I mentioned in today’s Zoom call about the Constant Currency/Go Live proposal that I had serious concerns about setting a ‘fixed price’ for Seeds. The proposal has clearly been the result of a lot of work and careful thought and I don’t want to downplay that, but I am in the possibly unique position of having been through something extremely similar in my previous project: FairCoop, with our cryptocurrency Faircoin.
Even though we had very good uptake of Faircoins on exchanges (it was in the top 100 cryptocurrencies for quite a while with good volumes and the price rose from 0.00001$ to almost $1.50 during its lifetime), due to price volatility we were unable to generate a circular economy, because particularly merchants could not rely on the coin having a stable price.
Our solution to this was the Community Price, which would be a reference value that we sold the Faircoins for and which the community was strongly encouraged to use when buying or selling. We also decided that this agreed price could only go up, and not down. It was based on a sort of average market price from month to month, for example when we introduced it, the price of one Faircoin was around 0.25$, so even though it fluctuated between let’s say 0.15$ and 0.30$, we decided to set the price for that month to 0.25$. It was fairly arbitrary, but it gave us a number we could base things on, and the merchants used that to price their goods.
For a long time this worked well, because the price was going up, but not too sharply, so every two or three months we would agree to raise the price, say from 0.25$ to 0.40$, then it would remain at that level for several more months. This level of volatility was acceptable for most merchants and those buying from them. At times it seemed as if our Community Price was affecting the market price positively - we would put the agreed price up slightly above the market price and the latter would seem to rise to meet it.
The problem we had was when the price rose very sharply, in line with the big Bitcoin price pump in 2017. We then had to change the Community Price more often and it got more difficult to keep it stable. Then when Bitcoin’s price crashed - in late 2017 I think it was - the market price of Faircoin crashed from about 1.40$ down back to around 0.20$ (all altcoins experienced a similar big crash).
Ok, no problem, we thought, we will just keep reminding everyone to use the Community Price, we are all ethical people here in the community, and it will be fine. We won’t lower the Community Price because we agreed not to, so that those merchants who accepted Faircoins at the agreed price would not lose out. In addition, they were able to redeem their Faircoins from FairCoop for fiat at the Community Price.
However… some people (some from outside, but also some from inside - like in SEEDS there was no clear boundary who is ‘inside’ or ‘outside’ beyond having downloaded the wallet) realised they could buy Faircoins on exchanges or P2P at the market price, and then use those tokens to buy things at the Community Price. So for example, quite a few people bought FCs at 0.20$ and then spent them at 1.20$. The merchants then cashed out their FCs for fiat at the Community Price. So pretty soon we had no more fiat. People sometimes did this arbitrage and then sold the goods they had bought on eBay or whatever to get fiat.
There was then a sort of ‘witch hunt’ to find out who was doing the ‘bad speculative thing’. We were an ethical, green, fairtrade sort of community - it was called Faircoin for god’s sake! So how could people be doing this…? And who were they?
Well, some people were just traders who spotted an arbitrage opportunity and made no apologies for it. Others had been in the community but said they were sorry, they were desperate, and needed to do this or they would have nothing to eat, nowhere to live, whatever. We had no way of knowing if this was true or not in many cases.
So finally the community was divided, conflicts arose, accusations were made of people taking advantage of the commons, harming the ecosystem, not following agreements etc. Some people who had bought Faircoins on exchanges for a lower price were demonised and ways were sought to somehow mark the ‘bad’ coins from the ‘good’ ones (we ended up not doing that). Even though, of course, if the market price and the Community Price were ever going to synchronise in value again, we actually needed people to buy on the market and create some organic demand for the coins.
What actually happened was that when new people came to our Telegram channels, they found lots of conflict, and swiftly left. Trust leaked out of the project and the price fell and fell, leading to a vicious cycle of selling so people could recoup at least some value. No one would buy at the Community Price any more of course, when they could get the same thing for much less on an exchange. The Community Price is still 1.20$ to this day, and I doubt that anyone has paid that in several years.
So that is the end of the Cautionary Tale of Faircoin. I realise that the situation is not exactly the same as that which might result if the Constant Currency proposal comes into being, but there are enough similarities to concern me, for sure.
The Constant Currency price is basically equivalent to the Community Price, although I understand that it is meant to be fixed, other than correcting for inflation, whereas ours was designed to rise in a gradual manner. There is the same proposal of ‘agreements’ and ‘consistent behaviour’ within the ‘community’ - which as I say is not a defined entity, as it also wasn’t in FairCoop.
