There is some excitement around Yahoo’s planned “Yootles” currency and group decision-making mechanism. Near the end of the above paper, one sees that the initial interest rate for Yootles will be set to 5.375%. This strangely precise level is 1/8th of a percent higher than the current Fed Funds target rate. Yahoo will play central banker to its currency and is keen on controlling inflation.
Maybe interest rates aren’t the best way to combat inflation in a new currency like Yootles. In “play” money exchanges, inflation can be caused by traders opening multiple accounts in order to push prices and build profits in their main accounts. (This might be the best strategy where automated market makers set initial prices away from fair value.) Yootles are a little different in that you aren’t given any Yootles by virtue of creating an account, but a trader could still credit his main account arbitrarily. The trader doesn’t care about the second account, so it is not clear how the high interest rate would discourage borrowing (Yootle issuance). If anything it would encourage Yootle issuance since the trader only cares about the account that is earning interest. Although credits and debits always net to zero, higher interest rates will lead to more Yootles over time. Traders will also be able to specify custom interest rates on transactions and so will be tempted to use high rates on bogus transactions. Similarly, what’s to stop someone from abandoning an account that went negative through genuine transactions? Their past counterparties have already been paid and will continue to receive interest so they have no incentive to report users switching to new accounts. All of these scenarios underline the importance of user authentication in controlling inflation.
What are the interest rates on other play money exchanges? HSX currently pays the Fed Funds rate of 5.25% on cash balances. The rationale behind this is unclear since it discourages trading. Possibly HSX feels that the interest rate improves the quality of trades that are made, and inflation is not a concern there. Foresight’s market rate has traded roughly between 3% and 0.5%, and since tying-up currency that is less recognized has less opportunity cost, one would generally expect play money market rates to be lower than real money rates. It is also expected that market interest rates for new exchanges will decline over time, as inefficiencies and reliable profit opportunities are competed away.
Regarding money supply, as a currency becomes more widely recognized and therefore useful, a “network effect” will accelerate its acceptance. This network effect will work against potential inflation from the increasing money supply.
Illegitimate transactions might again be the more important issue in practice. If they cannot be stopped, a high interest rate might do little to control inflation, and unexpected monetary operations could confuse traders.
Many will be especially focused on the emergence of a dollar-Yootle exchange rate. Although some qualms have been expressed about this from the perspective of fairness in the decision-making process, Yahoo has not indicated that it will block dollar-for-Yootle transactions. Even identifying such transactions may not be possible, as users might resort to suitably cryptic descriptions (“Craig’s List style” indeed!). Exchange rate transactions have some very interesting implications.
“Similarly, what’s to stop someone from abandoning an account that went negative through genuine transactions?”
If the Yootles account is related to your main Yahoo! account, Yahoo! could have rules that say that… for instance… Yootles accounts are open only to serious Yahoo! users… the ones who use Yahoo! Mail everyday for instance (like a certain Jason Ruspini). That way, Yahoo! would exclude trouble makers.
There’s actually a stronger sense in which yootles are robust to such sybil attacks (loaning yourself yootles from fake accounts). This was the subject of a recent yootles trivia question: http://blog.yootles.com/?p=7 — see the 2nd comment for the answer.
Yes, so much on the reading list.. http://www.le.ac.uk/ulmc/ijccr/
What about the 5.375% interest rate?
http://blog.yootles.com/?p=7
Regarding the Yootle/Ripple system — in a prediction market context, this means you can only trade with people you trust. That seems like a serious hindrance to liquidity and inhibitor of the markets.
The whole reason that these markets have flourished lately is that the contracts can be standardized and traded electronically. If the contracts are non standard, because you’re not sure of people’s trustworthiness, seems like that will destroy the market.
Bo Cowgill has a valid point. I’m not an empire —I’m just telling you that my first thought was like Bo’s one.
However, I would bet that the Yahoo! guys have thought about that and have a secret weapon.
Jason, the 5.375% interest rate established itself by historical precedent. Long story short, it’s my friend Dave Morris’s mortgage rate.
As to trading with people you don’t trust in a prediction market, one way is to mimic the real-money world: assume everyone trusts the market maker and avoid the need for credit lines in the other direction by having traders deposit money. If that’s not an option for legal or other reasons then you can just start trading with credit limits of zero, meaning people will be exceeding their credit limits — eg, some user Alice will owe/pay me yootles and I’ll have no faith that having those IOUs will ever do me any good. This will initially dampen trading as you fear, Bo and Chris. Later, as the social trust credit network builds up, a trust path will be found between Alice and me and those IOUs will have real value to me.
Daniel
(PS, the following may be obvious to this audience but I found it subtle and slippery at first: there’s no fundamental distinction between owing someone money and paying them. When you owe someone and issue them an IOU, that IOU is truly money in every sense that dollars and euros are, except for the liquidity.)
Can’t one argue that liquidity is a more essential property of money than representation of debt? Wiki doesn’t say much about liquidity (although it would intuitively seem to apply to the “medium of exchange” requirement), so the articles refer to necessary properties, not sufficient ones.
I would rather possess universally-recognized fiat currency than an illiquid, more risky (in most cases) IOU. Most would consider the former to be more money-like.
LETS-style arrangements will be less vulnerable to inflation than group “fiat” currencies (that might also suffer from multiple-identity attacks). But if inflation could be controlled in a non-LETS-style currency, participation would probably grow faster than in mutual credit systems.