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fernandonm / interest_rates.md
Created Sep 13, 2019
Interest Rates and Bitcoin
View interest_rates.md

The lack of a good money being available to use as unit of account (UoA) makes reasoning about interest rates a bit cumbersome, so I’ll try to clarify some concepts using a naive version of the formulas that explain their relationship.

An ideal UoA asset would be one characterized by a constant relative demand in the economy, no cost of storage and no friction to be exchanged for other goods and services. Such monetary asset will increase in purchasing power at the same rate as the production of goods and services grows.

price_inflation = -productivity_growth

Human beings will always try to accomplish their goals as soon as possible, and they will only be willing to postpone the attainment of their ends when they subjectively believe that by doing so they will achieve more valuable objectives 1. Hence, even in the absence of risk, any loan will have a time preference premium. In purchasing power terms we can say that:

real_ir = productivity_growth + time_preference + risk_premium
@fernandonm
fernandonm / pow_scales_market_security.md
Last active Sep 10, 2019
Convergence to consensus enabled by PoW allow us to scale market incentives to secure digital scarce assets.
View pow_scales_market_security.md

Convergence to consensus enabled by PoW allow us to scale market incentives to secure digital scarce assets.

Assumptions

  1. One large tx is as secure as many small txs from one single sender.
  2. Coin issuance can be seen as many small txs from one single sender (whoever mines the blocks).
  3. Reorging a block is equivalent to double-spending its coinbase.
  4. Efficiency improvements and price raises would make economically rational to reorg the whole chain (and some other fractions of it) if we consider PoW as the only cost of a successful reorg (pow_days * daily_rewards < total_issuance).

Conclusion

PoW in not the only factor in the cost of a successful reorg.

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fernandonm / bitcoin_IOUs.md
Last active Apr 25, 2019
Bitcoin IOUs & interest rates
View bitcoin_IOUs.md

Bitcoin IOUs & interest rates

I had a recent conversation with Juan Ramón Rallo about bitcoin IOUs and how they would curb interest rates when credit demand rises. I think it is worth sumarizing the arguments to focus the debate if this conversation is resumed and to make it easier for other people to follow and challenge any of the points.

Premises

There is no limit to the amount of bitcoins that can be lent

Supply of bitcoins to lend is not limited by the total amount of bitcoins (around 17 million at the moment), you just need to pay an interest rate high enough to borrow them from current owners. If demand increases, so will do interest rates, incentivising those who are paid with borrowed bitcoins to lend them again.

An increase in IOUs supply would result in lower interest rates

If part of the credit demand is satisfied with bitcoin denominated IOUs instead of bitcoin, the presure on interest rates will be lower. So any increase

@fernandonm
fernandonm / bitcoin_derivatives.md
Last active May 29, 2019
Trust-minimized derivatives
View bitcoin_derivatives.md

Trust-minimized derivatives

Options contracts can be implemented as trust-minimized smart contracts using Bitcoin script. These contracts don't require oracles feeding the price into the blockchain or any other trusted third party. Recipients will only trust miners to mine (and not reverse) transactions paying a reasonable feerate, securing their payouts.

The underlier of these derivatives can be any digital asset available on a blockchain that can do HLTCs.

Call options

The buyer of an American-style call binary option pays a premium (eg: 0.1 BTC) for <seller secret> wich gives the right to buy Q units (quantity) of the underlying asset (100 LTC) at a specified strike price (0.016 BTC per LTC) at any time until the expiration date.

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