A Trust Based Monetary System

Abstract. Rya is a cryptocurrency and monetary system designed to be both a store of value and a medium of exchange. Using a free, decentralized monetary market, the Rya  system  tethers  money  supply  to  credit  without  the  need  for  a  monopolistic regulatory institution. Money supply is adjusted dynamically depending on economic cycles making  for a  better medium  of exchange. Rya  and  its Proof of Trust (PoT) model  is  therefore  expected  to  be  a  fuller  and  more  complete  substitute  for  Fiat monetary systems than any cryptocurrency yet.

1.   Introduction

Bitcoin and other cryptocurrencies have proven the feasibility of peer-to-peer payments over a communication channel without a trusted third party. Blockchain technology is a cryptographic proof designed to be a substitute for a central mint that protects buyers and  sellers  from  fraud  (e.g.  the  double-spending  problem).  While  existing  blockchain technology performs this task well, banking institutions and governments still have a monopoly on credit and money supply. This has limited cryptographic currency from bringing about a full monetary revolution.

In today’s climate, evolution of new cryptocurrencies stems mainly from the need to deal with technical and methodological problems in existing cryptocurrency systems. Some  examples  of  improvements  are  better  security  mechanisms,  higher  transaction frequency and more efficient use of resources. However, no cryptocurrency system has attempted  to  incorporate  the  combination  of  interest  rates  and  money  supply  that constitute a full money market. While several cryptocurrencies have been able to create a system of payments sans a trusted third party, not all the features of FIAT monetary systems (debt and fractional-reserve banking) have been fully expressed.

In  a  traditional  monetary  system,  money’s  real  demand  (rather  than  nominal demand) depends on interest rates and income is in equilibrium with money supply set by the central bank. A decentralized credit and money creation solution should perform as a stable monetary system in which the money market has normal demand and supply curves. It must also have a term spread of interest rates which reflect the risk for credit recipients, the average duration of transactions and the preferences of credit providers.

2.   Money Supply Let us first examine Bitcoin’s naïve Proof of Work based model for money supply through the following equation:

Audited criticism held against Bitcoin is that the structure of the system has a capped money supply which will be maxed out in the long term. The resulting deflationary money trend is bad for the economy.

Now let’s examine the FIAT money market. The quantity of money in the FIAT economy is determined as a fixed multiple of the quantity of bank reserves. This number is determined by a central bank (i.e. the US Federal Reserve). The supply curve of money is a vertical line at that quantity. In other words, the money market is monopolistic (both in terms of the basic interest rate and money supply).

We  aim  to  create  a  monetary  system  in  which  money  supply  is  substantively adjusted in order to best serve current economic conditions. To achieve this, the Rya system is built to be a perfectly competitive free money market and money supply is controlled by a decentralized regulatory mechanism. Unlike Bitcoin, which only allows the transfer of present value, Rya allows peers to transfer future value as well (i.e. credit). We aspire           to   have     economic            conditions       in         which         the        following  holds          true:

𝐷 (𝑑𝑒𝑚𝑎𝑛𝑑 𝑓𝑜𝑟 𝑚𝑜𝑛𝑒𝑦) = 𝐼 (𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡) = 𝑀𝑅 (𝑚𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑐𝑜𝑠𝑡) = 𝐴𝑅 (𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑒𝑣𝑒𝑛𝑢𝑒)

3.   The Trust Token

In  order  to  express  future  value  in  the  Rya  system,  we  propose  a  double  token architecture. While Rya is the cryptocurrency through which transactions can be made

(like any other currency), we also establish a token called Trust. Every account has a Trust token balance which cannot be transferred from one account to another.

The  primary  purpose  of  the  Trust  token  is  to  tether  money  supply  to  users economic behaviour over time. To this end two key conditions are met. Number one, an account’s Trust balance is impacted by his credibility in the system (find out more ‘The Trust Token as a Credit Score’ below).

Number  two,  the  Trust  token  plays  a  key  role  in  money  creation  in  the  Rya ecosystem. A users Trust token balance directly impacts their effectiveness at minting new Rya and thus the Trust token represents potential for new money creation.

Before we discuss how peers earn Trust, let’s establish some basic terminology:

1.   C - Rya coins

2.   T - Trust

3.   goodInterestInBlock - the amount of interest successfully paid back to lenders in the current block in the blockchain.

4.   systemTrust and systemCoins - the total amount of Trust and Rya respectively.

5.   loanSize – the size of a Rya loan (principal).

6.   loanInterest - the interest on the loan.

7.   trustReward - the reward in Trust granted for a successfully returned Rya loan.

8.   trustDeposit - Trust required to lend Rya.

Trust can be gained just by holding Rya. We suggest that a peer who does not take any action with his money (e.g spend or lend Rya) is equivalent to a person who deposits FIAT money in a savings bank account.

The Trust token enables decentralization by shifting the way interest is set and money  is  minted.  We  strive  to  replace  the  monopolistic  central  bank  and  fractional- reserve  banking  controlled  by  governments  today.  We  are  progressing  to  a  simple formula which provides a more stable economy and a higher level of transparency to stakeholders.

A peer can gain Trust tokens (and the right to create more Rya in the future) each block by holding Rya coins. Mathematically, this can be described as:

The second way to gain Trust is by lending/borrowing Rya. Loans in the Rya ecosystem are simple transactions: one peer borrows a set amount of Rya from a second peer for an agreed upon number of blocks. If, by the last block in that time frame the borrower has successfully returned the principle plus interest (in Rya) to the lender, then both parties are rewarded - we will call this a trustReward.

In order to loan Rya, a proportionate amount of Trust must be deposit by the lender.  Once  deposited,  this  Trust  is  reduced  from  his  active  available  Trust  token balance,  impacting  the  peer’s  ability  to  mint  blocks  and  engage  in  additional  loan transactions. In other words, a peer must risk Trust (in the short term) to gain Trust through a loan transaction:

The reward component is built in the following way:

S  is  the  group  of  all  loan  transactions  successfully  returned  in  the  current  block. Correspondingly, F is the group of all loan transactions that were defaulted on in the current block. This reward is divided between the lender and the borrower.

There is an intuitively pleasing side effect to structuring the reward in this fashion. Over time Trust will necessarily be funneled to the group of peers that are involved with successful loan transactions and away from the group of peers that are not. So we can be sure that Trust token balances will function as accurate crypto-credit-scores in the long term.