In this article, I will try to explain how to build a new incentive mechanism for investment in order to replace profits as a motivation.
Is it possible to have people invest with a zero or negative rate of return?
At first, this will look impossible to happen but one will soon find out that there are examples where this actually happens. Some banks have recently decided to have negative interest rates on their saving accounts. The reason why people did not withdraw their money has to do with risk. Putting the money somewhere else would increase the risk of losing most of the money, in other words, eventually it is better to have a negative interest rate than losing your money.
There are two points to be made from the above example. First, investors chose a negative interest rate because there was no other choice. Second, risk aversion can be a motivation mechanism for investment.
How can we introduce risk in our monetary system?
Let us look at the stock market. The value of the stock of a corporation is determined by its equity, the value of its assets and its liabilities and its price is determined by the belief by the investors of its future valuation.
Let us introduce three new rules in the stock market. First, selling stocks to get fiat money is prohibited. There can only be an exchange between stocks. Second, the above corporations become non-profit. Third, you can use your stocks to buy the products of these companies. For example, if a product has a price p, and the capital depreciation for its creation is c, you need to destroy shares of value equal to c (because the capital they represented does not exist anymore) and transfer shares of value (p - c) to pay the labor cost.
The first rule guarantees that investors will not flee into non-risky financial instruments because of the second rule. The third rule introduces a new incentive mechanism for the ownership of shares, the use value of their products. At the same time, we have introduced a new problem, we do not have a single currency with which to perform our exchanges, thus most exchanges will fail to materialize. We need to find a way to solve this problem.
The problem can be solved with a version of the ripple payment protocol. The ripple protocol was invented by Ryan Fugger, a Canadian developer that initially wanted to enable people to create credit and use it to perform transactions. A few years later, the main idea was used to enable cross-border payments and cheap inter-banking money transfers. The currency of this company that is used to make the transactions is currently the third most prominent digital currency after bitcoin and ethereum.
Let me make an example of the use of the ripple protocol in our case. I will use the simplest method. Better methods could exist.
The first rule of the protocol is that investors input the stocks that they would like to own and the maximum number of shares per stock. The ripple protocol is then permitted to exchange stocks by itself as long as these limits are respected at the current value of the stock. (In our case the value is constant and is determined by the initial investment in capital)
Consider investors Alice , Bob and Tom.
Alice owns 5$ shares of A and wouln't mind having 4$ shares of B.
Bob has 8$ shares of C and wouldn't mind having 3$ shares of A.
Tom has 6$ shares of B and he would like to buy a product from C that is worth 3$.
Alice works at company C, for every product, 2/3 of its price goes to repay the capital investment and 1/3 goes to her.
Ripple checks to see if there is a transaction path. It there is, it performs the payment.
After the transaction:
Alice owns 3$ shares of A and 3$ shares of B.
Bob has 6$ shares of C and 2$ shares of A.
Tom has 3$ of B and his product.
As one can see, ripple enables us to use the equity of companies as an exchange currency without having to use fiat money.
It is also worth to see the total credit before and after the transaction. After, the total credit is 2$ less because the capital has been expended.
Ripple creates a trust network on top of the stocks with each edge representing that the investor is willing to own the specific stock. Will this network be connected enough to permit seamless payments inside it? This is a research question that requires agent based simulation and that I do not have the time to perform. I have a specific transaction routing algorithm in mind that incentivizes investor to disperse their investments to multiple stocks, thus increasing the connectivity of the network.
Consider the case where
a 500$ stock of A is owned by
Alice 200$
Bob 250$
Tom 50$
and someone buys a product with 5$ going to the investors (total price is irrelevant here).
One would think that Alice would get 2$, bob 2,5$ and Tom 0.5$. If the rate of sales is r, then the rate per capital remains equal among all the investors.
If on the other hand, we equally split the money to all the investors, 5/3 to all, the rate per capital would be lower for Alice and Bob and higher for Tom. This incentivizes Alice and Bob to create trust connections in the ripple network to split their capital to as many stocks as possible.
