Let’s first continue the conversation about, proof of stake, masternodes as a potential form of investment, as well as the fact that certain elements of crypto-currency, particularly the proof of stake coins that we are seeing might be viewed as a sort of series of grand economic experiments. And that these economic experiments are not being conducted in laboratories, like most experiments would, but in the real world with the investments of tens of thousands of people who are experience a wide range of results. All I can say is that if I were a university economics or psychology professor with an interesting in the mass psychology of investing in markets – that I would instruct my grad student researchers to spend a few months in the Discord channels of any number of these proof of stake coins that are being released. This week’s coin is particularly fascinating in this regard, since the roller-coaster of its story continues to this very minute.
Masternodes and Staking
But before we dive into this project, let’s spend a few minutes about masternodes and the so-called Staking coins. For the last couple of years, there has been an entire class of coins that have come into existence, very often slightly modified versions of each other, which incentivize the participants to “hold” or otherwise lock away the coin. This incentive usually comes in the form of a healthy percentage that is delivered in a similar way that your bank adds interest to your savings account. And let’s take a step back to the good old days and ask that simple question – Why do banks do that? I’ll keep it very simple, even though it’s a bit more complicated – if they incentivize you to keep your money in their bank, by adding a percentage of your stake as it were – as a reward to keep your money in the bank – they can loan your money to other people at a higher rate (or invest it elsewhere), and hopefully make more money than they pay you to keep it there. Now if the price of money goes up, the interest rate rises, because the incentive needs to be increased to make it less attractive for you to move your money away. And if you have been paying attention to the interest rates have been paying to keep your money in their bank you might conclude that money isn’t very expensive right now, and thus they don’t need to reward you quite as much, since interest rates are very low. And you would be right about that. Now, interest rates, money supply, and our entire economy is much more complicated that than simplification, and because we literally live and die by concepts such as interest rates and money supply, you don’t see the Federal Reserve – which is the authority that actually governs our money supply, perform drastic measures unless they are called for through some major emergency, like an economic crisis, or a depression.
But the issuers of a crypto-currency are free to experiment. For instance, they can create a currency and set whatever interest rate they like, and can also create any kind of rules that they wish in terms of the supply of that currency. And this is precisely what they do, and what makes this week’s crypto-currency token so interesting.
B3 Coin – a mad professor’s economics experiment?
The first thing I should mention about this coin is that the team that developed it is reportedly the same team that brought us two other quite successful projects – named BitCore and BitSend (B3 website) If you had invested in BitCore when it was first released you would have seen a return of 1000% of your investment. If you had done the same for BitSend, you would have realized a return of 9000 % within about six months.
But this time around, the developers had a completely new and some might say outrageous idea. Using the concept of proof of stake, and also the masternode idea in a rather unique way, this coin advertised a rate of return of 27% per DAY. And why do you suppose they came up with this almost ridiculous figure? Because 27% a day is about 10,000% per year. And so they wanted to be the first proof of stake coin to offer 10,000% annual return.
Now given this, can you see what I mean when I say that this is a bit like the experiment of a completely insane economics professor? As a follow-up I would very much like to dial up an economics professor, tell them this story and ask them what they think. With any luck, we may have a very interesting follow-up episode.
But lets’ talk about what this means and how it actually works. The idea is that you would purchase the coins – and these coins were available only on a few exchanges – and you would then lock them in a wallet. That is, you would “stake” them for a period of time. Similar to last week – there was and is a specific schedule posted, but different than last week, the schedule provided a return based on the number of blockchains that were in existence. For the first 10,000 blocks of the chain, the annual rate of 8%, then from 10-25K blocks, it doubled. And then it doubled twice between 30K and 50K and then it soared to 1000 % , and then for the 20,000 blocks between 60 and 80K, it provided 10,000 % interest . And because as of this time of this podcast, the block is not yet at 80,000, it is still providing 10,000% interest – although that seems set to last for just a week or two more, since that 80,000 block is coming fairly soon. What this actually meant is that if you had, say, 1000 of these tokens on day 1 of the month, the next day you would have 1,270, and your stake of tokens would compound. Using a simple compounding daily interest calculator we see that we would have over 1.5 million tokens by the end of the month if we had not added any during that month.
