Fath

Humanode dismantles the involvement of token in the consensus mechanism, meaning that different monetary systems can be implemented on top of the Humanode network without the necessity to conform with the requirements of token-entangled protocols. Humanode will implement the Fath hypothesis as the basis for the circulation of HMND (Humanode Token).

Fath is a monetary algorithm with a proportional distribution of issued tokens. The amount of issuance is determined by the amount of additional value created in the monetary system—the economic output of goods and services sold. The distribution of issued tokens happens proportionally based on the currency savings of each holder. When the output of the economic system around Fath currency rises by 1%, 1% of the monetary base is issued. As a result, every wallet gets 1% of the currency on top of their holdings.

The idea behind Fath is to create a monetary system where emission is distributed proportionally, in contrast to how modern fiat credit-cycle financial networks and capital-based public blockchain networks operate.

Figure 2. Issuance in modern credit-cycle fiat systems

With the global conversion to fiat and decimalization that overwhelmed most countries in the early 1970s, world leaders decided to transcend us all to a system in which emission is injected as a form of debt. Afterward, it is passed down the system in the form of loans. Even if we leave out the fact that some of that issuance forever resides on one of the upper levels because of corruption and fraud, people, enterprise and retail banks are the ones who are constantly cornered because they are the ones paying for that emission and the only ones they can resell their debt to is each other. If for some reason one of the large financial organizations fails to accumulate enough money to cover its expenses and interest then in most cases the emitting entity prints a relief package to save it. If ordinary people or enterprises fail likewise, in most cases they are fined, thrown onto the street by law enforcement, go bankrupt, or go to jail. Consider the fact that every time the emitting entity prints money it increases the monetary supply and devalues the currency, meaning that agents at the bottom of the emission pyramid not only get devalued with each coin printed, they also pay for it to happen.

Figure 3. Issuance and commission in Proof-of-Work blockchains

In Proof-of-Work blockchains, the protocol acts as the emitting entity. Most PoW coins have set the emission and max supply, for example, Bitcoin has a max supply of 21 million coins. At the time of the creation of this paper its circulating supply was 18.6 million. With emission set in every block and halving that happens every four years, it will take approximately 120 years to mint everything. Emission is received by miners not in the form of a loan, but directly. However, only miners receive it. Ordinary users and even financial entities that hold large chunks of bitcoin get nothing. Miners either decide to hold onto the emitted money or sell it on the market. This system does not sell debt to the agents at its bottom, but devaluation of non-miner agents’ assets, even if ridiculously small, still happens, as the emission is received only by miners. Another thing is that supply is not balanced with value creation, meaning that the limited supply is not lining up to the growth of value in the system. That makes it deflationary, which on a nation-sized scale makes economies unhealthy and can even lead to a crisis.

Figure 4. Issuance and commission in Proof-of-Stake blockchains

As in Proof-of-Work, in Proof-of-Stake the protocol acts as the issuance entity. In most cases, PoS have some kind of a governing entity that decides upon emission; it can be either pre-set as in Bitcoin or it can be flexible with many different methods of realization. Commonly there is a DAO that sets the emission. As in Proof-of-Work, validators receive issuance directly from the protocol, but in delegated PoS, they also redistribute it across their delegators. Protocol users get nothing from emission and DAO can set emission at any level. Sometimes devaluation is very strong because validators accumulate minted tokens and sell them on the market to cover expenses and for profit—at the same time their networks are not as big as Bitcoin to counterweight the devaluation effect.

Figure 5. Issuance and commission in Fath

The emission of tokens in Fath happens differently from the systems mentioned above. One of the hypotheses that lies as the basis of Fath is that it is possible to mitigate the long-term effects of devaluation by the proportional distribution of emission. Emission is delivered to every single member of the network directly from the protocol, regardless of whether a person is a validator or not.

The amount of emission is defined by the Fath protocol algorithm, which calculates the difference between real value creation (Gross Network Product - GNetP) in two different time periods. If GNetP in the second period is different from GNetP in the first then the algorithm calculates the difference and changes the monetary supply by the same percentage.

We consider the HMND token first of all to be a transaction-processing as well as biometric network, which is why GNetP in the first implementation of Fath will be calculated based on the fees spent by participants of the network. If the amount of commission received by human nodes in the second period is different from the first then the algorithm applies the same difference in percentage to supply and rebalances every single wallet that exists.

There are two types of rebalances that occur, inFath and outFath:

• If the amount of commission paid out in the second period of time exceeds the commission paid out in the first period, then inFath occurs and emission is distributed across every wallet proportionally.

• If the amount of commission paid out in the second period is smaller than in the first then outFath occurs and protocol proportionally burns excessive supply throughout every single wallet as well.

Transaction-based emission algorithm example

End of Year 0

Supply: 10,000,000 HMND

Commission paid out: 1,000,000 HMND

Your wallet: 1000 HMND

End of Year 1

Supply: 10,000,000 HMND

Commission paid out: 2,000,000 HMND

As commission paid out in Year 1 exceeds the same quantity in Year 0 by 100%, inFath occurs. A total of 100% of the supply is minted and given out to everyone proportionally to ledger balances.

New supply: 20,000,000 HMND

Your wallet: 2000 HMND

End of Year 2

Supply: 20,000,000 HMND

Commission paid out: 1,500,000 HMND

As commission paid out in Year 2 is smaller than in Year 1 by 25%, outFath occurs. A total of 25% of the monetary supply is burned and rebased proportionally.

New supply: 15,000,000 HMND

Your wallet: 1500 HMND

Such a rebalance mechanism tries to:

• Mitigate the long-term effect of devaluation due to disproportional emission and

• Negate macroeconomic shocks and structural inefficiencies that occur due to the monetary supply not satisfying the needs of the growing or shrinking GNetP. If you are interested in Fath hypotheses that are based on data of monetary systems from the 3rd century BC, you can read more about it here.

Implications of the transaction-based Fath system for a distributed network economy

If the total fees (TF) in the Humanode network in the terms of the dominant currency stay the same, the price change of the HMND token will be followed by changing the price of the transaction in HMND according to the formula stated in Fee-setting and distribution mechanism in the Humanode network.

As we found out, the fee paid in HMND changes opposite to the price change. The token issuance is tied to the change of total fees collected by the protocol. If the changes in quantity and size of the transactions are bigger than the asset price change, only then the protocol will initiate inFath.

However, over time, the network and its token obtain new use-cases other than trust in processing valuable data. That is when we need to account for value creation in the network and derive a value that was created in the system, other than transaction processing. When the system obtains new properties the new Fath modules should be launched to account for new values created and to change the algorithm accordingly. In the end, Fath is supposed to have modules that combined are capable of self-accounting for as many transaction and contract types as the calculation of GNetP involves.