Vehicle Currency in Web Payments [WAS: Ripple]

The topic of what could or should be backing a currency is a very big
matter, not only in significance globally, but also in terms of the volume
of essential discussion needed.  My worry here is that it could involve
considerable off-topic conversation for the "webpayments" list. I will
therefore limit my comments here to the intersection of the two topics:
"web payments" and "vehicle currency". I have adjusted the subject line
accordingly, since this matter is of generic concern, and is not unique to
Ripple or XRP.

Let me introduce the existing phrase "vehicle currency" with a google
search link:
https://www.google.ca/#q=%22vehicle+currency%22
... in order to illustrate that the "medium of exchange" role discussed in
relation to XRP within Ripple is not unique. Example: "In this sense the
dollar acts as a ‘vehicle currency’, i.e., a medium of exchange between
currencies."
http://www.economics.ubc.ca/files/2013/05/pdf_paper_michael-devereux-vehicle-currency-2011.pdf

In systems design the well-known aphorism that it's best "when form fits
function" is always good to keep in mind. I mentioned earlier three
consensus functions of money, but more generally I include a fourth which
is greatly enhanced in the digital currency era:
(1) a medium of exchange
(2) a unit of account
(3) a standard of deferred payment (requiring that it be a stable store of
value)
(4) a system of information

The Ripple "paths" concept illustrates nicely why economists generally have
"medium of exchange" separate from "unit of account". When there's a need
to accomplish an EUR→CLP conversion, the vendor, or the purchaser, or the
transaction intermediary might find it most convenient to accomplish this
as EUR→USD | USD→CLP. The vehicle currency function is a much larger
proportion of conventional international trade than most people realize.
For just one nicely illustrated empirical study, this paper reports the
following:

Italian Imports (2010)
43.4% “Vehicle” currency
36.6% Importer's currency (€)
20.0% Exporter's currency

Italian Exports (2010)
19.6% “Vehicle” currency
7.7% Importer's currency
72.2% Exporter's currency (€)

Luigi Ventura and Mark David Witte. 2011. "An Empirical Examination of the
Currency Denomination of Trade"
https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=MWITFall2011&paper_id=70

That's to say, when Italian wines or Alfa Romeos are being sold to Chile,
the transaction may not be in EUR or CLP, but in USD.

The USD has been an all-purpose workhorse for all four of the functions of
money, so in our minds each function blends into another as a big
conceptual blob. The elegant thing about discussing web payments is that we
get to separate out the precise functions being served, and we have the
opportunity to tailor form to function.

My concern with the current design of XRP is that the "medium of exchange"
function is unnecessarily conflated with the "standard of deferred payment"
function. I say "poorly" because the part about a stable store of value is
missing. It instability to the up-side is precisely what has Ripple Labs
investors excited. But here's the problem. When The Fed needs more
"liquidity" they type more USD units into their databases and give that a
fancy name and some procedural mumbo jumbo so it doens't seem quite as
simple as it is. But when they need to "unwind", they can and do, with some
impact. The money they conjured in, then gets conjured out of existence.
http://www.ft.com/intl/cms/s/0/9763c2d2-d9c5-11e2-bab1-00144feab7de.html?siteedition=intl#axzz2lFNfKtN6


The ideal digital "medium of exchange" vehicle currency is one that gets
conjured in and conjured out of existence in the time it takes to carry out
the transaction, so that form is precisely matched to function. There
absolutely no need to keep any in a reserve -- they are virtual after all!

Joking about the separate store of value function I suggested to declare 1
XRP=1 banana, which is at least more generic and value-convertible than 1
XRP = 1 very very happy Ripple Labs Investor.  I've got nothing at all
against Ripple Labs Investors. I just don't know what their happiness has
to do with web payments functionality. (Of course, when I refer to XRP,
read also BTC and any other such system.) In monetary theory and actual
practice there used to be the (key!) concept of ultimate value
convertibility. Should the currency system implode, I could always convert
my holding to "x", whatever that was. It might be an inconvenience, but I
can usefully take (or thus trade) delivery on 1000 bananas or an ounce of
gold. However I can't access the happy feelings of a cryptocurrency
investor, especially if their cryptocurrency has just imploded.

A couple of people have raised the topic of an energy unit definition of
money. There's considerable literature on that. My own work on an "Earth
Reserve" system would include (but is not limited to) a unit referred to as
"exergy":
https://en.wikipedia.org/wiki/Exergy
http://www.theoildrum.com/node/7016
I'll follow up later on this topic....

Joseph Potvin



On Wed, Nov 20, 2013 at 5:15 PM, Fabio Barone <holon.earth@gmail.com> wrote:

> That's the same question I have.
>
> The only answer I have so far is that it would allow comparison.
> BTC or XRP only have value when compared to USD or EUR.
> Now, if we could arrange (market-driven) prices to say 1.5 BTC = 2
> EnergyUnits,
> I may have an idea of how much XRPs I can expect/I am willing to invest for
> a specific transaction.
>
> maybe ;)
>
>
> 2013/11/20 Patrick Logan <patrickdlogan@gmail.com>
>
>> But I have no idea why I, as a holder of one of your notes, would care
>> how much energy you can "reference" unless I have the ability to
>> exchange my note for your energy?
>>
>> (I'm missing something fundamenta;.)
>>
>> On Wed, Nov 20, 2013 at 12:47 PM, Fabio Barone <holon.earth@gmail.com>
>> wrote:
>> >
>> >>
>> >> My first thought is, how could that be? Currency is virtual and can be
>> >> exchanged virtually for relatively little energy.
>> >>
>> >> Energy is not (yet) at all stable and is not efficiently exchanged
>> >> across significant distance. In fact in the US at least for multiple
>> >> reasons, we need to put a lot of energy *into* decentralizing our
>> >> energy generation.
>> >>
>> > Good question. I think it is not about exchanging intrinsic value of
>> energy,
>> > but about by reference to...
>>
>
>


-- 
Joseph Potvin
Operations Manager | Gestionnaire des opérations
The Opman Company | La compagnie Opman
http://www.projectmanagementhotel.com/projects/opman-portfolio
jpotvin@opman.ca
Mobile: 819-593-5983
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