What are the economic parameters of Nxt?

written by: HassenBlasques; the author is a PhD student of economics, he
specializes in alternative financial solutions and currencies

This paper is supposed to analyze parameters of Nxt as a currency from microand macroeconomic perspectives. It is not a mere comparison of Nxt against
other cryptocurrencies or fiat. It is about seeking a role a currency like Nxt can
play in the global economy.
In the current world, there are two general expectations concerning currencies
that are not often mentioned when speaking about them. Firstly, a currency is
supposed to perform multiple functions. Secondly, a currency is supposed to be
universal in a monetary area – either sole or competing other universal
currencies. In my opinion, this approach is a mistake. The attempt to have
currencies universal is economically irrational.
Anyway, cryptocurrencies have not yet broken this paradigm of versatility. They
do not attempt to specialize for certain functions only. Nxt is and isn’t different,
as it will be described later on. Nevertheless, existing currencies still do differ
from each other and these differences are going to make them be specialized in
use. Once the market gets used to cryptos and starts using them as tools rather
than assets, the users will get more sensitive for the different parameters, which
affect the utility of particular currencies for performing separate functions.
Which are the separate functions? There are two basic and more than 10 other.
The two basic functions of money are medium of exchange and store of value
(treasure). In economics, there is a Gresham’s law that basically claims that the
better a currency suits the function of a store of value, the worse it suits the
function of a medium of exchange. In other words, if a currency is designed in a
way leading to deflation, people will prefer to get rid of other currencies and store
the first one; and vice versa. A similar scheme can be applied on some of the
other functions too. That is exactly why it is not rational to expect one currency to
be universal. The more we adjust it to function A, the more difficult is to adjust it
to function B.
Economics in theory often recognizes only the two main functions plus measure
of value (informational function) and sometimes even standard of deferred

Economic parameters of NxtPage1

payments. The praxis is different. Over time, currencies were getting more and
more functions that can be distinguished. The other functions may be:

informational – what costs what; a denominator of values; what it is

profitable to invest in
allocative –joining the savings and investments; money flow to the hand

that can use them in the most profitable way
unit of account – the unit you denominate other things in when doing

clearing unit – unit of account used for offsetting mutual debts
standard of deferred payment – money that are accepted as an instrument

for settling a debt
statutory – virtual penis; declaration of success; score; measure of control

over the others
o a manifestation of a social relation between the original and the new
owner of the thing (money); e.g. tribute; members’ allowances; tax,

to some extend
a secondary phenomenon confirming the modification of the social
relationship between the original and the new owner of the thing

(money); e.g. dowry
wergeld – fine; compensation; retribution
power – related to the authority standing behind the currency; increasing

the power of the monetary monopoly
stabilizing – anchor for other currencies
world reserve currency – enabling international trade
investment –using money as an asset; making money out of money;

redistributive – government transfers; taxes; moving wealth from lower

levels of the economy to the upper or vice versa
stimulator of desirable behavior – ecological permits; generally tokens

related to externalities; food stamps, to some extend
money laundering – breaking the link between a (criminal) activity and its
outcome (profit); connected to the depersonalization that money do

Some of the functions help rather an individual (micro), some help rather the
society (macro). Any new currency faces a decision what kind of a problem it
should be designed to overcome. Either the main task for the currency is to ease
1 According to anthropologist David Graeber, the original functions of money
were not commercial but statutory and social. The very basic quality of money is
its power to depersonalize social relations. See (Graeber 2011).

