ass. We need to figure out new ways of water management, so as to retain a
maximum of rainwater, whilst possibly alleviating occasional flood-flows. Thus,
we need to figure out good ways of capturing rainwater, and of retaining it.
Rivers are the drainpipes of surrounding lands, whence the concept of draining
basin: this is the expanse of land, adjacent to a river, where said river
collects (drains) water from. That water comes from atmospheric precipitations.
When we collect water from rivers, we collect rainwater, which fell on the
ground, trickled underground, and then, under the irresistible force of grandpa
Newton, flew towards the lowest point in the whereabouts, that lowest point
being the river.
Thus,
when we collect water from the river, we collect rainwater, just drained
through land. We can collect it in big artificial reservoirs, which has been
done for decades. An alternative solution is to retain water in wetlands. This
is something that nature has been doing for millions of years. We have sort of
a ready-made recipe from. Wetlands are like sponges covered with towels. A
layer of spongy ground, allowing substantial accumulation of water, is covered
with a dense, yet not very thick layer of shallowly rooted vegetation. That
cover layer prevents the evaporation of water.
Now,
I go into somehow novel a form of expression, i.e. novel for me. The age I am,
52, I have that slightly old school attachment to writing, and for the last 4
years, I have been mostly writing on my blog. Still, as a university professor,
I work with young people – students – and those young people end up, every now
and then, by teaching me something. I go more visual in my expression, which this
whole written passage can be considered as an introduction to. Under the two
links below, you will find:
That
would be all in this update. Just as with my other ideas, in the times we have,
i.e. with the necessity to figure out new s**t in the presence of pathogens,
you are welcome to contact me with any intellectual contribution you feel like supplying.
I
continue developing my ideas. Most people do, all the time, actually: they keep
developing their own ideas, and other people’s ideas, and, on the whole, we
just develop our ideas.
Good.
Linguistic warm up done, I go to work. I continue what I started in my last
update ( Steady
inflow of assets and predictable rules ): a
workable business concept for restarting local economies after COVID-19
lockdowns, and during the ongoing pandemic. Last time, I studied the early days
of the Bitcoin, in the hope of understanding how a completely new economic
scheme emerges. As hope crystalizes into something more structured, ideas
emerge. I am going to make a quick sketch of what I have come up with, and then
I will try give it some shine by using my observations as regards the early infancy
of the Bitcoin.
As
I observe the present situation, I can see that local communities both need and
accumulate some typical goods and assets. The most immediately needed, and
semi-instinctively accumulated goods are those serving personal protection and
hygiene: gloves, facial protections (masks, covers, googles etc.), scrubs and
aprons, bonnets, soap, ethanol-based sanitizers. I wonder, and, honestly, I
would gladly do with the consultation of an epidemiologist, to what extent an
abundant use of those hygienic goods can be substitute to social distancing. I
mean, to what extent can we restart social interactions with adequate
protection?
Anyway, I am quite confident that local communities will be accumulating what I provisionally call ‘epidemic assets’. The challenge consists in using that phenomenon, and those assets, so as to give some spin to economies brought down by lockdowns.
Now, I am using basic laws of economics. Whenever and wherever some stock of medical supplies will be accumulated, it will be inventories, i.e. circulating assets subject to storage and endowed with direct economic utility, but not to amortization. Sooner or later, substantial inventories of anything attract the company of some fixed assets, such as buildings, equipment, and intellectual property, on the one hand, as well as the company of other circulating assets (e.g. receivable claims on third parties), and, finally, the company of JOBS, which are the key point here.
Now,
let’s imagine the following scenario. A local community, e.g. local hospital
plus local city council, need to have a given amount of ‘epidemic assets’ stored
and ready to use, just to keep the local epidemic situation under control. They
need those epidemic assets, yet, as the local economy is stricken by epidemic
lockdown, they don’t have enough money (or no money at all) to pay for those
assets. Here starts the gamble. The local community offers the suppliers of
epidemic assets to be paid in tokens of a virtual currency, where each token
corresponds to a futures contractwith claims on a future stock of epidemic
assets.
