Noble: Corporate Colored Coins


'Applying Blockchain Technology to Traditional Business Structures as an Experimental Step towards Distributed Autonomous Corporations (DACs)'

2. Distribution

First published November 2014
Work in progress
<< 1. Abstract & Introduction3. Platform Agnosticism >>

2. Distribution

In June, Mr. Andresen recognized that Bitcoin mining has been too centralized for years, with just a handful of pool operators controlling well over 50% of hashing power.4 Mining, from a technical perspective, performs the important task of processing transactions in a secure manner. Idealistically, mining should distribute the power of wealth creation into the hands of the global community in a decentralized manner. In reality it is a ‘feature’ used by profiteers and often centralized entities for the sole purpose of funneling value out of the cryptocurrency ecosystem and back into fiat. While advocates of the blockchain highlight the near-zero fees necessary to transact, they ignore the fact that it the emission schedule and its associated energy-use that acts as the ‘hidden’ fee (or tax) of maintaining and security the network.

In the alternative cryptocurrency space, this year has also seen mining morph more into a ‘weapon’ used by often malicious and sometimes quite public cheerleaders of Proof of Stake (PoS) coins who wreak havoc via multi-pools on traditional Proof of Work (PoW) coins. While 51% attacks are nothing new, we are seeing communities proud to not only promote but publicly attack PoW coins with their new-found concentrated mining power. Not only does this depress the price of PoW coins and effectively ‘kills’ them, it distorts the often whimsical public perception of particular systems. With PoS coins and multi-pools continuously being pushed the ‘value’ of PoW coins is slowly but surely being stripped bare.

We have decided to approach distribution from a different angle: we are issuing a predetermined and fixed number of colored coins, removing the need for constant re-evaluation and demand for ‘tweaking’ of numbers, variables, rate of issuance and total supply as emotional and industry trends are shifted by financial manipulators. There is no mining, staking or independent wallet, with focus being put squarely on corporate and financial use-cases of the colored coins themselves. The value of the underlying network may be affected by emission pressure but this does not have to apply to colored coins distributed on top.


2.2: Fair Distribution Fallacy


If a cryptocurrency is widely distributed the public perception is generally that it is fairer and there is less individual financial risk due to manipulation (albeit less potential reward also). Conversely, if we’re evaluating colored coins as if they were ‘investments’ and in the hands of smart money and strong hands, a concentrated distribution may appear more attractive. The problem so far has been distribution can and is easily ‘faked’ using many wallets, sock puppet accounts and ‘bots’.

There have been plenty of cases where two to five people have controlled 80% or more of a coin spread across hundreds of wallets in order to promote ‘fair distribution’. Full control can easily be achieved when a market is low and ignored under the guise of ‘no premine, no ICO’ through short mining periods, ‘insta-mines’ or by patient low market buys. In short, the best one can do is make a rough estimate of distribution knowing it is an educated guess in a game that is mostly smoke and mirrors. It is for this reason there will be no argument for or against the fairness of distributing in the manner described: it is up to individuals to weigh the risks and realities.


2.3: Community-Driven Fair ‘Experiments’


Assume an individual, organization or government attempts a voluntary and experimental ‘fair’ cryptocurrency to introduce its citizens or users to the concept. A method for determining the ideal entry price might be as simple as (proposed initial market cap / number of participants) = entry price. If a cryptocurrency project aims to achieve an initial market capitalization of $50,000,000 and is expecting to distribute colored coins fairly at one-hundred (100) dollars per participant, it will require five-hundred thousand (500,000) participants to achieve equal distribution. This method would require participant identity checks – effectively eliminating anonymity - to rule out sock puppets taking advantage of the system. This may or may not be taken favorably if attempted today. With such a small demographic currently involved in cryptocurrency, it would require an extremely well-marketed and/or funded campaign by a government or brand to pull off such an idea. These goals are not considered feasible in this small and immature market, and are better attempted in the years to come as the idea hits mainstream consciousness.


2.4: Proposed Distribution


Determining the set BTC exchange rate of colored coins is difficult because of the volatility of BTC. Speculators need to accept that their ‘value’ may fluctuate dramatically during ‘maturity’ stage. Bull and bear cycles or fear, uncertainty and doubt (‘FUD’) play an exacerbated role on the valuation of coins in this market. To reduce the risks of overvaluation, the market capitalization of the total crowd funded distribution should not exceed $150,000 (approximately 428 BTC at current price). With a zero emission schedule, real-world utility, public identities, a long-term roadmap, and infrastructure from day one, this is considered a conservative initial amount in the current environment. We wanted to raise enough to fund new core deliverables (improved infrastructure, licensing/registrations, industry representation, business planning and development, legal and regulatory clarifications and core development), while not being overly greedy in an environment that already demands too much as it is.

