Tether, Bitcoin, and the “Ideal Money”
Tether reported first half profits for 2024 of $5.2bn, which probably makes it the most profitable company per employee in history. This raises attention, interest, and eyebrows as to how Tether (USDT) has become a dollar trap when it’s just a virtual or synthetic currency literally tethering or pegging 1 — to — 1 to the price of an “actual” American dollar as liquidity for trading cryptocurrencies. This gives USDT the definition of a stablecoin as it’s believed fully backed by holdings of US Treasuries, bitcoins, and other assets.
Not so long ago, the general reaction would be one of scepticism and that this is all too good to be true — and indeed allegations of fraud still surround Tether. However, in this article, we look at how the Tether phenomena might be perfectly explainable. We also consider clues as to potential implications in future cryptocurrencies and money markets.
Is an Ideal Money Attainable?
The question of an “ideal money” is not new. Classically, it has been referred to as money which is constant and has fixity of value and which historically is believed best represented by gold or silver — but it has also been acknowledged that the value of commodity standards have not been perfectly constant due to production or stock factors and are therefore themselves not ideal money and for which fixed ratios of exchange can be difficult to maintain:
“The correction of such fluctuations is the avowed purpose of providing an ideal money. The classes of proposals which have been made for attaining such a money may be divided into two: those which propose to abolish the precious metals altogether as the material of money, and those which propose to retain the metals, but so to adjust the amount of them paid in execution of money contracts that exact justice shall be done between debtor and creditor.
The first class of proposals generally involves the creation of an abstract standard, representing no specific tangible commodity, but a determination of value by some other process.” Charles A. Conant (Is an Ideal Money Attainable?, Journal of Political Economy, 1903).
In Conant’s essay we can see that as far back as the 19th century a basket of commodities could potentially be constructed, whose geometrical average would periodically adjust logarithmically to a weighted gold value and which would constitute a standard for the settling of contracts. However the problem remained of “ideally” arranging this, and which accounted for each bargaining situation without the money losing its usefulness as a measurement. Conant eventually answers his own question in pursuit of the “ideal money” as idle as the search for the philosopher’s stone, or the attempt to find a fixed point in the solar system.
John Nash’s Asymptotically Ideal Money
The origins of John Nash’s scientific interest in money can be traced back to his first game theory paper The Bargaining Problem (1950), where he introduces a set of idealizations to achieve mutual benefit in bargaining (or a non-zero sum outcome):
“When the bargainers have a common medium of exchange the problem may take on an especially simple form.” John F Nash Jr., The Bargaining Problem, 1950.
As Nash then subsequently develops his works on Ideal Money and Asymptotically Ideal Money, he aligns with Charles Conant’s desire for a constant rate of inflation because of the usefulness in contract indexation:
“But simply to improve the conditions under which agreements for long term lending and borrowing would be made a money would be more or less equivalently good if it had a completely steady and constant rate of inflation. Then this inflation rate could be added to all lending and borrowing contracts.” John F Nash Jr., Ideal Money, 2002.
In the same paper, Nash also recognises a “moving average” could smooth out the value of his Ideal Money. Here, we recognise similarities with Bitcoin.
The Constant Supply Inflation in Bitcoin
In a message board post shortly before the release of Bitcoin, Satoshi Nakamoto explains how the bitcoin supply rate is determined by a moving average which targets an average number of blocks per hour through a difficulty adjustment mechanism.
Satoshi Nakamoto then mentions how a constant rate formulates distribution of the bitcoins:
“Coins have to get initially distributed somehow, and a constant rate seems like the best formula.” Satoshi Nakamoto, 2008
In the Bitcoin Whitepaper (Section 11, Calculations), a Poisson distribution is used because (presumably) it’s a memoryless process in which events occur continuously and independently at a constant average rate expressing the probability of a given number of events (block generation) happening in a fixed interval of time.
It’s the penultimate line of the Bitcoin Whitepaper — where the density is rearranged to avoid summing the infinite tail of the distribution — which then might offer some clue to as to the agency of the Bitcoin design if we consider how bitcoins have appreciated against the value of the US$ and the Tether dollar peg (USDT).
Scale Invariance
One of the idealisations (or axioms) Nash used in his first bargaining solution is scale invariance. This means in essence or character, Nash’s bargaining solution is affine or essentially unchanging in character or time no matter the measurement at an immediate moment. In terms of Nash’s Ideal Money, we can see the money which is used to represent a two player game bargaining solution would also be invariant where the design is set in stone from the outset.
Therefore the concluding remarks are if Bitcoin is deterministic by design (in the nature of a Nash bargain), but that its value has also been designed to be finite — and where we know the majority of the coins have been mined — then it suggests the possibility of a tail event arising which subjects Bitcoin to the same kind of appreciative but asymptotic trend which bitcoins have subjected USDT to. My view is this would require an official sovereign or multilateral currency coalition to come into being, designed from an axiomatic basis to improve inter-jurisdictional contract quality.