The central idea is that with the virus around, everybody will have a keen interest in having enforceable claims on epidemic assets. That keen interest will be driven by two motives. In the first place, many people will need to use those epidemic assets like directly and personally. Secondly, those assets will be valuable, and futures contracts on them will have monetizable, financial value. It should be possible to create a circulation of those tokens (futures), where the direct supplier of epidemic assets can use those tokens to pay their own suppliers of intermediate goods, as well as to pay a part of the payroll. Those whom he pays will either consume those futures to grab some epidemic assets, or make those futures circulate further.
As those tokenized futures contracts on epidemic assets get developed and put in circulation, we can use the relatively recent invention called ‘smart contract’. A complex contract can be split into separate component parts, like LEGO blocks, each endowed with a different function. Users can experiment with each part separately, and the actual contracts they sign and trade are compound legal schemes. For now, I can see 3 principal LEGO blocks. The first one is the exact substance of the claim incorporated in the tokenized contracts. Futures contracts have this nuance in them: they can embody claims on a certain quantity of specified goods or assets, e.g. 100 kg of something, or on a nominal financial value of those goods or assets, like $100 worth of something. Maturity of the claim is another thing. Futures contracts have a time horizon in them: 1 month, 6 months, 12 months etc. In this specific case, maturity of claims is the same as the lifecycle of one tokenized contract, and, honestly, if this scheme is applied in real life, we will be sailing uncharted waters. Those tokens are supposed to keep local economies going, and therefore they’d better have a long lifecycle. Hardly anyone would trust quasi – monetary tokens with a lifespan of 3 months. On the other hand, the longest futures I have seen, like those on coffee or wheat, stretch over 6 months, rarely longer. Here comes the third building block, namely convertibility of the claim. If we want the system to work smoothly, i.e. inspire trust in exchange, and be realistic in the same time, we can make those tokens convertible into something else. They could convert into similar tokens, just valid over the next window of trade, or into something else, e.g. shares in the equity of newly built local hospitals. Yes, we are certainly going to build more of them, trust me.
Building blocks in hand, we start experimenting. Looking at the phases I distinguished in the early infancy of the Bitcoin (once again, you can look up Steady inflow of assets and predictable rules ), I see three essential steps in the development of this scheme. The first step would consist in creating a first, small batch of those tokenized contracts and test them in deals with whoever would like to try. The experience of the Bitcoin shows that once the thing catches on (and IF the thing catches on), i.e. once and if there are any businesspeople interested, it should spread pretty quickly. Then comes the second phase, that of building large portfolios of those tokenized contracts in a relatively small and select community, sort of Illuminati of medical supplies. In that phase, which is likely to be pretty long, like 1,5 year, said Illuminati will be experimenting with the exact smart structure those contracts, so as to come up with workable, massively reproducible patterns for the third phase, that of democratization. This is when the already hammered and hardened contractual patterns in those tokens will spread to a larger population. Individual balances of those tokens are likely to shrink in that third phase and become sort of standardized. This could be the moment, when our tokenized contracts can start being used as a vehicle for saving economic value over time, and it looks like a necessary condition for driving it out of its so-far autonomous, closed market into exchangeability against money.
That would be all for today. If you want to contact me directly, you can mail at: goodscience@discoversocialsciences.com . If anyone wants to bounce this ball off their bat, you are welcome. I am deeply convinced that we need to figure out some new s**t. Our world is changing, and we’d better make that change liveable.
Clink!
The coin dropped… I have been turning that conceptual coin between my synapses
for the last 48 hours, and here it is. I know what I have been thinking about,
and what I want to write about today. I want to study the possible ways to
restart business and economy in the midst of the COVID-19 pandemic.
There
is a blunt, brutal truth: the virus will stay with us until we massively distribute
an efficient vaccine against it, and that is going to take many months, most
probably more than a year. Until then, we need to live our lives, and we cannot
live them in permanent lockdown. We need to restart, somehow, our socio-economic
structures. We need to overcome our fears, and start living in the presence of,
and in spite of danger.
