Currency Sell Pressure

Imagine an economy where people’s income is denominated in one currency, but all bills, rent, goods, services and so on are denominated in another currency. You can expect a strong and consistent selling pressure for the first currency in such an economy. Yet, this is the reality for all cryptocurrencies. There are two ways to address this problem: one is to counteract the sell pressure with demand pressure and value accrual for the currency, the other is to promote the use of the currency as a medium of exchange for goods and services. While nearly all protocols and web3 projects focus on the former, we believe both methods are needed.

Demand pressure:

There are three main use categories in the protocol that drive demand for the currency; the first use category is investment. Investors need to have the native currency of the protocol to be able to invest in public goods projects, or in estimators, validators or challengers. Since there is a timelock period of coins while estimates are under review this too acts to reduce sell pressure.

The second use category is estimators. Estimators need to provide a validation fee for their Estimate post to be reviewed (as a measure to prevent sybil attacks and spamming of the protocol). To do so they can either use their own funds or rely on investors (who will want a return on their investment).

The third use category is validators. Validators too need to deposit funds during the review of an Estimate post — in proportion to the expected return from the validation — as a measure to disincentivize fraudulent reviews. Validators can use their own funds or rely on investors. For both use cases above, investors can review the track record (and expertise scores) of estimators or validators to assess the risk of investing in their work. Such investment can only go toward the Estimate’s validation fee or for validation, and cannot be otherwise used by users, thus reducing the risk for investors (and promoting more investment).

Additionally, the protocol’s transparency and abundance of data for how impact is estimated for each public goods project will provide users with meaningful benchmarks to assess how they should value the currency in relation to other currencies.

Medium of exchange:

People are unlikely to use cryptocurrencies as a medium of exchange until transactions are cheap, convenient, and can be done at scale. While these are the necessary conditions, they are far from the optimal conditions to make a cryptocurrency a medium of exchange — for that the currency needs to have a clear advantage over the alternatives.

Since much of the work to scale a blockchain is open sourced, the Abundance Protocol can help accelerate this process through the business and investment opportunities it creates around public goods projects. It can also facilitate the development of UI to simplify the mainstream adoption of the tech in commerce (both online and in the real world).

While these are the minimal requirements to make the currency a potential medium of exchange, they are hardly sufficient to drive mass adoption of the currency to make it a medium of exchange in practice. It’s important to note however that it is not necessary for any business to use the protocol’s currency exclusively for it to be an effective medium of exchange; merely providing it as an option to customers would be sufficient since doing so would contribute to reducing selling pressure for the currency. What would drive adoption is the benefit of being part of a vibrant ecosystem that stimulates economic growth.

Business reputation:

The protocol’s integrated on-chain reputation system can facilitate commerce by allowing credible reviews of products — unlike the easily-manipulated reviews we have in online commerce today. The protocol would also allow the development of decentralized dispute resolution mechanisms to minimize fraud, and provide potential customers with data on the proportion of disputed transactions for businesses.

Tooling:

Participants in the ecosystem can expect consistent improvements in freely-provided open-source tools, products and services that facilitate commercial activity, and an active community of developers working to improve these tools.

Attracting innovation:

Since products and services using the protocol are more likely to have credible data available, it would also make it more likely that public goods are developed through the protocol to improve these products and services (since validators will prioritize public goods projects that have more data and are easier to review). This creates an incentive for more and more products to be denominated in the protocol’s native currency.

Native currency:

Since the protocol creates a sustainable business model for open-source projects, it is likely that many of the open-source projects funded through the protocol would integrate its currency into their products, or may even use the currency by default.