I was reading about a site that allocated crypto-currency to users … and I began thinking about how anyone redeemed that “money” for anything and started thinking of a model.

Let us suppose that I create a virtual currency called a “skep”. Let me also suppose that I created a mechanism by which people could add to their website a way to “earn” skeps (a short bit of code which created a “donate” button for holders of skeps.

Now, we have a mechanism whereby someone with a website can earn “skeps”. So let us say that originally there are 1000 skeps, and that a website earns 100 of them. How do they use these skeps? The obvious solution is that they could just give them to other people who write blogs … (who add the software). But an alternative is that they “auction” them on a host site … this would be a site where people who want to donate to websites, buy skeps in order to have skeps to donate to website holders.

And this provides a way to get the whole thing going at zero cost …

1. Create a website for the skep
2. Get users to sign on for “free” skeps (assigning a nominal value to them)**
3. This will then encourage websites to provide “donate” buttons ….
4. After a while, those who have been “donating” skeps to websites will need to replemish their supply and thus they will need to “buy” more and those who have received skeps will wish to sell them.

**There would have to be a lock to prevent buyers trying to sell these free skeps without donating them.

Auction mechanism

Anyone with skeps who wishes to sell some, merely states the quantity and price (in local currency) that they are willing to accept.

Anyone wishing to buy skeps, merely states the quantity and price (in local currency) that they are willing to accept.

If there is a buyer who is willing to pay the same or more than any seller, then the transaction immediately completes (up to the point the seller or buyer has reached their quantity limit).

Excess price

If the seller is willing to accept $0.98 per skep and the buyer willing to pay $1.00, then for every skep transferred, there is an excess price of $0.02. The simplest way to deal with this, would be to make the actual transaction price $0.99, so that if the buyer wanted 100 skeps at $1, if the seller were willing to accept $0.98 then they would get 100 skeps at $0.99 …which would be awkward as there is now $1 left which cannot be entirely fulfilled by skeps at $0.99 (101 skeps at $.99 would leave $0.01 that has not be “spent”).

So, another way to deal with this, would be to set the price at the value at which the buyer is willing to buy. Another way, is to pick the unit price that is closest to the mid-way point, above the seller’s price and which allows the buyer to purchase an integer number of skeps.

Another approach, is to charge the buyer the price they offer, give the seller the value they demanded, and to use the excess price to effectively create additional skeps 🙂

Speed of transaction and price

But the key to the bidding system, is that it encourages some people who wish to buy or sell large number of skeps, to set a price slightly above or below the current transaction price, in the hope that they can “get a better deal” – but at the cost that they have to wait some time to buy sell. This encourages a situation where some people are always available to buy/sell if a seller/buyer is willing to take a price hit and bid low/high enough for these long term buyers/sellers. This is important because many people want to be able to immediately buy or sell.

Why then don’t we just fix a set price? The reason is that if you simply set a fixed price, then in order to get the system “kick started”, by giving away free skeps, you are literally giving away money.

Usage?

I’ve been wondering for a while how it might be possible to give micro-payments to websites as donations. Let us say that a typical magazine at £5 is worth 100 website articles, then the typical value of website article might be £0.05. So, we want a way to donate money in perhaps £0.05 “units”. Or perhaps, more likely, we want a way to vote for articles giving them “donations” based on their perceived value of perhaps £0.01 to £0.09. And, indeed, there is no reason to limit the lower end … so that perhaps a “skep” could be split into “$0.001” or “£0.0001”?

Indeed, if a “skep” had a nominal price of about a pound/dollar, but could be divided as small as the computer arithmetic allowed, then the traditional limit on money being a “whole coin” would practically disappear (except for massive quantities of very minute transactions which would have to be automated and not allocated by a human donating money).

Inflation/deflation

What I find interesting is what is likely to happen to the value of the skep as time progresses. Let us suppose that initially 100 people sign up for “free” skeps with a nominal worth of $1000. Because they had this nominal value, it is reasonable to suppose that many individuals will treat them as if they had a not too dissimilar value. But some, no doubt will take the attitude “it was free and therefore has no value”. If those treating it as “free”, are a significant number of the initial users, we can assume that they will not be purchasing further skeps for actual money, as such there will be an excess of skeps being donated, to the number that are willing to rebuy. As such it is likely the value of the skep will drop.

However, if a lot of new people come in, or the original users feel that it is a good idea and significantly increase the number of skeps they wish to buy, there will be a shortage of skeps and possibly the price may start to increase dramatically.

But there is an easy mechanism to stabilise the value of the skep … that is to put in an upper price, where if buyers bid over this price, and there are no skeps available, then more skeps will be created automatically. In addition, there could be a lower limit whereby all skeps will be bought at that price, but this requires a central source of funds. Where can this come from?

Let us suppose that the upper limit is $1, and that we initially start with 1000 skeps, then for each skep automatically created, the central fund will gain $1. Let us suppose that after a while, we have a total of 2000 skeps in circulation. At this point, it is possible to set the lower limit whereby all skeps will be bought as being $1000/2000 = $0.50, because there is $1000 in the kitty and that is enough to guarantee a price for 2000 skeps of $0.5 per skep.

If however, we automatically create another 4000 skeps, we now have $4000 in the kitty, and that is enough to guarantee a lower price of $0.80 per skep. So, the guarantee price can rise as more skeps are created. That may be enough fluctuation to make the bidding system work smoothly. Therefore if further skeps are automatically created, the excess money could be redistributed to those selling skeps as a “bonus”.