Given this schedule, you might imagine that this began to gain interest when the reward reached 15% of 25% but REALLY started to take off when the reward reached 1000% and then exploded when it reached 10,000%. And of course you would be absolutely right – that is precisely what happened. And during that period when participants were receiving these interest rates, that original 1000 token investment we talked about before increased to over 1.5 million tokens in 30 days. If all of this sounds absurd – it is in a way, but not completely. The reason is that this token traded on an exchange which would allow you convert it to bitcoin – and it therefore had value – that is to say a token was worth some percentage of bitcoin. When this project was paying about an 8% annual rate, the price of a B3Coin was as high as $.80 in bitcoin. But what you do supposed happened to that value during that time of 10,000 interest? Of course, it plummeted – like falling off a cliff. Because economics 101 tells us that there is no free lunch, right? If the supply of the coin increased at a rate of 27% per day, then the price of one of those coins would decrease about as fast, right? Well – not exactly – and that’s where this experiment, if you will, gets very interesting.
By the way, one of the things that I highly recommend anyone who wants to understand markets in real-time, with real emotion behind it, is to open up a futures account and trade the e-mini futures. Don’t fall under the illusion that you will become wealthy doing this – treat it as an educational investment, in a way, because it is fascinating to see how humans – or perhaps humans programming computers nowadays – make a market move. And one the interesting things you discover is that there are many types of market participants who have many types of goals, and behavior. This is also true for the B3Coin community. What you had was a combination of people who participated and continue to participate as traders – in an effort to take short-term profit – and other people who participate for a longer term. And it would have been one thing if all of the participants in this market had participated in the way that the designers expected – which was to stake the coins in order to receive the rewards – but not all of them did. What happened was that a number of participants – probably more than was good for the network – began to sell their coins during that time when the rate of return exceeded the price collapse. And as they sold more and more, the price collapsed faster and faster. But as the price collapsed, the 10,000% returned continued. And what occurred was an inflation unlike anything we here in the human world could imagine.
B3 Fundamental Nodes
Then some things happened that seem to happen all too frequently in the crypto-currency world, and which again confirm that notion that no matter how well you program a market, intervention always seems necessary at some point. In this case, it was the danger of the value of the token going to zero. Fortunately, the programmers had foreseen all of this – although perhaps not as fast as they thought – and had created a mechanism by which they could intervene. Specifically, I’m talking about the concept of a Fundamental Node. This is a type of MasterNode which doesn’t lock away coins – it destroys them. You literally would burn 25,000,000 coins for the privilege of receiving 60% of whatever block was awarded to your Fundamental Node. The wallet that claimed the block would get the other 40% of the reward. And depending on the number of nodes, your Fundamental Node might win a block more than once per day. And because of some issues with the code that was released, the main exchange, CryptoTopia, froze all trading for B3Coin – which prevented some people who had amassed tens of millions of tokens from creating a Fundamental Node in time – leaving a relatively few nodes that have made, in the last week or so, hundreds of millions of tokens.
Since the coin is not valued at zero – this actually equates to some decent value – one Fundamental Node reportedly received as reward today of 500,000,000 coins, which, even at the rock-bottom low price of .00041 cents, is still over $200,000. What the developers are hoping and probably everyone in the project is that anyone with 25,000,000 coins or in fact anyone with any of them will see this opportunity and will either create a Fundamental Node, or join a Node Pool and thus burn tens of millions of tokens – which will, you guess it – lead to a rise in price of the coin.
At the moment, however, the main controversy of this project is this issue of just a few nodes making what seems to be an enormous amount of tokens through what amounts to being in the right place at the right time – and this controversy is going on right now if you join the Discord Channel and scroll up. One thing that was pointed out, however, by many in the Discord channel, is that just about everyone who is complaining because they have tens of millions of tokens locked in the exchanges and are unable to create a Fundamental Node with those tokens, has already realized a return of anywhere between 1000 and 10,000% or more on the their original investment. And when confronted with this, even the most ardent complainers more or less agreed with that sentiment. That is, in the grand scheme of things, they didn’t have all that much to complain about – except the inherent unfairness happening at the moment. I tend to agree with the majority here, when I think about millions of people worldwide who are lucky to realize a return of 10%, much less 10,000%.