Here
come three experiences of mine, which sum up to the financial concept I am
going to expose a few paragraphs further. The first experience is that of observing
a social project going on in my wife’s hometown, Starachowice, Poland, population
50 000. The project is Facebook-named ‘The Visible Hand’ (the original
Polish is: Widzialna Ręka), and it emerged spontaneously with the COVID-19
crisis. I hope to be able to present the full story of those people, which I
find truly fascinating, and now, I just give a short glimpse. That local community
has created, within less than two weeks, something like a parallel state, with its
supply system for the local hospital, and for people at risk. They even go into
developing their own technologies of 3D printing, to make critical medical equipment,
such as facial masks. Yesterday, I had a phone conversation with a friend, strongly
involved in that project, and my head still resonates with what he said: ‘Look,
the government is pretty much lost in all that situation. They pretend a lot,
and improvise a lot, and it is all sort of more pretending than actually doing
things. Our local politicians either suddenly evaporated, or make clumsy,
bitchy attempts to boost their popularity in the midst of all that s**t. But people…
Man, people are awesome. We are doing together things that our government
thinks it is impossible to do, and we are even sort of having fun with it. The
sense of community is nothing short of breath-taking’.
My
second experience is about the stock market. If you have been following my
updates since the one entitled ‘Back in the game’, you know that I decided to restart investing in the stock market,
which I had undertaken to do just before the s**t hit the fan, a few weeks ago.
Still, what I am observing right now, in the stock market, is something like a
latent, barely contained energy, which just seeks any opportunity to engage
into. Investors are really playing the game. Fear, which I could observe two weeks
ago, has almost vanished from the market. Once again, there is human energy to
exploit positively.
There is energy in people, but it is being locked down, with the
pandemic around. The big challenge is to restart it. Right now, many folks lose
their jobs, and their small businesses. It is important to create substantial
hope, i.e. hope which can be turned into action. Here comes my third experience,
which is that of preparing a business plan for an environmental project, which
I provisionally call Energy Ponds (see Bloody
hard to make a strategy and The
collective archetype of striking good deals in exports for latest developments).
As I prepare that business plan, I keep returning to the conclusion that I need
some sort of financial scheme for situations when a local community, willing to
implement the technology I propose, is short of capital and needs to sort of
squeeze money out of the surrounding landscape.
Those
three experiences of mine, taken together, lead me back to something I studied
3 years ago, when I was taking my first, toddler’s steps in scientific
blogging: the early days of the Bitcoin. Today, the Bitcoin is the big, sleek
predator of financial markets, yet most people have forgotten how that thing
was born. It was an idea
for safe financial transactions, based on an otherwise old concept of
financial law called ‘endorsement of debt’, implemented in the second year of
the big financial crisis, i.e. in 2009, to give some liquidity to small
networks of just as small local businesses. Initially, for more than 18 first months
of existence, the Bitcoin was a closed system of exchange, without any
interface with any established currency. As far as I know, it very much saved
the day for many small businesses, and I want to study the pattern of success,
so as to see how it can be reproduced today for restarting business in the context
of pandemic.
Before
I go analytical, two general remarks. Firstly, there is plenty of folks who
pretend having the magical recipe for the present s**t we are waist-deep in. I
start from the assumption that we have no fresh, general experience of
pandemics, and pretending to have figured the best way out is sheer bullshit.
Still, we need to explore and to experiment, and this is very much the spirit I
pursue.
Secondly,
the Bitcoin is a cryptocurrency, based on the technology designated as
Blockchain. What I want to take away is the concept of virtual financial
instrument focused on liquidity, rather than the strictly spoken technology. Of
course, platforms such as Ethereum can be
used for the purpose I intend to get across, here below, still they are just an
instrumental option.
Three
years ago, I used data from https://www.quandl.com/collections/markets/bitcoin-data,
which contains the mathematical early story
of what has grown, since, into the father of all cryptocurrencies, the Bitcoin.
