Cause: Economic Recession. Efficiency Score: N/a. 

For the past few months, I have been toying with the idea of a “savings account” that grows exponentially as a recession becomes more imminent. 

This savings account would act as a hedge for the average person who does not have the capability to predict volatile markets or gain access to expensive, managed portfolios or hedge funds. 

Even with access to those strategies, no one knows what part of our daily lives will be massively impacted by a change in asset values. Housing, for example, was not on the top of everyone’s mind until we were already waste-deep into a plummeting stock market and tons of bankruptcies. 

What I propose is a mechanism that acts as a “savings account” for lack of a better word. It utilizes the comfort level people already associate with savings accounts. Funds appear simply as a by-product of having funds in the account over time (as “interest” does currently. Though, it is not technically interest). It could also potentially use other methods to show a gain in value, however, those would need to be thought out further. It uses governance and distributed ledger technology to gain consensus that, yes, we are in fact in a recessionary environment. Only then could one withdraw their funds.

For most people, starting a savings account means setting it up with a bank and trusting that they could pay out the cash at any given time no matter the circumstances. The problem with this is that liquidity during a downturn could prove to be extremely difficult as we have seen a few times in our past. This is where panic would take over and the circumstances spiral downward.

Voting And Liquidation

One of Recession Coin’s key mechanisms is the that it requires all participants to vote on whether or not our economic environment is considered a “recession” (Another term may be more appropriate, but this is good enough). A consensus is reached when a majority of voters (65%) agree that the environment is recessionary.  Voters are individual accounts and Recession Coin is governed through smart contracts using distributed ledger technology and stored on the blockchain (or something similar). If consensus is reached, then everyone has the opportunity to remove their funds for a limited time. Perhaps as low as 30 days or as long as a year. 

It needs to be as easy to deposit and withdraw as it is with current bank accounts. You may think of the coin as a mix between a savings account and a retirement account. Savings accounts reward savers with interest. Both retirement accounts and savings accounts penalize you for removing funds (because they use those funds and like having a fraction of cash reserves handy). 

In a savings account, you receive a small amount of money as an incentive to let the bank lend your funds out. You both make a cut of the interest they charge on your funds. One would think of Recession Coin as a savings account simply because you receive money directly into your account on top of what is already there. 

The idea of savings accounts to the average investor is that they are one of the safest tools for earning money for money that is available. However, what most average people (not investors) do not realize is that when there is a crisis, the risk goes from being small to large. Especially if your bank has made some really bad investments. The 2008 crash was essenatially this. Bad investments called sub-prime mortgages. 

How It Works

Have you ever been surprised by fees from your bank? It happens a lot in savings accounts. For example, if you transfer funds 3 or more times, you could be penalized.

The way Recession Coin makes you money does not involve any investments or, therefore, hardly any risk. Instead, the funds are locked away once you put them in until the voting mechanism is triggered (On average, a recession happens every 5-10 years). If you need access to your funds, you can withdraw them for a fee (between 1%-2%).  Recession Coin immediately pools the fees and subtracts the fee amount by the number of accounts and distributes it across all of them. 

For a simple example, take Robin and Joey. Robin deposits (or exchanges) $1000 into Recession Coin. Joey also exchanges $1000. After six weeks, Joey decides he needs his funds back. He removes his $1000 and is charged a fee of 1%. He loses $10 during the transaction, but he has quick and effortless access to his cash. 

Let’s say after Joey withdraws his funds there are 5 accounts on the network. Each account would be credited 10/5 = $2. So Robin would now have $1002 in her account. 

The fees would be processed in no traditional timeframe. The frequency is simply one big transaction. So as people like Joey withdraws everyone immiately gains their fraction of the fee. Transactions would happen constantly and at random intervals. 

In my spreadsheet (Data.1), I have calculated a pool size of around 41,000 randomized accounts. It assumes people deposit between $1 and $1000. I use a randomized number of less than .25 to represent a portion of people removing a random percentage of their total account. The pool ends up around $25,000+ in most refreshes. So this divided by 41,000 is around $.63. That is an average increase of 2.33% per 41,000 transactions. 

