In a previous article I wrote that there are different types of decentralisation when it comes to the money supply. Decentralisation of money creation (seigniorage) is not the same as decentralisation of the payments system (which guarantees transactions cannot be reversed or blocked). Different forms of money over the course of history have featured different levels and types of centralisation, as you can see from this table.
Different forms of money display different types of centralisation
Fiat money has the advantage that you can alter the supply rate to take account of economic conditions. Put simply, if the economy is struggling, you create more money fuel greater consumption and economic activity. That’s also one of its greatest weaknesses, because centralised control necessarily introduces a point of failure. Get it wrong and you experience the hyperinflation of Weimar Germany or Zimbabwe, or perhaps just ordinary rates of inflation but the redistribution of wealth and greater inequality that has resulted from QE.
Bitcoin decentralises money creation, but does so in a way that is inflexible. It takes no account of the conditions of the economy it supports. Algorithmic issuance (or fixed supply) removes money from the control of a single party, and from politicised control, and for many people that’s a big enough step forwards — akin to returning to the gold standard. But the modern economy is a complex place.
The problem is, how do you vary the supply of money, so that shocks to an economy can be smoothed and equilibrium maintained, without centralising issuance in the hands of a small group of people like the Federal Reserve’s Board of Governors or the Monetary Policy Committee of the Bank of England?
The Incent experiment
One of the great things about the bitcoin experiment is that it’s just that: an experiment. Subsequent iterations have introduced new elements to that, and I think that Incent is another important example of this. The Incent ecosystem will be an intriguing experiment in economics as well as technology: a whole new kind of money and asset class, with its own rules and outcomes. Incent doesn’t have inflation in the classical sense: its issuance is fixed at launch. But its velocity will be variable.
Look at it this way. As a merchant, you set your own issuance rate and redemption criteria for Incent according to your current and forecast profit margins, your growth targets and your overall view of the economy. Likely this process will be one of trial and error as you seek to optimise your ROI. If you’re looking to grow aggressively, perhaps you set Incent issuance as a higher proportion of each purchase, and seek to attract more Incent-based commerce by offering a bigger discount for Incent purchases. If you’re just starting out, or are looking to consolidate or maintain your position in the market, you might have more conservative criteria.
Multiply that by every merchant in the Incent network, and you have a distributed velocity (issuance/redemption) consensus that might be termed something like ‘proof of commerce’. The circulation and velocity of Incent will be an interplay between all the actors in the market — merchants issuing and redeeming, customers receiving and spending.
The TL;DR is that Incent will act as a form of private money, the dynamics of which will be driven by the whole Incent system. Not by the activities of a ‘central bank’, or a monetary policy committee, or a state, or even by a fixed algorithm. Something totally new and totally different to our existing paradigms.
And I think that’s kind of cool.