Economic parameters of NxtPage2

the people their economic activities or it is to promise them some profit. Cryptos
appeared in reaction to huge failures of the current financial system based on
credit fiat currencies.
The problem of fiat is to no extend that they would not be suitable for creating
profit out of it; on the contrary. Fiat is that great as a speculative instrument that
it causes a liquidity trap – a situation when money moves from real economy into
the virtual casino of the financial markets; leaving potential economic subjects
short of liquidity – meaning there’s not enough money they could use for trading
goods and services, for purely monetary reasons.
The other problem with credit based fiat is that the more money banks create,
the more debt they create too. Thus it is, for mathematical reasons, impossible to
clear the long-term debt that banks owe to their own accounting balance 2. The
aggregate indebtedness of our civilization boosts by gravity, as well as implosive
tendencies of the banks. Credit fiat cannot stand as a standard of deferred
That’s why any new currency that is not being issued against debt helps the
society. It supplies the population with liquidity that is otherwise being
systematically drained from the real economy. More liquidity means more sales,
more jobs, higher wages, healthier economy, moving towards the potential,
motivation for real investments3.
BUT: As it was said earlier, a currency cannot specialize for serving individuals
and the economy as a whole at the same time. Just the fact that Bitcoin is
designed as a deflationary currency motivates people to store it, not to send it
into circulation. From this and only this point of view, we got a new way how to
make money out of money instead of a solution to our real problem – the artificial
sustainable insufficiency.
2 Which means nothing less than that the final creditor is not even a subject but
a sheet of paper.
3 All the way to the point when there is too much liquidity, the potential has been
reached and inflationary tendencies appear. We are far away from there now. The
inflation that we experience is caused by government actions on the field of taxes
and mainly by intentional concentration of money on certain markets only –
typically on housing estate market. The housing bubble is an example of a bubble
boosted by central banks in order to make people with mortgages feel richer and
take another credits – because it is the only way to keep the system alive.

Economic parameters of NxtPage3

Now, let’s take a look at Nxt:

Medium of exchange

Nxt is faster than Bitcoin and the blockchain is not that massive so it is more
convenient to use Nxt 4. The easiness of practical use and adopting of cryptos
should be one of their main competitive advantages.
What may be discouraging is the build in fee for transaction. Right now, the
transaction fee of 1 Nxt is acceptable even for micropayments but may seem too
high e.g. for instant messaging, if someone would decide to use it this way – say
there is a Nxt based DNS system allowing the users to communicate safer and
‘privately’ (Nxt allows to send so called arbitrary messages). Still, it should not be
a problem arbitrarily cut the fee down when it turns to be needed.

Store of value

There is a fixed number of Nxt coins which would normally open the door for
deflation5. With Nxt this may possibly not be an issue because BCNext didn’t
perceive Nxt to be a coin per se:
Regarding NXT as coins: NXTs are not coins... or at least the creator of Nxt
didn't want them to be seen as coins. They are tokens that grant privileges
for supporting Nxt.
Deflation is not much better than inflation. "Real" coins should be created
on top of Nxt, and be issued in quantities that keep their value constant.
BCNext understands that this is very arguable. The community should
decide if it wants to follow the path showed by him, or stick to the Bitcoin
legacy of an unchangeable supply of coins with which people hope to
become rich by doing nothing.6

4 The in-use advantages of Nxt over Bitcoin are very well described here:
http://wiki.nxtcrypto.org/wiki/Whitepaper:Nxt(Nxt community 2014).
5 As more people get into the system the same amount of money will have to
satisfy the growing economic activity (hypothetically speaking, there is not yet
any relevant real economic activity denominated in Nxt). The trend will be
strengthened by Nxt accounts’ losses and also by concentration of Nxt in hands
of wealthy individuals that may be expected.

Economic parameters of NxtPage4

Even if Nxt should stay in use as a coin, there is no limit for a specific type of
monetary expansion – the community may democratically and distributionally
(simply by accepting it) decide to color certain Nxt coins so that they represent
for instance a value of 100 Nxt. Any such monetary policy may technically not be
enforced because everyone can easily get to know the history of each single coin
– and then decide either to accept a payment or not. So if the community does
not agree on the way a decision about a monetary expansion was made, there
will be none.
To continue with this idea I can suggest establishing a Nxt-based Kickstarter.
When somebody has a brilliant idea, he creates a completely new value out of
nothing. By donating him/her, the community recognizes that value and confirms
it. Using the mechanism described above, new money supply can be added to
the system in order to cover the new value. Yet the newly ‘printed’ money may
not cover all the value, for two reasons.
1. When a subject decides with money that is not his, he is not deciding at all.
He may support everything not being restricted and the information about
value gets lost.
2. Money is not consumed after being spent. It has a quantum substance –
both the number of coins and the speed (the velocity of money) combined
determine how much money there is. That’s why only a proportion of the
sum donated may be newly printed money in order to keep the math

