As Entrecarders know, there is a currency problem. How can this problem be fixed? Will EC buying credits back have any effect? And should Entrecard use a non-fiat currency?
Although you may have an idea of what Entrecard’s problem, lets go ahead and look what exactly happens within the economy:
- New members receive new credits.
- Anyone can create credits by dropping or receiving drops.
- When buying an ad or making a transaction, credits are lost (75% for ads, 12.5% for transactions).
Sounds easy enough, right? Well, sort of. The rate at which new members join and leave can have an awesome effect on the currencies worth. If 500 members join and each receive 100 credits, that is 50,000 credits added to the system. If only 300 members leave during the same period, that is still a net gain of 20,000 credits without any other actions taken by the members. To offset the additional currencies, 26,667 credits worth of ads would need to be bought. Again, another problem arises. These members obviously can’t offset their own footprint in the economy unless they generate more credits. And the circle begins: more credits mean higher ad prices. Higher ad prices mean more members dropping cards to have enough credits to buy ads.
A few weeks ago, Entrecard announced a new buyback program which will allow members to sell their credits back for real cash (alright, it is through PayPal, but it is still money, right?). So given the above example, to offset the new footprint just 20,000 credits need to be bought by Entrecard. Easy, right? Sure. But will this fix the economy?
Although the system has yet to be implemented, the announcement stated the price at which credits will be bought will vary daily. One day the credits may be bought back at $0.002 per credit, the next it may be $0.005 per credit (this is purely speculation of course, so don’t quote me on the actual price). The credits will be acting like a non-fiat currency, except when the credits are bought they will disappear and new ones will still be created. So why not use a non-fiat currency then?
Warning: History Lesson
The majority of countries used a gold standard until WWI. At that time, governments around the world couldn’t pay for the war thus a fiat currency was created. However, war was not over long enough, so when WWII arrived the fiat-currency once again took over the world–most countries were planning to return to the gold standard, but couldn’t afford it.
When World War II had ended, the world economy was hit hard. With the United States being one of the two Super Powers remaining, they decided to create a Gold Standard for the world to rely on. So they set the price of gold at $35/ounce. Instead of each individual country creating their own standard, many based their currency on the United States dollar. The idea was when a country decided to cash out, they would be returned with gold.
The problem was, the world population continued to grow. In order for the world economy (the United States in particular) money needed to be printed. So it was. Of course, with the United States being United States, they didn’t bother to officially change to a de facto fiat currency. Actually, they couldn’t. With other countries officially using the dollar as their own, the US had no choice unless they wished to harm other economies in the process. The price of gold kept at $35/ounce.
The change officially happened in 1971. Countries began to cash out as quickly as possible in the 60s because their own economies began to recover from the wars–France made an exchange in 1970 which all but killed the gold price in the United States. Nixon finally decided to make the change de facto so the United States own economy could both continue to grow (and continue to fund the Vietnam War).
End History Lesson
So what does this all mean for Entrecard? A non-fiat currency isn’t always best. Actually, if done wrong it can harm itself. The price must continue to adjust, and that was the problem in the United States. The price didn’t adjust–it couldn’t.
Does this mean Entrecard is doing the right thing? Well, we will have to see. The system hasn’t launched yet, so it can go either way. If credits can be bought at a reasonable price and consistently, then yes. It will create an economy which has the backing of real money. In order for it to work, almost the same amount of credits which come into the economy will need to be taken out. Can it be done?
Written: Apr 2, 2009
Karen | Ideas for Bloggers
April 2, 2009 @ 4:43 pm
The inclusion of a History lesson certainly makes this article stand out among the crowd. Congratulations!
As for the issue itself, all I can say is that I’ll be watching this “EC credit soap opera” closely.
Carol
April 2, 2009 @ 5:04 pm
I’m glad you explained the EC and fiat currency thing. I don’t think a lot of people understand that when our government ceased to use the gold standard and went to fiat money that the income and taxes of US citizens then became the “gold standard”. What I mean is our money is based on what they can squeeze out of us by taxing us.
Graham
April 2, 2009 @ 9:35 pm
Interesting post Gary.
The reason we have a fiat virtual currency is because the dropping system cannot operate without it. Every month, we facilitate over 5 million visits to our members blogs, all thanks to the drop system that gives you a credit for dropping. This system demands that credits can be created from nothing… though we’re always thinking of interesting alternatives and approaches
Gary R. Hess
April 2, 2009 @ 9:44 pm
@Graham I think Entrecard could become a non-fiat, it would just take quite a bit of work. I’ll have to write a post about it.
CyberCelt
April 3, 2009 @ 5:34 am
How is buying back credits and taking them out of circulation affecting the EC economy?
EC should get rid of the SPLOGS and confiscate the associated credits, that might help.
What is motivating people here? Is it social? Do we want to drop 300 cards a day for every one of our blogs for credits? Are we serious about advertising our blog business?
I do not like to see my bounce rate going up. It is encouraged by power dropping . . . yet, that is how people earn all those credits.
Good luck, Graham.
Mr. New Dilemma
April 4, 2009 @ 1:03 am
Wow! You know, I don’t typically don’t drop and run, I actually just look at Entrecard as a way to promote my blog, read some interesting blogs and don’t really put too much thought into how the “system” works. You post was indeed thought provoking and although it probably won’t effect my day to day routine, I would like to thank you for that brief insight on the EC economy and the problems associated within it.
mechape
April 4, 2009 @ 4:57 am
I won’t say anything about Entrecard “microeconomy”, I’m still new to this kind of ad blognetworks.
But your “history analysis” is so much biased towards US.
I guess Frenchman and De Gaulle himself have very different explanations about the rush to US gold treasuries
Gary R. Hess
April 4, 2009 @ 11:52 am
I didn’t mean to sound that way. The French were smart to get out while they could still exchange it for a great price.
laane
April 4, 2009 @ 6:38 am
Interesting post.
The comments of Graham make clear that they system hasn’t been prepared well.
It’s all about ad hoc decisions, so the system won’t survive.
I use entrecard as a way to see what’s going on in the blogworld and to visit a couple of nice blogs daily.
I don’t like the advertising, because the charming of entrecard was that those without money were able to reach as much blogs as those who were rich. It was all about your own active involvement.
So I’m well in the pre macro economy stage. LOL!