I am reproducing this story, now, so as to grasp a pattern. Let’s walse. I am focusing
on the period, during which the Bitcoin started, progressively acquired any exchangeable
value against the US dollar, and finished by being more or less at 1:1 par therewith.
That period stretches from January 3rd, 2009 until February 10th,
2011. You can download the exact dataset I work with, in the Excel format, from
this link:
Before
I present my take on that early Bitcoin story, a few methodological remarks.
The data I took originally contains the following variables: i) total number of
Bitcoins mined, ii) days destroyed non-cumulative,
iii) Bitcoin number of unique addresses used per day, and iv) market
capitalization of the Bitcoin in USD. On the basis of these variables, I calculated
a few others. Still, I want to explain the meaning of those original ones. As
you might know, Bitcoins were initially mined (as far as I know, not
anymore), i.e. you could generate 1 BTC if you solved a mathematical riddle. In
other words, the value you had to bring to the table in order to have 1 BTC was
your programming wit plus computational power in your hardware. With time, computational
power had been prevailing more and more. The first original variable, i. e. total
number of Bitcoins mined, is informative about the total real economic value
(computational power) brought to the network by successive agents joining it.
Here
comes the first moment of bridging between the early Bitcoin and the present
situation. If I want to create some kind of virtual financial system to restart,
or just give some spin to local economies, I need a real economic value as gauge
and benchmark. In the case of Bitcoin, it was computational power. Question: what
kind of real economic value is significant enough, right now, to become the tool
for mining the new, hypothetical virtual currency? Good question, which I
don’t even pretend to have a ready-made answer to, and which I want to ponder
carefully.
The
variable ‘days destroyed non-cumulative’ refers to the fact that Bitcoins
are crypto-coins, i.e. each Bitcoin has a unique signature, and it includes the
date of the last transaction made. If I hold 1 BTC for 2 days, and put it in circulation
on the 3rd day, on the very same 3rd day I destroy 2 days
of Bitcoins. If I hold 5 Bitcoins for 7 days, and kick them back into market on
the 8th day, I destroy, on that 8th day, 5*7 = 35 days.
The more days of Bitcoin I destroy on the given day of transactions, the more I
had been accumulating. John Maynard Keynes argued that a true currency is used
both for paying and for saving. The emergence of accumulation is important in the
shaping of new financial instruments. It shows that market participants
start perceiving the financial instrument in question as trustworthy enough to transport
economic value over time. Note: this variable can take values, like days =
1500, which seem absurd at the first sight. How can you destroy 1500 days in a
currency born like 200 days ago? You can, if you destroy more than one Bitcoin,
held for at least 1 day, per day.
The
third original variable, namely ‘Bitcoin number of unique addresses used per
day’, can be interpreted as the number of players in the game. When
you trade Bitcoins, you connect to a network, you have a unique address in that
network, and your address appears in the cumulative signature that each of the
Bitcoins you mine or use drags with it.
With
those three original variables, I calculate a few coefficients of mine. Firstly,
I divide the total number of Bitcoins mined by the number of unique addresses,
on each day separately, and thus I obtain the average number of Bitcoins
held, on that specific day, by one average participant in the network. Secondly,
I divide the non-cumulative number of days destroyed, on the given day, by the total
number of Bitcoins mined, and present in the market. The resulting quotient is
the average number of days, which 1 Bitcoin has been held for.
The
‘market capitalization of the Bitcoin in USD’, provided in the original
dataset from https://www.quandl.com/collections/markets/bitcoin-data,
is, from my point of view, an instrumental variable. When it becomes non-null,
it shows that the Bitcoin acquired an exchangeable value against the US dollar.
I divide that market capitalization by the total number of Bitcoins mined, and
I thus I get the average exchange rate of Bitcoin against USD.
