Apr 2, 2018
Why PoWH3D, an Ethereum Dapp, might be a better store of value than Bitcoin.
THIS ARTICLE IS SOLELY AN ANALYSIS OF THE MARKET. THIS IS NOT TRADING ADVICE. THIS IS NOT INVESTMENT ADVICE. I OWN A SMALL PORTION OF P3D THAT I PURCHASED WHILE WRITING THIS ARTICLE
(Edit 7/30/18 — As predicted, someone did make an ETC version, P3C.io currently has over 1098 ETC!)
What is a store of value? A store of value is an object that we look to put wealth in, and pull that wealth out in at some point in the future. Throughout history we’ve had a number of stores of value:
- Jewelry, and precious shells.
- Gold
- Bitcoin
Another store of value is insurance. Think about a life insurance policy that pays $100,000 on your death, and that you pay $30 a month to be a part of. The value you are storing is $100,000, and what you pay is $30 * months of your life. Now here is why insurance is cool: it’s because it gets together enough other people like you, and through the magic of large numbers is able to share risk between everyone. So now you and a group of people can also share value through this contract. Even though you haven’t stored $100,000, the policy still entitles inheritors to this amount of money. This is actually far more valuable than just a rock, because it allows you, by taking a small amount of risk, have assurance that at some point in the future you will be able to restore more wealth than you put in.
Lets compare that with Bitcoin. The current thesis of the Bitcoin core community is that Bitcoin is virtual gold. There is a finite supply of it, you put money into buying some, wait, and then the same Bitcoin will be worth more stuff in the future. Now the problem with this is that it assumes a market exists of people that will either accept or value Bitcoin in the future. This is assumed because people value it now. See the circular logic? A Dutch merchant probably though the same thing, that “these tulip seeds will feed my children!” Currently 16+ million out of the 21 million have been mined. This means that the more than 75% of all the wealth in the future has been allocated, and if you don’t have some we’ll all look up to some of the world’s richest people, not Elon Musk, but luminaries like Roger Ver, or Luke DashJr /s. Good luck getting most nocoiners to accept that…
Now insurance isn’t perfect. Since the USD your policy is denominated in may be worthless, however the system is self-regulating. The insurance policy only takes in what is considered valuable, and only pays out what is considered valuable. If it does not fulfill this purpose people will not use it. So a good insurance contract is actually very adaptable. It’s merely the collection of risk, the Schelling point, that makes the contract valuable.
Enter PoWH3D
Proof of Weak Hands 3D (P3D), a rapidly rising Ethereum Dapp, fits the traditional definition of a Ponzi scheme, with one key exception. A Ponzi involves lying about, and taking money from later investors and using it to pay back previous investors. This works easily at the beginning, but as the scheme grows, it becomes exponentially more difficult to find new investors. This eventually leads to a collapse in which the later investors start demanding their money back, causing other earlier investors to demand their money, eventually winding up, ensnarling its creator. This is bad because it involves lying to people about where their money is going.
P3D doesn’t lie to anyone. See the source. It works the following way: You buy a token through their contract with ETH, the price of the token goes up by 0.00000001 ETH every time you buy it. So first token is 0.00000001, second is 0.00000002, 300th is 0.000003. If there is 50 ETH in the contract, each token is priced at .001ETH. When you sell a token it pulls from the ETH stored in the contract and gives it to you at the given price. However, for every token sold it depresses the price per token the same way it increases, by 0.00000001. If you run the math, you’ll notice that there is always enough ETH in the contract to pay everyone out. Note: Everyone might not get the same price to sell at they they bought at. That is the risk associated with the contract.
When you buy a token, or sell a token, you have to pay a 10% fee. That 10% fee is then distributed evenly to all outstanding token holders. These fees can be withdrawn at any time and represents passive income, as a holder of P3D you get paid for taking the risk of holding onto the token. If you are a long term HODLr and don’t need to sell the tokens very often, you can collect the passive income. Everyone always gets paid; whether the number is “fair” is directly proportional to how much risk they took when they got into the contract.
Now why hasn’t this ever worked in the past? Well the problem was that it was run by humans. A human is tempted to change the numbers, a human has to worry about finding more people, a human can be jailed by a government and their books destroyed. A scheme that works on a blockchain, however is impervious to all of these concerns (assuming it doesn’t get hacked). A blockchain can always assure each participant that their policy is safe, show them at anytime how much they can expect to withdraw, and how much liquidity the policy provider has.
If P3D works, I imagine it becoming the premier provider of lending in the crypto space. You buy P3D when times are good, collect income from the few individuals who need to liquidate to pay rent, and know that you can always cash in your tokens when you need to pay rent.
Let’s imagine an alternative to P3D, it’s called InsuranceDAO. It uses the same contract, however, it checks for approval of agent before a participant is allowed to sell. If InsuranceDAO is selling Life Insurance, its agent checks the death of the individual. If InsuranceDAO is selling Car Insurance, the agent checks the receipt from the mechanic before allowing to sell. If InsuranceDAO is selling Medical insurance, the agent checks the hospital receipt before issuing a payment.
InsuranceDAO can charge lower fees since it knows the risk of different contracts. It will survive based solely on the quality of its governance and UI. The openness of the smart contract is key for this.
Because P3D always charges 10%, and users have unlimited freedom to buy and sell, there is also more risk. However, fees pay for this risk. A real insurance fund, will have far lower fees, but will also be more restricted. P3D is a very good initial version of InsuranceDAO because it requires no oracles.
Why do I think it’s a better store of value than Bitcoin? Bitcoin always requires there to be a greater fool to buy your asset. So if I stored value in Bitcoin, and I need to get that value out, but the market is bad that day, I can receive far less than I put in. Possibly even 0 if everyone agreed that Bitcoin has no intrinsic value. Compare to P3D, which collects ETH. The price of ETH is somewhat irrelevant to the contract itself. It only represents an onramp of value into the contract. Much the way Bitcoin is valuable because it represents the onramp to the Bitcoin payment network. Think of Bitcoin as having Paypal credit. It has no worth if nobody accepts Paypal. In the future an implementation that utilizes a stablecoin, like DAI would be far more useful, especially in providing a sense of security to participants.
Is P3D a game? Is it an InsuranceDAO? Is it a Ponzi scheme? Is it a pyramid scheme? Will it be hacked? I currently do not know the answer to any of these questions, but I do know that many people will immediately label it a fraud since it is actually very threatening as a business model to large financial institutions.
This is it folks, this is the ETH dapp that is going to make it big.
Other Predictions:
- P3D will demolish the altcoin market.
- P3D will solidify ETH as the only smart contract platform that matters.
- P3D will lock up a lot of ETH and reduce liquidity in the market.
- If it looks like it might be shut down, I can see a parallel market forming in Ethereum Classic land.