Given what I described above these are all red flags to me. I have always understood the Go Live price to be a market price, not an agreed price. Agreeing the price could be seen as a negative - as in, we were not able to get the market price up because people didn’t believe enough in the project - so we just set our own price, not backed by anything. At least the FairCoop Community Price was supposed to be based around the average value on the markets, which reflected genuine organic demand for the token.
The question then is: instead of setting our own price, would it not be better to grow the circular economy so that the Seeds actually become useful? But here comes the dilemma: if the price is not stable, a circular economy can’t be established, so as a result there is much less demand for the coin and the market price stays low. Merchants won’t buy in because they can’t set stable prices. So I see that this idea is meant to circumvent that dilemma. But I think it is unlikely to, because we don’t know, or at least are maybe not sure of, the answers to the following questions:
- Can an agreement or consistent behaviour ‘fix’ the price of a currency?
- How to stop ‘bad actors’?
- Are people who buy on exchanges or P2P at a lower price suddenly going to become considered ‘bad actors’? The utility of the current SEEDS tokenomics is that it incentivizes market players to buy on exchanges and therefore demonstrate that there is a real demand for the currency; then it reaches Go Live organically.
- If the Go Live price is not being reached organically on the markets, is there something else we need to do to increase uptake?
- Go Live was supposed to be a signal that there is a real and organic demand for the token, so by circumventing that process, how much damage is being done to confidence in the project?
- Other cryptos, much less evolved technically than Seeds, often have a much higher price and volume on exchanges, why? Is it because we took all the liquidity off the decentralised exchanges, and didn’t try to get listed on the centralised ones? Is that because we consider ourselves too ‘pure’ to enter into the ‘dirty’ speculative markets?
- If my Seeds that I bought for pennies are suddenly “worth” 0.80$ then what is my incentive not to try to sell as many as possible for that price? I personally currently have around 27,000 Seeds, if I can sell them for 0.80$ then I will have around 21,600$. That, for me, who has been involved in anarchist and ecological projects for many years and have been fiat-poor that whole time, is a significant amount of money. For someone in sub-Saharan Africa or India, even more so. Who am I to tell them they shouldn’t take the opportunity to make a better life for their family? Sure, it’s at the expense of the commons, but just saying ‘please don’t do that’ will likely not work in many cases, when the stakes are suddenly so high. If this were not the case then nobody would be cutting down the Amazon to graze cattle. Races to the bottom are unfortunately a thing.
- If no one wants to buy and everyone wants to sell then the market price will go lower - how will collaborative selling work in situations of desperate needs for cash?
- How will P2P Swap work? With a fixed price? Or market price? Can we stop people fixing a price between each other? Is this then seen as damaging the commons if they do that?
I am not saying that all of these questions are valid concerns, they may or may not be, but I’m not seeing enough evidence that they have been considered in the proposal. We have already seen what happened with people trying to sell their Campaign funds. These were people who made ethical-looking proposals which the Citizens decided to vote for.
As far as I can see, if there are opportunities for arbitrage, and people think they can get away with it at least once, at least some people will do that. Then the others feel like the suckers in the deal, holding on and not selling when they could have cashed out. The project starts to lose trust and then suddenly everyone wants to sell to get back at least some of what they put into it. And god knows a lot of people have put at lot into this project and deserve to get something back, surely? So they will be forced to sell.
My final question is: if we want a currency with a stable price, why use blockchain tokens at all? Why not just use a normal mutual credit currency with a fixed price and people can compensate by raising their prices in line with inflation? Consumers and merchants will know what the value is because it will be based on a currency they recognise. It will run on an ordinary server and no need for blockchain or exchanges or any of that, in fact it will be impossible to be a ‘bad actor’ in the ways considered here because it can’t be put on a crypto exchange.
For me the SEEDS tokenomics is already a good design, so I am not seriously suggesting we just switch to mutual credit, but IMO we need to explore other ways of getting the market value to the Go Live price rather than trying to fix a price ‘artificially’ like this. How that would work will be something we need to seriously consider, and it may never work. But I am even more convinced that this proposal for a Constant Currency could have even more harmful effects, and unfortunately I speak from experience.
Thanks for reading until here, I understand this was a big download!