If I increase the Fee to 2% (Data.2), the average increase per account per the same 41,000 transactions goes up to 4.66%.

Using both Data.1 and Data.2, I then calculated the growth in the account after 5 years. Assuming that there will be an average of 41,000 transactions a day and each of those adds a $.62 and $1.25 to an account starting with $1000 over 1825 days (Fig.1). For Data.1, we see an increase of around $1,131.50 (Up 131.15%) and for Data.2 we see an increase of around $2,281.25 (Up 228.13%). 

Keep in mind that for these tests I made some assumptions that would impact the growth of this in a severe way. The rate at which people would withdraw their funds is just a guess. But, on top of that, the deposits could be much bigger. We’ll save the potential errors and unintended consequences discussion until later. 

To get more granular, I have reworked my initial data set and built four scenarios. These four theoretical groups are people who invest between $1-$500 (a withdraw rate of [W.R.] <.30), $501-$1,000 (W.R. <.25), $1,001-$10,000 (W.R. <.20), and $10,001-$1,000,000 (W.R. <.15). For these groups, I will have to use a smaller sample size in order to calculate the data using the cloud spreadsheet. The four groups have separate totals which I will average out in order to produce several use cases. 

Joey and Robin are back. We’re going to add Steven and Sarah. After compiling the (Data.7) from the four sample sizes above, we see after 20,000 transactions per day the and a fee of 1.5% leads to an average of $139.16 in daily account increase. Account 1 starting with $300 dollars ends at $253,985.77 after 5 years (up 86,897.71%). Account 2 starting with $12,402.00 ends with $266,087.77 (up 2,102.02%). Account 3 starting at $104,345.00 ends with $365,038.13 (up 249.84%). Account 4 starting at $1,014,203.00 ends with $1,274,896.13 (up 25.70%).

Donations

One easy incentive to implement would be donations. It would work just like a fee, but anyone could contribute an amount to the coin.

Why Crypto?

For now Crypto remains one of the few ways in which this mechanism could work without a central figure like a bank or government institution. There is no need for “accounts” in the traditional sense. Just a safe way to “store” your coin. The reason not to use an intermediary is that every withdrawal and distributed credit is considered one transaction. The “pool” of funds which are collected from fees are immediately distributed among all accounts so there is no need for a bank account. 

Furthermore, depending on the severity of a downturn, there is a growing risk of banks becoming illiquid. 

Savings Account

I am using the phrase savings account to describe the idea more so than the actual process. People think of savings accounts as a literal place where their money is stored. In this case, and of digital currency in general, the storage facility could be either of the following: cold storage or through a custody account provided through another vendor. Of course, you would be able to choose which you think is the most trustworthy. 

The reserves would be a bit trickier since Recession Coin is focused highly on liquidity. Stablecoins are working on ways to solve this currently, by offering regulatory oversight, transparency, escrow accounts and other methods to ensure that the funds will never be touched once they are deposited except by the account holder. 

Type of Coin

Since the principle of saving is one of future security, volatility and exposure to speculation would be potentially harmful to those who have invested their money into Recession Coin. While, in the future, it could make sense to offer solutions to exchange Recession Coin with another Crypto asset, it would remain best practice for the foreseeable future to remain as a stable coin with a fiat currency like Dollars as the reserve currency. The reason being that perceived value has just as much potential damage as speculation or other components of cryptocurrency. If the average lifespan of the growth period for the coin is around 5-10 years, one could assume major currencies would be able to remain valuable. 

Critics would and should point out that the reason crypto and decentralized banking is so important, is that it removes the potential for currency manipulation by any one group. Because of this, the value of a crypto like Bitcoin would greatly surpass that of a U.S. Dollar due to the perceived value, trust and connectedness of the innovation. While we would not necessarily be aware of its true potential now. It stands to reason that it very well could itself devalue the monies we stored in a stable coin comparatively. 