(The investors want to take their money away from stock A because the investment is old, new technologies have emerged and thus new investments that are less risky than stock A.)
Let us now investigate a new property of the network that resembles a property that banks have.
Let us consider a single bank. The total amount of its customers saving accounts is more than its reserves.
Everyone , though, believes that they have unrestricted mobility on their money and that is because only a small percentage of it is used and when it is used, it is actually circulated among the banks.
The reserves of the bank are a hidden limit to the mobility of money. Another hidden limit is the production capacity of the world. If the total gdp of the world is tgdp and one has more money, one will realize that the total amount of money cannot immediately materialize into use value.
Now let us go back to our ripple, now called ryaki (meaning stream), network.
At first the total production of the network will be limited and thus the credit inside the system will feel restricted and limiting. As soon as the internal production expands above the average needs of the people, then the limit will be forgotten and we would have achieved to have a monetary system that uses the stock of the companies as the currency.
How are new investments financed?
A. Investors that want to reduce their risk extend their trust on the new investments. This means that if there are transaction paths between the company that produces the machinery and this new investment stock, the machinery will be bought through these new credit paths. The total money in the network expands by adding the cost of the new machinery.
B. Sales that are done outside of the network are used as well. In a traditional for profit company the sale of a product of value v is split to pay for the capital cost, the labor cost and the profits. v = c + w + p. In the ryaki network, the workers will be given w. p will be given to them to invest it inside the ryaki network. There are details on this example that I omit but It is worth noting that the rate of expansion of the network will initially depend on the profits that will be acquired by the external market.
I would like to conclude here even though there are many important details that are not mentioned. If the above trigger your interest, feel free to ask me questions. Not only that, It would be really nice if one did agent-based simulations to verify properties of the network. One could verify by performing random transactions that we will not have inequality. Economic crises will also not be triggered due to debt or due to the profits falling very low.
It is also worth noting that this monetary/production network is not designed to be the best way to distribute resources or the best way to guide production. Its design has been shaped by the initial conditions of our society.
Is it possible to have people invest with a zero or negative rate of return?
At first, this will look impossible to happen but one will soon find out that there are examples where this actually happens. Some banks have recently decided to have negative interest rates on their saving accounts. The reason why people did not withdraw their money has to do with risk. Putting the money somewhere else would increase the risk of losing most of the money, in other words, eventually it is better to have a negative interest rate than losing your money.
There are two points to be made from the above example. First, investors chose a negative interest rate because there was no other choice. Second, risk aversion can be a motivation mechanism for investment.
How can we introduce risk in our monetary system?
Let us look at the stock market. The value of the stock of a corporation is determined by its equity, the value of its assets and its liabilities and its price is determined by the belief by the investors of its future valuation.
Let us introduce three new rules in the stock market. First, selling stocks to get fiat money is prohibited. There can only be an exchange between stocks. Second, the above corporations become non-profit. Third, you can use your stocks to buy the products of these companies. For example, if a product has a price p, and the capital depreciation for its creation is c, you need to destroy shares of value equal to c (because the capital they represented does not exist anymore) and transfer shares of value (p - c) to pay the labor cost.
The first rule guarantees that investors will not flee into non-risky financial instruments because of the second rule. The third rule introduces a new incentive mechanism for the ownership of shares, the use value of their products. At the same time, we have introduced a new problem, we do not have a single currency with which to perform our exchanges, thus most exchanges will fail to materialize. We need to find a way to solve this problem.
The problem can be solved with a version of the ripple payment protocol. The ripple protocol was invented by Ryan Fugger, a Canadian developer that initially wanted to enable people to create credit and use it to perform transactions. A few years later, the main idea was used to enable cross-border payments and cheap inter-banking money transfers. The currency of this company that is used to make the transactions is currently the third most prominent digital currency after bitcoin and ethereum.
Let me make an example of the use of the ripple protocol in our case. I will use the simplest method. Better methods could exist.
