In early June of 2020, the National Science Foundation (NSF) awarded a $225,000 research grant to KRNC. The purpose of the grant was to make a new system or protocol that combines our US fiat currency, the dollar, and features of cryptocurrency.
As the popularity of cryptocurrency is on the rise and some desire to push the idea of cryptocurrency becoming the universal currency, it is natural that the US government and other groups would be a little concerned. For institutions such as the US Government or Central bank, cryptocurrency is a volatile and potentially dangerous currency because it cannot be regulated. If regular people hold a large amount of cryptocurrency and some type of crash or disaster occurs, the efficiency and efficacy of the government to aid and guide these situations is greatly diminished.
In the eyes of KRNC, cryptocurrencies have major barriers for adoption which in turn have major network effects. For a member of the public to join, they have to use their fiat currency, e.g dollars, to buy cryptocurrency. But is this not what we do when we engage in currency exchange– e.g using our dollars to buy euros for a trip to Paris? Yes, in principle it is the same, however, when we exchange our dollars for another fiat currency such as euros, we are giving ourselves a stable, reputable currency to use in trade when we travel to Europe and at the same time give a European the American dollars to use on American goods and services. Trading dollars for Bitcoin differs because cryptocurrency is incredibly volatile and there is no formal institution which monitors it. The power lies in the hands of the early adopters of it who own 85% of all available Bitcoin; if they can get everyone to buy from them, they will be able to amass a large amount of valued, stable currency while everyone else is thrown into the pit with a dangerous currency.
While the cryptocurrency game can be unfair to those who are joining the bandwagon late, the dollar is not perfect either. If you are familiar with the principles of inflation and deflation, then you have a basic understanding that the dollar’s value rests on the amount of it that is available in the economy for trade. The scientists behind the NSF funded crypto protocol project called Key Retroactivity Network Consensus (KRNC) want to “upgrade fiat money with scarce digital gold”. In principle, it is similar to returning to the gold standard, but in a digital form.
To do this, scientists will allocate the scarce Bitcoin to fiat currency via blockchain and then distribute a finite amount of KRNC to everyone for free. Therefore, everyone who has ledgers of dollars can engage in the crypto markets, proportional to the value of someone’s existing wealth. What keeps everything in this system secure and working is KRNC Chief Scientist Clint Ehrlich’s Proof-of-Balance. It eliminates the need to buy and complete math problems to mine cryptocurrency and allows a blockchain to remain secure even if an adversary outspends all honest protocol participants.
What implications does this have for markets and pensions? It is hard to say. It is too early to anticipate how well KRNC will take off and decide if this splash will have major ripple effects on the markets. In the case of pensions, state pension managers may see an opportunity in the fact that these KRNC improved crypto-dollar hybrids will be safer from government malfeasance, but there may not be enough growth and returns for pension holders to justify involvement. After all, pension managers’ primary duty is their fiduciary obligation they owe to the public employees. Besides, this project is a test, and according to Anna Brady-Estevez, the National Science Foundation program manager for the grant, “Our funding of this protocol shouldn’t be misconstrued as an endorsement of any initiative to upgrade the U.S. dollar or make it more like bitcoin or any other cryptocurrency for that matter”.