So far Nxt seems to be flexible. It should be able to adjust to the amount of coins
that the equation of exchange would require to keep the prices stable and
economy around potential. The individuals should thus not be motivated to store
the Nxt instead of using it; and by that supplying the economy with liquidity. But
there is the reward for forging.
In the proof of stake system in Nxt, ‘miners’ are awarded according to the
amount of Nxt that they already have. In relative terms, everybody profits at the
same percentage, everybody enjoys the same return of investment. In absolute
terms it is not true. Why? Because the distribution would only be linear if the rich
made much more transactions than the poor. This will never be the case because
6 See (Come-from-Beyond 2014).

Economic parameters of NxtPage5

there is no reason to expect that the rich will be more economically active; or at
least not proportionally. Even if the fee was not constant 7 but defined as a
percentage of money send, the more active users of the currency still support the
systems with proportionally higher fees. The incentive in form of a riskless
appreciation goes against the wish to spend money. It is naturally true that the
more talented and capable businessmen can profit so to cover the fees they pay
– but to who’s expense? To the expense of ordinary users of the currency, not the
parasites. If a parasite only sits on his money and forges, it is not important that
he does not earn by doing business. He experiences some opportunity costs but
still his stake grows. In relation to the whole Nxt economy, he keeps getting
richer. Mathematically, the gain of all users may never be linear because there is
a constant monetary supply. The only case in which the equation can work is
when there is no activity and thus no fees at all 8. In a nutshell, the model of
forging is unfavorable for those subject who spend, it discourages of spending.
The industrious may never get wealthy at the expense of the big stack bullies like
this. It is another stepping over each other’s heads, another race towards the
bottom, in principle. Once again, it is never possible for a currency to be
optimized for functions of medium of exchange and store of value at the same
Knowing this, it would tempt to advice to remove the advantage for forging at all.
The system can be operated by computing capacities granted by sponsors. But
still the bonus has its meaning. Without offering the early adopters a bonus, a
new currency may never spread world-wide unless pushed forward by a central
authority like is a state. My final recommendation would be to keep the bonus but
consider removing it in the future when Nxt is a widely accepted and recognized

7 Yet they are constant!
8 Mgr. Salsacz promotes the linear return of investment in his paper Nxt Myths
(Salsacz). He has some good points comparing it to the real ROI of Bitcoin and he
is right even when arguing whether Nxt distribution is fair or not. I agree that
forging is as fair as possible but still the model discourages from using the money
for trading goods and services.

Economic parameters of NxtPage6

Note: There are monetary concepts that even aim lessening the usability of a
currency as a store of value in order to help the function of medium of exchange.
This topic was discussed after the World War II. J.M. Keynes came up with a
solution in the form of inflation. With inflation, or expectation of further inflation,
economic subjects tend to speed up their expenditures and the money circulates
faster. Silvio Gesell offered a competing solution – demurrage. Demurrage-just
like inflation-makes the money lose its value. But it does not touch the currency
per se but the single units, coins and banknotes. The technical solution in his
time involved re-stamping the notes. That was uncomfortable and it created
some new issues related to the moment of re-stamping. Our own possibilities are
much more sophisticated today. With strictly digital money, the demurrage can
be as smooth and linear as vaporization of water. The ‘vaporized’ money then
can be redistributed according to proof of bandwidth or whatever. This solves the
problem of sitting on the money and the perceived problem with early adopters,
however, it has nothing to offer to the early adopters who are necessary for
promoting the currency on the first place.


Only the major (dominant) currency in a monetary area may play this role.
Complementary currencies cannot have much different pricing, valuation of other
goods and services, because of the arbitrage. If a currency is dominant, it must
also be stable and not manipulated. It is a hard task because it's solving includes
achieving a high informational equality in the economy, checks and balances
against misusing the economic power to shape the markets at will or
manipulating the benchmarks etc. It surely helps when at least the currency itself
is not controlled and manipulated by one interest group. But this subject is far
beyond the object of this paper. The odds for Nxt to become a dominant currency
somewhere are low in the near future.