The first rule of the protocol is that investors input the stocks that they would like to own and the maximum number of shares per stock. The ripple protocol is then permitted to exchange stocks by itself as long as these limits are respected at the current value of the stock. (In our case the value is constant and is determined by the initial investment in capital)
Consider investors Alice , Bob and Tom.
Alice owns 5$ shares of A and wouln't mind having 4$ shares of B.
Bob has 8$ shares of C and wouldn't mind having 3$ shares of A.
Tom has 6$ shares of B and he would like to buy a product from C that is worth 3$.
Alice works at company C, for every product, 2/3 of its price goes to repay the capital investment and 1/3 goes to her.
Ripple checks to see if there is a transaction path. It there is, it performs the payment.
After the transaction:
Alice owns 3$ shares of A and 3$ shares of B.
Bob has 6$ shares of C and 2$ shares of A.
Tom has 3$ of B and his product.
As one can see, ripple enables us to use the equity of companies as an exchange currency without having to use fiat money.
It is also worth to see the total credit before and after the transaction. After, the total credit is 2$ less because the capital has been expended.
Ripple creates a trust network on top of the stocks with each edge representing that the investor is willing to own the specific stock. Will this network be connected enough to permit seamless payments inside it? This is a research question that requires agent based simulation and that I do not have the time to perform. I have a specific transaction routing algorithm in mind that incentivizes investor to disperse their investments to multiple stocks, thus increasing the connectivity of the network.
Consider the case where
a 500$ stock of A is owned by
Alice 200$
Bob 250$
Tom 50$
and someone buys a product with 5$ going to the investors (total price is irrelevant here).
One would think that Alice would get 2$, bob 2,5$ and Tom 0.5$. If the rate of sales is r, then the rate per capital remains equal among all the investors.
If on the other hand, we equally split the money to all the investors, 5/3 to all, the rate per capital would be lower for Alice and Bob and higher for Tom. This incentivizes Alice and Bob to create trust connections in the ripple network to split their capital to as many stocks as possible.
(The investors want to take their money away from stock A because the investment is old, new technologies have emerged and thus new investments that are less risky than stock A.)
Let us now investigate a new property of the network that resembles a property that banks have.
Let us consider a single bank. The total amount of its customers saving accounts is more than its reserves.
Everyone , though, believes that they have unrestricted mobility on their money and that is because only a small percentage of it is used and when it is used, it is actually circulated among the banks.
The reserves of the bank are a hidden limit to the mobility of money. Another hidden limit is the production capacity of the world. If the total gdp of the world is tgdp and one has more money, one will realize that the total amount of money cannot immediately materialize into use value.
Now let us go back to our ripple, now called ryaki (meaning stream), network.
At first the total production of the network will be limited and thus the credit inside the system will feel restricted and limiting. As soon as the internal production expands above the average needs of the people, then the limit will be forgotten and we would have achieved to have a monetary system that uses the stock of the companies as the currency.
How are new investments financed?
A. Investors that want to reduce their risk extend their trust on the new investments. This means that if there are transaction paths between the company that produces the machinery and this new investment stock, the machinery will be bought through these new credit paths. The total money in the network expands by adding the cost of the new machinery.
B. Sales that are done outside of the network are used as well. In a traditional for profit company the sale of a product of value v is split to pay for the capital cost, the labor cost and the profits. v = c + w + p. In the ryaki network, the workers will be given w. p will be given to them to invest it inside the ryaki network. There are details on this example that I omit but It is worth noting that the rate of expansion of the network will initially depend on the profits that will be acquired by the external market.
I would like to conclude here even though there are many important details that are not mentioned. If the above trigger your interest, feel free to ask me questions. Not only that, It would be really nice if one did agent-based simulations to verify properties of the network. One could verify by performing random transactions that we will not have inequality. Economic crises will also not be triggered due to debt or due to the profits falling very low.
It is also worth noting that this monetary/production network is not designed to be the best way to distribute resources or the best way to guide production. Its design has been shaped by the initial conditions of our society.
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