Musings on the EC economy

Some people have started posting some interesting stuff about the economy, and obviously we’ve been thinking about it a lot, so I figured I’d share some thoughts.

Inflation

Inflation in EC has turned out to be an interesting thing indeed. Traditionally, the math basically says that the more credits are around, the less valuable each credit is. With EC things aren’t quite that nicely sliced.

One of the major things we have to balance with is, basically, liquidity. We have X users, and those users must be able to obtain sufficient funds to participate in the economy or it’s all just a waste of space. Since we don’t permit interest-baring loans of any kind, this capital is not readily supplied by “ec investors”. Instead, people obtain credit via dropping or trade.

As a result, there isn’t a great deal of motivation for people holding large amounts of “unspendable” credit to do anything with it except sell it. The fundamental nature of EC is that it lacks luxury goods – there’s nothing you could spend 100,000ec on and feel happy about.

What this all boils down to is that the guiding thing we try and maintain is that the economy increase in line with the increase in active users. We basically want X number of credits in the market with population Y, and X*2 with population Y*2. We’ve been pretty successful in this regard.

Valuation

Valuation is a tricky thing with the credit at the moment. You’ve got a few things missing that a real currency has. EC has mechanisms built into it for the “magical” creation and destruction of credits, EC is only backed by a startup company, not a Government, EC holds all the account balances and can arbitrarily remove your credits without any appeal, and the EC market is relatively limited at the moment.

This is how it should be, people talking of gold-backed currencies etc are missing the point – the credit is there to act as a mechanism to enable trade, it’s not designed as a commodity in itself.

We don’t mind people acting as if it has value, because in any short term window it does – you can reasonably say that if you trade your sock for 10,000ec, you’ve done reasonably well out of the bargain – but only if you then proceed to do something with those EC. The long term prospects are completely impossible to predict, even for us.

The crux of this is that the valuation of the EC is considerably more about perception than translatable value – nobody is doing the math regarding the value of a spot in US$, then in EC for the same spot, then working out what the EC is valued at as a result, they’re buying and selling based almost entirely on what everyone else is buying and selling for.

The reason for this is that everyone doing it is doing it as a hobby at best. While there have been the occasional users who tried to make a lot of money by farming etc, even then all they were interested in was dumping the credits for $ as fast as they could – and coincidentally driving the auction price down – rather than doing a serious valuation.

Spot valuation

I’m only going to touch on this for a moment, but overall the spot pricing system works very well. It is demand driven and does a pretty amazing job of finding the sweet-spot for the pricing for any given blog. Yes it has it’s downsides, notably the big steps at the high end, and we hope to improve it in the future in nice comfortable increments, but overall it works well.

One thing people constantly bring up is the idea that they’d like to be able to set their own price, and I totally get that. EC has done very well out of working hard to let users make decisions about their blog, even when automated solutions might be easier, and it’s kind of counter to this philosphy for us to set the pricing automatically.

The fundamental problem however is just how much time people can afford to put in to managing their valuation. If you wanted to figure out your spot price yourself, you’d need to keep track of all the purchases for people of the same basic profile, work out what your buyers were willing to pay etc etc, and constantly fiddle it to match the changes in perception due to your advertising and promotion – or lack thereof. The pricing system removes all of that, and does an equivalent job for everyone at the same time. It didn’t seem fair to demand so much time and effort out of people, on top of dropping etc.

In addition, it is necessary for the economy as a whole for people to do a good job with the spot valuation. If people under-value their spot, it reduces the tax take, and leads to inflation (or us having to increase the tax rate). There’s the potential there for a kind of spiralling collapse as users “do everyone a favor” by reducing their spot price significantly in an act of goodwill, accidentally undermining the economy as a side effect.

The future

The real question is, how will things change in the future. The credit does it’s job just fine right now, it facilitates trade in both ads, and a number of other things, and the range of purchasables and the stability of the system is increasing all the time.

There are a few things we’re likely to do however.

The first is luxury goods. We’re trying to come up with things that will be worth paying a pile of credits for, to try and get those big credit lots moving without basically being binned at ebay.

The second is general credit sinks. We want to give people more variety in their spending options, because it’s clear that not everyone really wants to advertise – one of the more interesting discoveries is that if the price of advertising goes up, the total spend does not increase, despite the fact that there are credits to spare in “savings”. These credits are essentially dead for advertising purposes – the holders are not willing to spend them on ads – so we’d like to find ways of shaking them lose in a valuable fashion.

The last is that we are in the early stages of considering removing the “magic” from the economy entirely. At the moment, each day X new credits are generated by dropping, and Y credits are removed via the tax system. When they’re removed they’re destroyed, we don’t store them up or anything.

We work to keep these two numbers roughly the same, with the difference basically being new users coming into the system (so, X is expected to be slightly more than Y). What we’re considering doing is linking the two. At the moment, you can drop 300 a day and get a credit for each. In the future, the number of drops you can make may vary slightly depending on the amount of credits taken out via tax the day before. In essence, creating an “economy account” at the back that receives the tax, then dolls it out in the drops.

This would turn inflation from something we manage via the tax rate and credit sinks, to something we can manage directly if necessary, by specifying a % growth of the economy account. This is some time off yet, and may not happen, but the benefit would be a more predictable, transparent economy – which increases trust in the credit and thus inspires more people to use it as a trading tool.

I’m tired now so I’m going to stop typing, but we do read everything people post about the economy with interest, so please don’t stop