Economic parameters of NxtPage7

Fiat currency does not truly perform this function. Credits are mostly given from
money that has not existed before. Credits are the basic way new fiat money is
issued. Nobody has to make any savings in fact, the connection is broken and
thus the allocative function is not driven by markets but by decision makers. It is
a monetary version of central planning.
With Nxt, this is not the case because no new Nxt coins per se are to be issued. If
a person wants to borrow, somebody must have made savings before. That is an
argument in favor of Nxt. On the other hand, there are no Nxt capital exchanges
or savings banks operating yet. Not even the OTC markets perform the function
now9. I guess it is only a question of time when people would be able to lend in
Nxt or cryptos in general for investments.

unit of account

Accounting for state (tax and legal purposes) will perhaps never be possible in a
currency that is not recognized by the state. And making managerial accounting
using a relatively volatile currency as Nxt is now is not practical either. Yet Bitcoin
is widely used as a unit of account for knowing the value of a portfolio of







cryptocurrencies. Once Nxt reaches similar popularity, it may be surely used the
same way – the more that there are going to be cryptos build up on Nxt.

clearing unit

Again, Nxt is ideal for doing this for institutions that will hold accounts in
currencies derived from Nxt.

standard of deferred payment

Strictly speaking, Nxt or any other currency may not repay the original debt that
arises when new fiat money is being issued via credit. To clear the long-term
debt, the bank is obliged to destroy, write-off the money in the same currency.

9 And the same more or less applies to Bitcoin as far as I know.

Economic parameters of NxtPage8

The ‘normal’ peer-to-peer debt may be paid off by virtually anything the sides
agree, including Nxt of course. Fiat currencies-i.e. money enforced by a state-can
be pushed by the state even as a default and unrefusable standard of deferred
payment. Nxt can clearly not.


This function is not economical. It is contra-economical, so to say. When Nxt
becomes a collateral token for many on-it-based instruments and currencies,
holding a lot of Nxt may appeal to the people who like to show their virtual penis.
To solve this problem, I strongly recommend developing a derivate strictly for this
one function. Many coins held irrationally out of the markets will be exchangeable
for colored coin whose only function would be to declare: “Look, I had a lot of
money and I donated it. This is a token proving how generous I am and what
score I was able to earn.” This colored coin would be issued by a foundation that
would redistribute the gained coins or just enrich the forged blocks with them.
Even the forging redistribution may be build upon this function. Instead of proof
of stack, there would be proof of donation. Forgers could be rewarded according
to the sum of Nxt they have given up so far. Like this, they would still generate
earning according to the money they have invested, yet the money would
circulate more. In order to avoid creating of a separate group of donators who
would just infinitely enlarge their share and transfer the money among each
other practically prohibiting anyone other to step in, I would rather recommend
combining proof of stake with proof of donation.


A currency like Nxt may be used for these purposes better than ordinary
currencies because the coins can be colored – the purpose (the legal cause) may
be imprinted into them.


Economic parameters of NxtPage9

A cannot see any advantages or disadvantages in Nxt compared to other existing
currencies. A hypothetical ideal currency for just penalizing someone would be
such, that is burnt when accepted as a wergeld 10. That is neutral to other
functions only in case, that the money is being created at will in order to supply
the right amount of money to the economy.


Nxt is not completely decentralized because there are specific people entitled to
change its parameterization. There are some proto schemes of public voting
already but the real democratic control is yet to be developed – if there will be
the will to do so. At this moment it is hard for me to state, whether Nxt can be
misused by the people standing behind it, working on improving it, implementing
new functions; or to which extend. Important is that the source-code was
published on the 1st of March 2014, so that there are no barriers to switch to
another currency when Nxt gets corrupt. That is generally a huge advantage of
the world where complementary currencies exist simultaneously 11.


Nxt will be a natural collateral for all its colored coins 12. They will not only be
derived from Nxt referencing to it but Nxt will be their direct carrier. That
practically means that Nxt will determine the threshold price of its derivatives.

