A reader posed a question to me recently. The answer was rather involved. I put the question and the answer here.

Question: Nano seems much better than bitcoin at being a good currency. But since there is a fixed supply with no inflation, should we expect most people won’t want to spend their nano, and use it for speculation instead? Just curious. (Also, this spam attack from the last month sounds interesting, which I’m assuming will be fixed ok.) 

Answer:

Nano is brilliant.  It has several things going for it:

• Instantaneous (A bitcoin transaction currently takes about 15 minutes. Confirmation of the transaction is probabilistic, so most entities require approximately 4 transactions before making the funds available to the new owner. In contrast, Nano takes less than a second. The innovation required to alter a cryptocurrency so that there can be consensus and still be instantaneous is a thing of genius).
• Unlimited numbers of transactions (Bitcoin has a maximum number of 7 transactions per second [1]; the number of transactions that Nano can handle per second is unlimited. Again, the technology to make this happen was genius. Organizations are trying to build layers on top of Bitcoin (e.g. Lightning Network) to somehow increase the transaction frequency, but this incurs additional complexity and cost. You can see [2] for an example of how the utility of the two technologies compares. The summary is that Nano is easy and the Lightning Network barely works.)
• Fee-less (There are no fees to send or receive Nano; this differs significantly from Bitcoin, for example, which currently requires approximately $50 to send).
• Natrium Wallet (The Nano wallet is super easy to use. I’m currently contracting an illustrator in Bulgaria. I pay her in Nano. I send it from my wallet to hers, it’s easy and fast. There is no middle man. It’s as easy as sending an email.)
• Energy consumption (Where Bitcoin is extremely energy intensive because of the mining required, Nano is far less.  Bitcoin currently consumes more energy than Argentina and this will get worse with additional adoption. Nano takes about as much energy as a lightbulb. Insanely, people are arguing that the demand for energy created by Bitcoin is good because it will increase the drive for cheaper energy solutions [3]. But that’s like saying that filling a pool daily with water is good because it will increase the drive for cheaper desalination solutions; it’s ridiculous to waste resources to prompt engineers to find better ways of conserving.)

The idea behind Nano is “Do one thing extremely well.”  As such, the Nano foundation is not including smart contracts or other features into the coin.  I don’t really understand what smart contracts are, but I’ve been told that they are valuable.  So there will be a major question to see whether Nano survives without this feature.  Moreover, even though the transaction fees for the major coins are high, there are coins that have relatively small transaction fees.  Bitcoin Cash was created as an alternative to Bitcoin with extremely small transaction fees.  And Ethereum and Litecoin were created in a similar vein, both with nominally higher numbers of transactions per second than Bitcoin.  Nevertheless, they do not have all the benefits of Nano.

There has not yet been widespread adoption of Nano when compared to other cryptocurrencies.  You can buy it on Kraken, Binance, and other smaller exchanges, but not Coinbase.  Whether it will ever get there is a major question.  (Kraken, by the way, is satisfying American federal law.  So, it is very difficult to put Money into Kraken.  It’s intended to be a crypto bank with crypto deposits.  It’s much easier to purchase crypto somewhere else, like Coinbase, then transfer it to Kraken, which incurs a fee, and then purchase the Nano with it.  Nevertheless, it’s a well established and well funded bank in Wyoming. I’m very excited about it.  Avanti bank is coming soon, and it should be similarly amazing [4].)

As a side note, you don’t actually own your coins when you purchase them on Coinbase.  You put dollars into Coinbase, and you get an ‘IOU’.  If you convert those dollars to cryptocurrencies in your account, what you’re really doing is changing the ‘IOU’ so that they now owe you a certain number of the crypto instead of dollars.  Coinbase has converted material ownership to a contractual obligation [5].  Coinbase was initially called ‘BitBank’.  But, because of this IOUness, it was illegal to call themselves a bank [6], and they had to change their name.  Kraken is actually a bank (though not FDIC insured), as Avanti will be.

Some cryptocurrencies offer interest.  You loan out your coins to miners, those minors get more of a say of changes to the technology and validation of transactions, and they pay you to control your votes.  Ethereum will be paying approximately 6% interest within a year.  Nano does not offer this.  So for major Nano adoption, it will have to overcome the support of those people who are making money with mining and staking of the other coins, overcome the companies who have developed technologies to profit from Bitcoin transactions, and overcome the investors who have already plowed money into the established coins.  This reminds me of a similar story.  Former president Jimmy Carter started a charity to treat water to prevent guinea worm parasites from entering the body [7].  The worm is a terrible disease; once it gets to a certain size, it chooses a direction and starts digging its way out.  It goes through spines, eyes, hearts, anything in its way.  So people became blind, paralyzed, and sometimes died.  Medicine men of the area treated people afflicted by this disease by putting tension on the worm once it started exiting the body, which reduced the time of exit from four weeks to three.  They charged money for this treatment.  When Carter showed up saying that he could prevent the disease entirely, the medicine men claimed that he was using bad magic.  He eventually won out, and the number of guinea worm afflictions went from 3.5 million to 126 in a single year.  It’s an amazing achievement.  (I will always love Jimmy Carter for this.)  The current situation with Nano and other cryptocurrencies feels analogous.