Mining and Proof

If Recession Coin uses an existing stablecoin like Trueusd or USDT, they may need to have access to the Bitcoin or Ethereum networks. While Recession Coin would not require a Proof of Work or Proof of Stake algorithm, it would need to rely on that of an existing blockchain network. Which is the best one to use remains to be seen. 

Managed Portfolio

As part of the time frame people have their funds locked into Recession Coin, they may decide that it makes sense to invest it and add some risk to their portfolio. This could very well be a feature, but it would require that funds remain locked unless they withdraw their funds to the reserved currency. In this case, it would be like an IRA, where you could change how the funds are invested. Perhaps, if tokenization becomes part of everyday investing, you decide to push 10% of your Recession Coin into a mutual fund or other derivatives similar to that of an Index ETF. 

For some active participants, this could be a helpful tool to accelerate their fund’s growth. Of course, it could also defeat the purpose of Recession Coin if they lose all of their money in bad investments.

Reserve Currency

I believe we are still in the beginning stages of the “Crypto” market. Big, well-supported crypto assets are not safe from the extreme shifts in volatility that, if stabilized, would give people the confidence needed to rely solely on those coins. For the time being, it makes the most obvious sense to take advantage of historically dependable currencies. However, we must also realize that the general perception could change to favoring a crypto asset like Bitcoin during the lock period of Recession Coin. Or even other innovations not yet conceived. If so, the same governance and consensus tools could also be utilized to vote on transitioning the currency at pivotal moments. This, or perhaps individuals would have the option to transition their reserves to certain currencies. How this would work needs to be addressed and I have not yet figured this out.

External Incentives

Incentives for a Recession Coin are multiplicitous in nature. Currently, many regulatory measures go into preventing complete chaos as a result of a recession. There are a few ways in which Recession Coin takes pressure off the Government and the people using it.

Stimulus

Stimulus is a tool which enables massive liquidity into the market at a time when cash is not readily available. Recession Coin would provide exactly this. If a recession happens and everyone who invested suddenly had access to much more money than they expected. New money would enter the market at a rate which could help support the fallout of an economic meltdown.

Tax Write-Offs

During the years of stability and confidence while the market is running smoothly and the economy is healthy, people making money on their recession coin should not be punished. It should be a safe haven for their livelihoods. Therefore, people using it should not be subjected to taxes like a normal investment account. Even retirement accounts allow you to grow your funds tax-free (IRA and 401k plans). 

Money contributed should also be able to be written off. This incentive would also work if people donated funds to a pool. Further incentivising the growth in future richness gained through this system.

Time and effort

Not only are many peoples’ time and effort wrapped up in the prevention of an economic collapse, but there are jobs which are built entirely on maintaining the status quo of our economic standing.

No Inflationary Effects

Since there would not be any printed, new money issued during the recession, there would be no change in value as a result of recession coin being cashed out. 

Perception and Trust

Stablecoins, generally, have come into existence in order to serve the purpose of accomplishing part of the crypto vision. While not adhering to some of the more orthodox beliefs of the anarcho-type crypto creators. The general public can not be easily swayed over night to simply trust a new form of currency. And so, the stablecoin is, so far, the best way to remove the need for traditional means of saving for the unexpected. 

Conclusion

While Recession Coin is extremely interesting to me, the model is what opens my mind to many possibilities. At its core, the mechanism which produces an exponential increase in growth is already in use and banks are cashing in on those profits. The reason these core features work at all, though, is that they work against impulsive economic behavior while rewarding delayed gratification. Both of which only work when there is a waiting period and a gatekeeper.

Lastly, I want to end on a note about what the implication of a stablecoin that earns “interest” means. It means that it would not be limited to a Recession Coin. It could be something short term that is not designed with a voting mechanism. It could be something where the fees are based in some other behavior like energy consumption or waste. There are also other ways to derive value other than the reward and penalty approach.