I
can distinguish four phases in that early history of the Bitcoin. The first one
is the launch, which seems to have taken 6 days, from January 3rd,
2009 to January 8th, 2009. There were practically no players, i.e.
no exchange transactions, and the number of Bitcoins mined was constant, equal
to 50. The early growth starts on January 9th, 2009, and last
just for 3 days, until January 11th, 2009. The number of Bitcoins
mined grows, from 50 to 7600. The number of players in the game grows as well, from
14 to 106. No player destroys any days, in this phase. Each Bitcoin mined is
instantaneously put in circulation. The average amount of Bitcoins per player
evolves from 50/14 = 3,57 to 7600/106 = 71,7.
On
January 12th, 2009, something changes: participants in the network
start (timidly) to hold their Bitcoins for at least one day. This is how the phase
of accelerating growth starts, and will last for 581 days, until August
16th, 2010. On the next day, August 17th, the first Bitcoins
will get exchanged against US dollars. On that path of accelerating growth, the
total number of Bitcoins mined passes from 7600 to 3 737 700, and the daily number
on players in the network passes from an average around 106 to about 500 a day.
By the end of this phase, the average amount of Bitcoins per player reaches 7475,4.
Speculative positions (i.e. propensity to save Bitcoins for later) grow, up to an
average of about 1500 days destroyed per address.
Finally,
the fourth stage of evolution is reached: entry into the financial market, when
we pass from 1 BTC = $0,08 to 1 BTC = $1. This transition from any exchange
rate at all to being at par with the dollar takes 189 days, from August 17th,
2010 until February 10th, 2011. The total number of Bitcoins grows at
a surprisingly steady rate, from 3 737 700 to about 5 300 000, whilst
the number of players triples, from about 500 to about 1 500. Interestingly,
in this phase, the average amount of Bitcoins per player decreases, from 7475,4
to 3 533,33. Speculative positions grow steadily, from about 1500 days destroyed
per address to some 2 400 days per address.
Below,
you will find graphs with a birds-eye view of the whole infancy of the Bitcoin.
Further below, after the graphs, I try to give some closure, i.e. to guess what
we can learn from that story, so as to replicate it, possibly, amid the
COVID-19 crisis.
My
first general conclusion is that the total number of Bitcoins mined is the only
variable, among those studied, which shows a steady, quasi linear trend of
growth. It is not really exponential, more sort of a power function. The total
number of Bitcoins mined corresponds, in the early spirit of this
cryptocurrency, to the total computational power brought to the game by its
participants. The real economic value pumped into the new concept was
growing steadily, linearly, and to an economist, such as I am, it suggests the
presence of exogenous forces at play. In other words, the early Bitcoin was
not growing by itself, through sheer enthusiasm of its early partisans. It was
growing because some people saw real value in that thing and kept bringing
assets to the line. It is important in the present context. If we want to use
something similar to power the flywheels of local markets under the COVID-19
restrictions, we need some people to bring real, productive assets to the game,
and thus we need to know what those key assets should be. Maybe the capacity to
supply medical materials, combined with R&D potential in biotech and 3D
printing? These are just loose thoughts, as I observe the way that events are unfolding.
My
second conclusion is that everything else I have just studied is very swingy
and very experimental. The first behavioural transition I can see is
that of a relatively small number of initial players experimenting with using
whatever assets they bring to the table in order to generate a growing number
of new tokens of virtual currency. The
first 7 – 8 months in the Bitcoin show the marks of such experimentation. There
comes a moment, when instead of playing big games in a small, select network,
the thing spills over into a larger population of participants. What attracts
those new ones? As I see it, the attractive force consists in relatively predictable
rules of the game: ‘if I bring X $mln of assets to the game, I will have
Y tokens of the new virtual currency’, something like that.
Hence,
what creates propitious conditions for acquiring exchangeable value in the new
virtual currency against the established ones, is a combination of steady
inflow of assets, and crystallization of predictable rules to use them in that
specific scheme.
I
can also see that people started saving Bitcoins before these had any value in
dollars. It suggests that even in a closed system, without openings to other
financial markets, a virtual currency can start giving to its holders a sense
of economic value. Interesting.