Finally, there is the SPAM. Since there are no fees for a Nano transaction, the network suffers from SPAM. (There is a minimal energy cost associated with conducting the proof of work necessary to conduct a transaction, but that cost is not significant enough to prevent spammers.) Spam might be done to find vulnerabilities in an effort to steal Nano, or to reduce the value of the coin for those who have found a way to sell short.  That looks to be somewhat addressed at the moment by a purposeful throttling.  But V22 is about to come out.  It has a new feature that will address all SPAM currently taking place. Miraculously, this spam mechanism requires no learning (like a spam email filter might), is nearly instantaneous, and free.  The programmers of Nano definitely know what they’re doing.  “Will spammers be able to overcome this mechanism” is a big question.  If not, it looks like Nano will be even more valuable than it has been. 

Regarding the question of whether Nano will experience deflation: OF COURSE!  And that’s kind of the point.  The deflation will only be with respect to the dollar. This is a common feature of non-fiat currencies. For example, hamburgers today are sold for approximately the same prices that they were in 1964, when those prices are measured in silver [8]. It’s only when we think of prices in dollars that prices have increased. The dollar is getting printed at such high rates that inflation has been inevitable for some time and is currently going haywire (contrary to the federal government’s evaluation). Copper, lumber, corn, steel, autos, stocks, housing, milk, bread, and fuel are all experiencing exponential price increases.  Gold was, but has leveled off for a while; if it follows historical trends, this should change soon [9].

And yet, the government continues to increase the rate that it is printing money exponentially.  Inflation is a tax.  A major purpose of cryptocurrency is getting around that tax with a finite asset.  This will reduce some of the power of monetary policy; they cannot print more cryptocurrency, so they cannot artificially increase economic productivity with a corresponding reduction in value of the dollar.  Is this a problem?  I do not think so.  The same is true for stock shares and housing; there are approximately a finite number of them.  So it will be similar with Nano, should the coin ever get adopted widely.  But, at the moment, the government is heading towards insolvency.  The gold standard would have prevented that, and that was discarded in the early 70s in favor of more governmental control.  At the moment, we currently increase GDP approximately 40 cents with every additional dollar of debt.  If the linear trend continues (which is a conservative estimate) then we will arrive at a point where the increase in GDP is 0 with every additional dollar of debt.  This happens, in part, because 1) the interest on our debt is consuming the increase productivity that might result from the debt, and 2) inflation increases in expectation of additional printing so the additional productivity is robbed by inflation before the dollars are even printed.  We should never have arrived here, and yet, here we are.

This has happened in other Democratic countries recently.  In Cypress, the government ended up insolvent in a similar way.  The response of the government was to raid their citizen’s bank accounts.  Any account with a value of over 100,000 Euro had its amount reduced to 100,000 Euro; the excess was taken by the government.  The citizens lost their life savings, their retirements, their mortgage payments, their education savings, it didn’t matter.  The government called it “a haircut” [10].

In 2016, in an effort to legitimize more of its economy, India changed its currency; people had a short time to sumbit all of their cash to banks, but they could only submit a small amount in a given timeframe. The result was that many people lost the value of the currency they were storing (due to the almost-all cash economy). Approximately 86% of the currency in circulation had its value eliminated [11]. Mexico regularly raids its citizens’ bank accounts.  Recently, they took all the money from any account of a Mexican living in America [12].  Mexicans are used to this, and many will only handle cash.  Where I lived recently, there was a small beautiful Mexican grocery market (with excellent tamales) at the nearby corner.  As part of the store, they had a very active Western Union station where people could send cash to their relatives without going through a bank.  It’s cheaper for them to pay the wiring fee than it is for them to risk losing their money by keeping it in a bank.  (Imagine if they began widespread adoption of Nano, and the fee to transfer money became 0.)

True Keynesians required that the debt be paid off once productivity was increased after a time of economic downturn.  There are requirements in Keynesian theory describing how the money taken on as debt was spent.  But current money market theorists (Obama, Biden, Sanders, and almost every other politician, though the Republicans occasionally pay lip service to the contrary; Thomas Massie and Rand Paul are clear exceptions) do not think we are required to pay off the debt.  The interesting point is that MMT is logically sound, but it requires a perfect understanding of inflation and an immediate reaction time by the government, as well as an interest in reducing money availability immediately when inflation is too high.  So, though it’s theoretically interesting, it’s not practical AT ALL!  What’s the alternative?  Before crypto, I would have said gold.  But gold has the problems that it is difficult to store and difficult to transfer.  Enter crypto.  But crypto costs money to transfer from one person to another.  Who would pay $6 to buy a $1.50 soda?  Enter Nano.

Time will tell.  I’m hopeful, and I’ve purchased a significant (for me) amount of Nano, currently stored at Kraken with a smaller amount for spending in my Natrium wallet.

-Nick

[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3338560
[2] https://twitter.com/mira_hurley/status/1385932693611876352?s=20
[3] https://www.bloomberg.com/news/articles/2021-04-22/cathie-wood-s-ark-says-bitcoin-mining-is-good-for-the-planet
[4] https://www.americanbanker.com/news/avanti-got-a-bank-charter-heres-whats-next-on-its-agenda
[5] https://twitter.com/CaitlinLong_/status/1382115969338728453?s=20
[6] https://twitter.com/CaitlinLong_/status/1382524197759447042?s=20
[7] https://www.cc.com/video/vvc9ew/the-daily-show-with-jon-stewart-jimmy-carter
[8] https://www.coinbooks.org/esylum_v16n34a26.html
[9] https://twitter.com/crescatkevin/status/1390736606756151297?s=20
[10] Bitcoin Billionaires, Ben Mezrich
[11] https://money.cnn.com/2017/01/04/news/india/india-cash-crisis-rupee/index.html
[12] https://www.bloomberg.com/news/articles/2019-05-23/expats-millions-in-life-savings-disappear-from-mexican-accounts