10 So that nobody is motivated to penalize anyone else for selfish reasons.
11 This advantage described already August von Hayek in the ‘70s (Hayek 1976).
12Any other digital currency or asset can be hashed so that it is compatible with
the Nxt platform and then transferred through it. And not only currencies: Nxt
opens the door for a new decentralized information superhighway enabling peerto-peer run services replacing Facebook, YouTube, Flicker, Dropbox asf. (See:
Decentralized internet and Nxt solutions;

Economic parameters of NxtPage10

Before I know more specific technical details of the solutions that are expected to
be implemented in the near future 13, I cannot say how flexible settings there can
be for the colored coins. Economically speaking, the more adjustable the
derivatives are the better. The demand should call for the best solutions. The
more secure, predictable and stable the anchor (the original Nxt) the better too.

world reserve currency

A functional world reserve currency must be either backed by a respectable
authority or it must lack the authority at all. Gold is a good reserve currency
because it’s scarce and can’t be issued. Bitcoin is potentially a good reserve
currency because its emission is predictable and can hardly be manipulated.
The US dollar used to be a good reserve currency when USA’s position in
global economy was undisputable – at least from the American point of view it
was favorable. Nowadays, the USD is being maintained as the major reserve
currency by the US army and by the still mutually advantageous position of
China holding USD reserves.
Next has none of these strengths. If a new information superhighway truly
arises upon Nxt, then Nxt as a currency would appear to be a natural reserve
currency for the traffic on it. But that is just a reading from a crystal ball.
There are other projects with ambition to start ‘a new internet’ in 2014, e.g.
by Kim Dotcom or Namecoin.


In the world of fiat currencies, a parasitic emission of new money against creation
of debt is indistinguishable from any kind of primarily emission. Since the ‘70s,
credit emission is even expected and predominant. Fiat currencies have no
carrier; they are a mere accounting record 14. An authority claims that money
13 The technical possibilities of a Nxt asset exchange and colored coins has already been
tested, see the forum: https://bitcointalk.org/index.php?

14 Yes, cash is a carrier. But the stack of cash on the whole monetary supply is

Economic parameters of NxtPage11

exists and is here and there. Due to the fractional reserve system and counting
derivatives into monetary supply, everybody who has a lot of money can literally
create new money. He or she does not even have to earn it anyhow.
Thanks to the invention of blockchain as a complete and shared public ledger of
transactions, there doesn’t have to be any central authority stating that money
are here or there and in that quantity. Everybody knows how much Nxt is out
there in every moment and everybody can track all transactions. It is thus
impossible that somebody just creates new money of nothing. Thanks to these
parameters, it is unlikely that that bubble of ‘financial casino’ will overgrow the
market economy so strongly, that it would become just a supporting farm for the
financial sector15.
Nxt surely can be used for speculation on the currency markets. But according to
the points from the beginning of this paper, this role will be played rather by
scam-coins designed purely for this purpose. They are more volatile and there are
always new ones to come and experience their one day long bubbly evaluation
just to die slowly afterwards. A coin that is not a copy-cat promises different ways
of evaluation and should not be widely sought by the short-run speculators.
The comparative advantage of Nxt over these copy-cats is that you don’t have to
do anything more than just put the money in a wallet, let the application running
and forge without any risks. You don’t even have to buy any hardware, keep it upto-date and competitive, anything.


There have been many words said about Nxt pre-mine fair or unfair.
Q: How would you solve problem with scam accusations according to
"unfair" distribution Nxt to 73 big stakeholders?
A: This problem can not be solved. Even if we had a million
stakeholders the rest seven billion people would call this unfair. A world
with the money can not be perfect. 16
15 Which has basically been the case in credit fiat economies in last decades.
16 http://wiki.nxtcrypto.org/wiki/Whitepaper:Nxt

Economic parameters of NxtPage12

This is a normative discussion. Positively speaking, function of redistribution is
desired by the monetary authority (or the people standing behind it). It goes
against the free market. Since free market is something like a religion among
certain economists, it is a dogma to criticize any redistribution. In the world of