Another thing you will find, if you scroll up at Discord or read the BitCoinTalk forum, is that the original plan was to not release the concept of the Fundamental Node until block 80,000 – and they did it early. And finally, just like so many other noble projects which aim for the most democratic ideals, this project fell prey to a rogue actor – which was the largest wallet with the largest number of tokens refused to upgrade to the latest code. This caused a major problem for security – since in a proof of stake algorithm the real danger is in any one node becoming too powerful and rich and then acting against the interests of the blockchain as a whole and in the interests of themselves. In this case, it appears that the problem may be solved through a large burn of tokens and possibly this rogue actor standing up a number of Fundamantal Nodes in return. I’m completely speculating here is the team doesn’t want to reveal the solution – but I can’t see another way out of that issue, so I’m going to make that educated guess.
The latest word from B3 seems to be that they will be converting to a new token named, “KB3” which is 1,000 times fewer than the original B3. Details to follow.
But what does all of this mean for you, beyond what might be an interesting story? Well, I would venture that this deserves a look because the confluence of the code issue, of the so-called #1 Wallet controversy, and the exchange freeze, is that when the exchange opens up again it’s quite possible that the price will fall to an all-time low of 1 Satoshi, which is as close to zero as is possible – and even with the current price of bitcoin at a jaw-dropping $9,700, you could purchase enough B3Coin at that price for a Fundamental Node for less than $2,500. The odds, of course, of you being able to buy this many B3Coin at that price is probably pretty slim, but nevertheless, if you believe in the developer’s vision – that hundreds or maybe thousands of nodes will be created, resulting in billions of coins being destroyed, which will then cause the price of B3Coin to rise again – then this strategy just might turn out to be a very lucrative investment indeed. The risk, of course, is very high – this is literally a coin toss, no pun intended, as to whether it will pay off in a huge way, or will end in zero.
Speaking of the latter, there are some precedents for this, such as embercoin. There is no question that this entire concept is a work in progress. As for me, I’m intrigued by the concept of masternodes. Last week I made a slight mistake – I meant to say please visit masternodes.pro. That’s plural – I still think this is a good site to visit. Click on any of the listings for more detail. Take, for instance, INNOVA, which at the time of this podcast, is showing an ROI of 533%. What this essentially means is that if you start with zero, you would need to purchase 1,000 INNOVA coins and set up a machine to work as a so-called masternode. In most cases, this can be a Virtual Private Server, which means you don’t even have to buy any hardware. According to this list – which by the way, changes often, with ROI increasing and decreasing daily – you would spend about $2,400 and for that $2,400 you should earn about $35.00 per day, minus VPS costs. What’s interesting to me about this is that this is probably about the same return as you might get if you invested in $2,400 worth of hardware and mined some s7 antminers for bitcoin joining a pool, or maybe some GPU’s mining ethereum – but with Proof of Stake you can use a cheap VPS at about $10/month, so all things being equal, Proof of Stake might be more profitable – and certainly easer to maintain. The big problem with Proof of Stake, however, is the unknown ROI. Yes, it’s true that Masternodes,pro has some good information TODAY – but very few of these coins, with the exception of expensive coins like Dash and PiVX, have the kind of stability and long-term potential as BitCoin and Ethereum. I should also remind everyone here that Ethereum is moving to Proof of Stake, which will be interesting in terms of mining – but it may also mean that it will be considerably more difficult to mine ethereum without a significant investement – unless, of course, we see Proof of Stake Mining Pools, like we see with B3Coin. And I imagine we will see that.
To close with this week, I would just say that if you are interested in the idea of running a machine that will provide a return on investment as opposed to simply buying and holding a coin, you should investigate some of these proof of stake coins. And if you are particularly risk-friendly and believe that you should be rewarded handsomely for that risk – well then have a look at S3 Coin in the next few days, since the exchanges should start trading again and the price may reach a very attractive level. One last thing – in case you are quite new to this – the steps for something like that would be to 1) if you live in the US, open an account with an exchange that allows you to purchase BitCoin (I use CEX.IO but friends of mine use Coinbase) and then open an account at Cryptopia, and transfer bitcoins to your Cryptopia wallet. From there you can trade BTC for B3.