Apply HN: Gresham Dollar – Viral Currency for Basic Income

* Someone with a deep pocket decides to buy as much as possible at a high discount, say 1 cent per dollar, and wait 30 days and get a 100x gain in a month. *

We've addressed this concern in a very specific way through something I call the "activation cap" on GD, which limits the pace at which GD can convert to USD. The activation cap doesn't apply to merchants who have signed merchant contracts with us. But if you're a merchant partner, your contract stipulates that you have to maintain par 1-to-1 pricing between GD and USD, so merchant partners can't set separate prices or do this kind of arbitrage.

When GD is added to an account, its lifetime begins counting down immediately. Starter and basic accounts (i.e. accounts with no merchant contract) are subject to the activation cap. The activation cap is is a limit to the amount of GD that can activate (i.e. begin counting down) in a period of time. GD countdowns remain suspended until there's room for them to activate without violating the cap. This helps prevent large hoards of GD from quickly expiring.

For example, let's say the activation cap is $20/day. In other words, at most $20 GD will activate per day. If an account's only income consisted of a single lump sum of $60, that GD would then activate continuously over the course of three days, and hence would later expire continuously over the course of three days.

The activation cap does not affect users whose total GD income remains below the cap. We will set the activation cap higher than (e.g. double) the basic income so that those who only receive the basic income remain unaffected by the activation cap.

This is a form of capital control, to be sure. But since there are always merchants who will accept GD at par, I'm confident that the market value of GD won't deviate too far from USD.

* Hi from Argentina! *

Hi! I'm in the U.S., but I actually came up with the idea for Gresham Dollar when I was contemplating Greece's possible exit from the Eurozone and how they might smoothly transition to a new currency if their euro reserves were limited. My hope is to extend Gresham Dollar to international markets.

* Nobody in their right mind would buy the money, no merchant, no exchange, no other user because all of them think that the value will continue to decrease. *

That's fine. Initially, Gresham Dollar will be 100% backed by USD, and we'll be putting GD in the hands of people who otherwise won't have any money to spend, so I'm confident that we will convince some merchants to accept it Gresham Dollars. If people don't want to spend it, they can sit on it and allow it to convert to USD.

* So the only option is to save them in a drawer and wait 30 days, and after 30 days they are convertible to dollars. (At the 29th day, you can choose to sell it to someone that will have to wait 30 days or exchange it for a few cents, or wait 24 hours and get a whole dollar.) *

Yes. That makes sense. Usually, my "tomorrow dollar" is worth more to me than a "dollar in 30 days" is worth to you, so why would you give me fair value for it?

The merchant partners are contracted to accept GD at par. You'll always be able to get your full dollar's worth, with a caveat being that the number of merchants who accept GD at par will initially be fairly small.

But maybe I'm in a situation where I'm out of USD and I need to make a certain payment in USD. In that case, I may be willing to pay a premium to get that liquidity from you at 95 cents on the dollar, or whatever the market exchange rate happens to be.

Cheers.

1. Where does the money come from to fund the conversion into USD? i.e. is this self-funding somehow or is it a government program?

It's not a government program. The primary way in which we build our USD reserves is through the sale of "Future Gresham Dollars," which are tokens that automatically convert into GD at a pre-determined future date, after which Gresham Dollar no longer automatically converts into USD. An early investor might pay, say, $5 million USD in exchange for $50 million FGD. Anyone can buy FGD, so you can think of it as a form of crowd funding or crowd investment.

2. Why 30 days to mature (why not 0, 3, 15, 45, 3650)?

30 is an arbitrary number. I picked 30 days because it sounded reasonable and then I did some calculations based on that number.

For example, let's say we choose Boston as our starting city. We would sign several merchants, probably mostly grocery stores, to 90 day merchant contracts with a 100% reserve ratio requirement. There are roughly 10,000 homeless people in Boston. We'd need about $5 million in FGD investment to run a 3-month experiment during which we distribute basic accounts with a $10 daily basic income and a 30-day GD lifetime. This assumes that we're handing out the same number of accounts every day; on the last day, the 10,000th account will be activated.

In a worst-case scenario assuming we don't get any further USD reserves and everybody sits on their GD without spending it, we run out of money and shut the whole thing down after 90 days. But that's a worst-case scenario.

We can do similar calculations with other GD lifetimes. And, in fact, the plan is to gradually lengthen the lifetime of Gresham Dollar until the day when it no longer converts to USD at all anymore.

3. "Far fewer USD reserves than a central bank would normally need..." OK. So I'm missing a bigger point of the mechanics.