monetary sub-systems, nevertheless the claim for free market is satisfied
because these systems compete each other for users. In such system, running a
currency does not much differ from running any other business. Nobody can be
blamed for addressing certain types of users who prefer either redistribution from
the bottom to the top or vice versa.
As I pointed out in the section concerning store of value, the reward for forging
does lead to the bottom->top redistribution. It is not manipulated by any
authority, it is even an implemented feature. If Nxt truly shall be more an anchor
and platform for other currencies, it shall be neutral in the field of redistribution.
Interesting thoughts about distribution brought a Nxt-based currency NEM. Every
pre-miner was allowed to buy only one share. That should result in the same
starting line for all the users once the currency enters the market. Anyway, if you
strictly want to give the money to everyone but once, you need to know some
personal data of his/her. Otherwise the person can claim more money on alter
egos. All pseudonymity is gone that way. The Auroracoin-a coin for Iceland17should be given to every island’s citizen. I imagine it like this: Somebody lets
several hundred thousand aurora-wallets open and then every citizen gets a mail
(paper letter) with keys to that purse. It’s a one-shot ad hoc donation. Perhaps
they can pseudonymize the money later, at least some of them would surely
know how to.
What if it should not be one-shot? What if the Icelanders were given an
opportunity to earn a periodical basic income? There are two dangers:
1. Manipulation with the wallet must be restricted to a single person. The
person has to identify using some strictly personal sign – like fingerprints
or DNA. This solution goes directly against the original ideas of cryptos. It
grants the donor with complete surveillance over everyone’s financial
17 Or a whole new SpainCoin for Spain – both countries have experienced huge
trouble with their financial systems recently.

Economic parameters of NxtPage13

2. Everyone only gets the wallet and keys. No further checks are required and
the basic income just keeps coming. Such solution will definitely lead to
selling the keys and just another form of feudalism.
If the phenomenon will continue, the issue will perhaps be resolved legally. It is a
task for lawyers and states, not for pioneer creators of young cryptocurrencies.

stimulator of desirable behavior

Currencies or tokens designed for performing this function usually stand against a
specific affair. When they are used for the supposed purpose-very much like a
voucher-they get eliminated. That is something Nxt was not designed for. It does
not operate with the idea of burning coins18. Burning coins when there cannot be
made any new coins is another deflationary scheme. Technically, colored coins
serving as a stimulator of certain behavior may be used that way and theninstead of being eliminated-they get de-colored. This is surely an interesting
challenge for developers.

money laundering

There have been plenty words said about cryptocurrencies and money
laundering. As far as I know, Nxt is no different than other cryptos in this matter.

18 A coin can be practically eliminated when send to an address for which there
is no private key.

Economic parameters of NxtPage14

The times when a monetary area was a domain of one universal currency are
over. Alternative currencies have started to appear at large in the last century
already. But only the information revolution, the inventions of the Internet and
distributed computing and also the financial crisis, they were the basic stimuli to
create complementary currencies that truly question the monopoly of credit fiat
money. Nxt is the first and most important cryptocurrency that genuinely tries to
break out the paradigm Bitcoin has set up. Now it is clear that at least several
(but possibly many) significantly different types of currencies will compete with
each other. Just like in any competition, more business models are going to
survive and find their customers/users. For economic reasons, it is not possible
for one currency to be adjusted to perform all the possible monetary functions
conveniently. Currencies will have to specialize.
Nxt, as it stands now, has some competitive advantages in both major monetary
functions; as a medium of exchange as well as a store of value. From that being
stated, the fact directly results that Nxt can’t be the best currency for either of
these two functions. 15 other functions of money have been mentioned in this










recommendations that should help the currency to improve its possible
performance. In my opinion, Nxt’s most valuable feature is the platform it builds
for other monetary solutions derived from Nxt. With its stability, relatively low








transparent forging, Nxt seems to be an ideal anchor for colored coins,
representing other currencies.
If you want to support me, my Nxt address is: 1820734801611231561

Come-from-Beyond. „BCNext's Plan.“ NXT WIKI. 10. February 2014.
Graeber, David. Debt: The First 5000 Years. New York: Melville House, 2011.
Hayek, Friedrich August von. Denationalisation of Money. The Institute of Economic
Affairs, 1976.

Economic parameters of NxtPage15

Nxt community. „Whitepaper:Nxt.“ NXT WIKI. 11. March 2014.
Salsacz, Mgr. „NXT Myths.“ pages 26-27.
https://docs.google.com/file/d/0BwAGADgnQcrtM3g1cU1VSHZtTGM/edit (přístup získán
11. March 2014).

Economic parameters of NxtPage16