After experiencing a long and steady downward trend, the price of Peercoin suddenly rallied this week when Peershares developer Jordan Lee announced a release date for NuBits. The project will go live on the 23rd of September. So far, the details of the project have remained a secret and the only specific information available about it is that it is claimed to “completely solve the volatility problem cryptocurrencies have experienced.” Despite a lack of any further information, this has fueled the recent rally in Peercoin.
But based on the claim that NuBits will “reduce volatility” the number of possibilities of whatit could entail is limited. Volatility can, for example, be reduced through controlling monetary supply. This would, however, completely go against the decentralized nature of cryptocurrencies. Monetary variables such as total supply and monetary expansion rate are predefined, not to be changed by any central entity such as a government. This option can therefore quickly be taken off the list.
Another option is backing a currency with an asset such as gold. But it would not be the first time a cryptocurrency is backed by gold, and it would not satisfy the claim that volatility is reduced while: “It does so with zero counterparty risk using a decentralized network” If physical gold is stored at some location to back a cryptocurrency, it does not eliminate the counterparty risk. There is always a risk non-delivery due to theft or worse, and can hardly be considered decentralized. Again, this does not seem like a serious possibility.
At this point, the list is getting very thin. Another way of thinking can be obtained from the NuBits website, which quotes an investigation by Deloitte that cites price volatility as the main reason for Bitcoin’s reduced utility: “no one wants to use bitcoin to make future commitments, or even buy a cup of coffee, when its value can change by 30 percent overnight.” When it comes to fixing future commitments, one should immediately think of financial derivatives. Specifically Forward, Futures and Swap contracts can all be used to agree on a price for a certain amount of coins at a future date. Futures Contracts on Bitcoin and Litecoin are already available to the general public, so this would not exactly be groundbreaking. But this is also not without counterparty risk as claimed given that Futures are exchanged traded, so this cannot be applicable either – or can it?
The answer to the latter question lies in so called “smart contracts.” A smart contract is nothing more than a computer protocol that facilitates, verifies and enforces contracts. They are already implemented in Ripple, Mastercoin and Ethereum, and can be designed to mimic the behavior of any financial contract like a Forward contract. This does not involve an exchange, and is therefore both decentralized and free of counterparty risk.
NuBits would thus most likely feature smart contract technology. If this is the case, then NuBits would obviously not be a major innovation. After all, the concept is not new anymore, and definitely not “the most important development in the cryptoasset space since Bitcoin was released.” Given that Peercoin’s market capitalization increased from $17 million to $40 million at its peak following the announcement it would also seem to be overvalued. Ethereum raised $15 million in its IPO that ended less than three weeks ago, and includes a lot more than smart contracts that can mimic financial instruments or anything similar to it. The rally in Peercoin therefore seems difficult to justify, and investors should avoid getting caught up in the hype without any further details.