These types of colored coins make no false impression of being a currency alongside the decentralized Bitcoin (BTC), although they can well be used as one. Nor is there a desire to disguise initial distribution as fair: the number of coins received is proportional to the level of support given. In our particular early crowdfunding, 1,000,000 NOXT may be issued on the NXT Asset Exchange (AE) or 1,000,000 NOCC may be issued as a colored coin on the BTC blockchain. Historical distribution patterns will see the colored coin distributed in amounts between .2%-7% and between 200-400 initial funders.

To solve the problem of the issued colored coin being tied to the price of its master via trading pair exclusivity (as would be the case with NXT/NOXT) it will have an exchange pair with BTC and potentially fiat. This removes the trading pair ‘monopoly’ a master platform may initially have, and allows the colored coin to either be traded on a decentralized 2.0 platform (in the case of NXT) or for BTC on any number of centralized/decentralized exchanges. By removing the initial peg to a single trading pair, we reduce the reliance a colored coin has on the price of its platforms native currency.


noxt-1
Figure 2.1: Initial Distribution of the First ‘Cycle’

2.5: Distribution ‘Cycles’

This proposed system works slightly different when compared to long-term emission cryptocurrencies. Due to their increasing scarcity (see section 7: Stability), and having an expected life of approximately one (1) to two (2) years before returning to the hands of the issuer, NOXT are re-distributed in cycles (with this cycle being the first; the second is not estimated necessary for at least eighteen (18) months). In summary, colored coins are distributed (via crowd funding) for perks, rewards and exclusivity on sponsored services for the cryptocurrency community. Every time these coins are used for perks and services they helped crowd fund (coin listings, free shipping, group buys, discounts, advertising, articles, cryptocurrency services) they are taken off-market and kept in transparent wallets (the chest).

Elements of these cycles promote community engagement and use of the colored coin (see section 6: Incentive to Participate,) as an increase in its scarcity is a direct result of its continued utility and real-world use. It is envisioned that once the off-market colored coins approach the 90% mark (meaning only 10% remain for use – which may either be kept for use or transferred) a new cycle is proposed with a refined plan, products, services and goals for the future. It is important to clearly demonstrate a difference with our proposed perk/service-oriented colored coins from something resembling a traditional and illegal Ponzi-scheme (see 15: Legalities). Services crowd funded must be expected to reach at minimum a level of self-sufficiency to ensure that they do not require constant funding, draining the entire ecosystem rather than reinforcing it (see section 4: Utility).


noxt-2
Figure 2.2: Long-term Lifecycle of Colored Coins


2.6: Determining NobleCoin Burn Exchange Rate


How to determine a fair and transparent burn/crowd fund rate of two coins (NOBL & BTC) is a sensitive subject requiring thought from multiple angles. On one hand, it is important to raise necessary funds to grow the project; on the other hand it is important to ensure the exchange rate and burning proposal rewards NOBL supporters while leaving as little room as possible for abuse and manipulation. There were a number of approaches considered:

  • Offer a fixed exchange rate for NOBL crowd funding,
  • Offer an exchange rate equal to the current satoshi price of NOBL, or
  • Offer a fixed exchange rate for NOBL crowdfunding that adjusted upwards over time.

The key issue with approach a is that if a fixed exchange rate is too low (15 satoshi) it does not attract enough interest. If it is too high (30 satoshi) it encourages speculators who bought low to immediately exchange to NOXT and ‘cash out’ at a likely profit, harming early momentum. Approach b is susceptible to large market moves created to ensure the best possible deal (buy at 12 satoshi, pump to 35 satoshi and exchange at a more attractive rate). With approach c, an increasingly higher exchange rate stifles and punishes early support. After much discussion and in an attempt to balance these concerns we propose the following approach:

  • Offer five-hundred thousand (500,000) NOXT at crowd funding rate of 0.00042 per for a potential total of 210BTC;
  • Using the BTC amount raised as a baseline, determine the NOBL equivalent exchange rate offered;
  • 100 BTC is the minimum for the crowd fund to be considered a success, with all NOXT not distributed permanently taken out of circulation.

noxt-3
Figure 2.3: Proposed Exchange Rate Depending on Crowd Fund Success

By tying the potential rate offered with a variable somewhat out of our control (amount of BTC raised) we better ensure that the rate offered is not one pre-planned in private or proposed ‘on a whim’ to benefit early accumulators with insider knowledge. While there is no true protection from such market forces, by publicly listing the amount of NOXT crowd funded and potential exchange rate beforehand the community has the opportunity to trade and prepare their NOBL accordingly. For example, should 100BTC worth of NOXT be crowd funded holders will know before we begin the ‘burning’ round that the exchange rate will be 17 satoshi per NOBL with the aim of removing approximately five-hundred and eighty-eight million (588,235,294) NOBL from circulation.

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4. Gavin Andresen, “Centralized Mining”, https://bitcoinfoundaition.org/2014/06/centralized-mining, 2014.

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