NSF Explained
I have noticed a lot of chatter/confusion over the NSF so I though I would expand on the purpose and design. The inspiration for the NSF is Friedrich Hayek's book The Denationalization of Money.
Hayek believed that the state should not have a monopoly on the creation of currency - he viewed currency as a commodity that should compete for acceptance. He surmised that competition would create the strongest currency and society would benefit. The conclusion Hayek reached was that a weak currency (devalued) would hurt creditors as they would be paid back with currency that is worth less than when it was lent. For example, if I lend money at an interest rate of 10% but the currency falls by 20% I am really losing 10% of purchasing power.
On the other hand, a strong currency hurts debtors as they must pay back debt with currency that can buy more than when it was borrowed. So, if I borrow money at 10% and the currency appreciates by 10%, my interest rate is really 20%.
Hayek concluded that both debtors and creditors would gravitate toward a stable currency because it was mutually beneficially.
The biggest criticism of Bitcoin from the financial community is its volatility - everyone has the same question, "How can bitcoin ever become a viable currency if it fluctuates 10-20% a day?" The volatility is a huge flaw for BTC and it is why I created Nautiluscoin. A merchant must have a reasonable expectation that a currency can be converted to fiat if needed without losing 10% of its value. At the same time, those who want to use the currency must first buy the currency and need to be assured that they can buy enough to make a purchase without having to pay 10% higher to obtain the currency. In other words, a stable growth pattern is needed.
I share Hayek's view that a currency should reflect its supply and demand - if more people want to use it, the price should rise. Wild daily fluctuations will kill any medium of exchange.
My original concept was to use either a currency peg system or daily band. However, as we have seen countless times these systems are flawed. Once the market realizes the entity responsible for maintaining the peg is under-capitalized people abandon the currency. For a real life example we need not look any further than the breaking of the Bank of England.
The NSF is designed to act as a speed bump - when things get out of hand in either direction the NSF has the ability to step into the market. As with all systems the NSF has a flaw too - it can be overwhelmed. That is to say if a miner decides to dump, the NSF can only buy so much...alternatively if merchant and investment interest create tremendous demand the price can move rapidly higher.
The speed bump nature of the NSF is a way to gain acceptance, just like Hayek concluded. The NSF does not prevent the price from appreciating significantly, it just aims to make the pace reasonable so end users of the currency will be attracted. At the same time, the NSF cannot prevent the price falling to zero as it does not have enough fire power to buy every NAUT in existence.
A Real Life ExampleThe creation of the Get NAUTi shirts is a real life example of why a stable currency is needed. Between production and shipping the shirts will cost me around $18-20 - I must convert to fiat because the printer only accepts US Dollars. I decided to take only NAUT to illustrate how the system works. I am charging 200 NAUT for the shirts, which at current exchange rates is about $18. If miners decide to sell and the rate drops to 0.0001 BTC then I am only collecting $9, leaving me on the hook for $11 per shirt. I am willing to take this risk because I am trying to illustrate why a reasonably stable rate is needed.
Mrs. BK tells me I don't always explain what is going on inside my head, so I hope this helped more than confused
-BK