Hmm. Well, we don't offer on-demand par exchange for GD. The only way for GD to convert back into USD is for its lifetime to expire and its lifetime gets reset every time it changes hands. The less people trust it, the more they will get rid of it, and the less we have to dip into our USD reserves. That being said, we will initially have 100% reserves, but not forever.

4. Is there a Ponzi-Scheme danger as more people are trading their Viral Currency?

There's always the risk that we run out of USD reserves. But we will continually maintain worst-case estimates of when that will happen that are visible users when they log into their accounts, so it won't hit anyone out of nowhere. Furthemore, you'll always be able to see how much of your GD is guaranteed to convert even in the scenario where everybody just suddenly decides to sit on their GD one day. Even so, if you're an ordinary user not holding large balances of GD, you'll be okay even if we run out of reserves.

Unless you're a merchant partner, there's a cap on the amount of GD that will convert to USD in a given period of time. So if, for whatever reason, you're holding $2 billion in your Gresham Account and we run out of USD reserves, you're not going to get most of your USD back. I wrote more about the activation cap in one of the other comments here.

Merchant partners take on risk as defined in their contract. If you're a merchant partner whose contract says you get 90% of your USD back in the event that we fail, you'll get 90% of your USD back.

It's actually more involved than (and not quite as bad as) that. We have a whole plan for what happens if we run out of USD reserves. It's called the Disruption event, and it's something we can technically come back from. But during Disruption, GD will obviously not be converted to USD as normal and we will allow merchants to set separate prices in GD and USD. But if Gresham Dollar is already somewhat established by then, it doesn't necessarily mean the end of the currency and we can always recover from Disruption by bringing our USD reserve levels back up.

PS- 1. The premise of the hack is interesting--bad money gets spent first, good gets saved; though ironically the bad is less valuable if you spend it today (discount)

Thanks!

If you spend at a merchant partner, who's required to accept GD at par with USD, then you don't actually get less value from your GD for spending it early. And if you're selling your GD on the market, you'll still get more value for your "younger" GD because all GD is the same to the person receiving it, so you'll get the same price no matter what.

2. I like the goals of basic income. Thanks for experimenting with it and starting a conversation.

=)

Hmm. I don't know if this helps, but because of how the Gresham Dollar system works, GD can actually be divided into two categories:

1. Active GD. This GD's lifetime is counting down and will always convert into some amount USD when it expires. These are proper liabilities and they will always be guaranteed to be funded by USD reserves at a pre-determined level (e.g. 70%).

2. Suspended GD. This GD's lifetime never started counting down and we don't promise that it will ever convert to USD. We only ever take on the liability of activating GD when we have the USD reserves to do so. All GD held back by the Activation Cap (described in another comment) is suspended.

When Gresham Dollar first launches, we will have sufficient USD reserves to convert into USD all GD in existence. We could even afford to activate any Suspended GD held back by the activation cap and and take them on as liabilities, but we choose not to.

As Gresham Dollar progresses into being backed only by a fractional reserve of USD, we will keep less USD in reserve than the total amount of GD in existence. But we will not keep less USD in reserve than the total amount required to fund the Active GD in existence at their required reserve level.

Each Gresham Account is subject to a minimum reserve ratio, which constitutes a promise that we will earmark an amount of USD in our reserves to back the Active GD in that account. All non-merchant (starter, basic) accounts share the same minimum reserve ratio, but each merchant account has its own associated minimum reserve ratio negotiated in its merchant contract. For example, consider an account holding $1,000 in Active GD with a 60% minimum reserve ratio. This account requires that we hold $600 USD in our reserves to back it.

We can easily calculate the minimum total of USD reserves we require to back all Gresham Accounts. We do this by taking the sum of Active GD in each account multiplied by that account's minimum reserve ratio.

For example, if we have three merchant accounts each holding $1 million with minimum reserve ratios of 60%, 70%, and 80%, and there is a total of $3 million Active GD in non-merchant accounts with a non-merchant minimum reserve ratio of 90%, then our total required USD reserves are:

60% * $1m + 70% * $1m + 80% * $1m + 90% * $3m = $4.8 million

This calculation is agnostic to the amount of Suspended GD due to the activation cap. For example, assuming an activation cap of $20/day, if a user opens a starter account and adds $2 billion GD to it by converting it from USD, it increases our reserves by $2 billion USD, but it doesn't do much to affect the amount of USD reserves we require because only a tiny portion of that $2 billion GD activates per day. If that user then spends the $2 billion at a merchant who has a 50% reserve ratio, our reserve requirement does then increase by $1 billion USD. But because of the $2 billion USD he just provided us, we already have the USD reserves to meet that requirement.

What I call Disruption occurs when our USD reserves become insufficient to back additional Active GD. In other words, the total amount of our actual USD reserves drops exactly to the total level of our required USD reserves. During normal times, when a user spends Active GD, it helps stave off Disruption.

During Disruption, the Gresham Dollar system will continue to function normally in most ways. GD can continue to circulate and people will continue to receive their basic incomes. However, any new GD added to an account will remain suspended until there are enough USD reserves to back it. We will not require merchants to set equal GD and USD prices during Disruption because the value of GD relative to USD will be more difficult to maintain.

Active GD will continue to count down and expire. When it expires, it converts into an amount of USD based on the account's minimum reserve ratio. The GD that doesn't convert to USD gets its lifetime rolled over. For example, during Disruption, if an account has an 80% reserve requirement, each Active GD that expires will convert into 80 cents of USD and 20 of cents new (full lifetime) Suspended GD.

As our USD reserves replenish, we will activate more GD. Whenever Active GD is spent, it becomes Suspended GD in the new account. This frees up USD reserves and allows us to activate Suspended GD elsewhere in the system. When our total USD reserves again become sufficient to back all GD that would normally be backed, Disruption ends. At that point, we reinstate merchant price requirements, and resume converting GD to USD at 100% using our excess reserves.

Reaching Disruption depends both on our total USD/GD ratio and the distribution of GD. Disruption will theoretically arrive at the soonest possible date if the following happens:

1. All GD becomes distributed in such a way that it active (i.e. is not subject to the activation cap).

2. Everybody sits on their GD and lets it expire.

3. All GD is backed by the highest possible minimum reserve ratio.

Given #1 and #2 above, our USD reserves will drain at the fastest possible rate. And given #3, our total USD reserve requirement is at its maximum. Disruption will occur as soon as our total USD/GD ratio decreases to be equal to that minimum reserve ratio. For example, if the non-merchant general minimum reserve ratio is 70% and it is higher than any specific merchant's minimum reserve ratio, Disruption occurs when the total USD/GD ratio decreases to 70%.

We can use this information to predict the soonest possible (worst case) date of Disruption. Whenever the total reserve ratio is less than the highest minimum, Disruption could theoretically occur at any moment depending on the changing distribution of GD. For example, if our present total USD/GD reserve ratio is 60% and there's a merchant account out there with a minimum reserve ratio of 70%, attempting to transfer all the GD in the world into that merchant account will trigger Disruption.

A slightly less conservative -- but still very conservative and improbable -- Disruption date estimate comes from taking the current distribution of GD and assuming that all of it is allowed to expire where it sits (i.e. everybody stops spending at once). Users will be able to view both of these pessimistic Disruption date estimates through the online interface and will feel encouraged to see both dates continually moving further into the future.

Furthermore, they'll be able to track exactly how much of their GD is guaranteed to convert to USD in the event that either of these two pessimistic scenarios starts immediately.

Okay. That was a lot. Anyway, you could think of Suspended GD as a commodity that's not backed by anything, just like Bitcoin. And if we have sufficient USD reserves, we take it on as our liability by activating it. And you could think of Active GD as a liability for the amount determined by its corresponding reserve requirement.

Maybe? =)

I mean, a fractional reserve bank's deposits are fully backed, just mostly not with reserve dollars but with a bonds and loans which are creditors' obligations to repay the bank more than the face value of its deposits.

Right. From the perspective of any individual bank, it can appear solvent if you just add up the nominal values of assets and liabilities. I prefer to think more in terms of liquidity rather than solvency. But I digress.

Maybe a better analogy than fractional reserve banking is a central bank maintaining reserves of foreign currencies. They don't need to maintain an amount of each foreign currency that's equivalent to the total amount of their own currency in circulation. That would be absurd.

Your startup has a lot of obligations to pay people dollars. Who has an obligation to pay you?

Nobody. But they have various incentives to help us build our USD reserves.

You can think of each GD as an IOU for a USD that automatically gets paid after a period of time. In that sense, it's like borrowing. But, over time, as people get accustomed to paying using the IOUs, the IOUS become a currency of their own.

Similarly, USD used to be an IOU for gold, but there was always far more USD in circulation than there was gold to back it up. Eventually USD progressed passed the point where it needed anything concrete underpinning its value.

Money has value because other people value it. Once everyone accepts it, its value is self reinforcing. I'll accept cash as payment from Alice because I know Bob will accept it as payment from me.

Eventually, Gresham Dollar will not need to be backed by USD anymore.