The Inevitable Rise of Skycoin
The mathematical effect of Skywire traction on the value of Skycoin and Coin Hours
By Inge Wallin
A Brief History of Skycoin and Coin Hours
Skycoin is similar in many ways to most other cryptocurrencies. Like Bitcoin, for example, a public blockchain exists to keep track of Skycoin. Transactions are stored on the chain, and the coins themselves are assigned to addresses, which are like bank accounts. Each address is represented by a large integer number just like a normal bank account, and they can only be controlled by knowing a secret key.
However, in contrast to how Bitcoin are generated by mining activity, all of the Skycoin that will ever exist were minted at its inception. The manner in which they are released into the market is a tightly controlled process.
One hundred million Skycoin were minted at inception; called the “zero” or “genesis” block. The first phase of the market distribution for those coins is to slowly release 25 million of them. These are distributed as payments for the team and for over-the-counter (OTC) sales to large investors. Of these first 25 million, 18 million have been distributed at the time of publication. Periodically, when founders deem it necessary, another minting wallet of 1 million Skycoin is opened and the coins are released into the market. The first phase can take any amount of time, depending on market conditions.
After the first phase is finished — that is, when the first 25 million Skycoin are distributed — the second phase begins. In this phase there can be a release of up to five million Skycoin per year. This will continue until the full 100 million are distributed.
Unlike most other cryptocurrencies, Skycoin generates secondary currency called Coin Hours. Each hour that a Skycoin resides in an address in a wallet, one Coin Hour is generated into that address. The amount of Coin Hours that will be generated over time is unlimited. This unique mechanism can be compared to the GAS of Ethereum, as a portion of Coin Hours are ‘burned’ as a transaction fee on the Skycoin blockchain.
It is interesting to note that because of the limited supply of Skycoin they are by nature deflationary. If the market demands increase there is no way to generate any more of them beyond the maximum total amount of 100 million, similar to Bitcoin. Instead, each existing Skycoin will increase in value. Coin Hours, on the other hand, are constantly generated and are therefore inflationary. This means that there is an incentive to keep the Skycoin but to spend the Coin Hours, since the former will generate the latter.
The Coin Hours will ultimately be the primary payment method for goods and services in the Skycoin ecosystem. Coin Hours are currently being tracked on the Skycoin blockchain, but will receive their own chain once there is a sufficient market for goods and services. That has already begun, and there is already a small speculative market for Coin Hours, and Coin Hours have been sold for more Skycoin.
Skywire
In the old days, currencies used to be tied to something of inherent value that guaranteed the money would not go through hyperinflation and become worthless. This is the idea behind the gold standard. Government minted (fiat) money is no longer tied to the value of any physical commodity like gold.
Most cryptocurrencies, including Bitcoin, behave like fiat currencies in the way that they are not secured by anything that possesses inherent value. The founders of Skycoin wanted to ensure their currency could be linked to a commodity that was valuable and always in-demand. That dovetailed with the founders’ goal to create a new peer-to-peer mesh network called Skwire. They wanted their network to be completely private, end-to-end and point-to-point encrypted, as well as less expensive to access than the legacy internet. They could use Coin Hours as the currency that would power this new censorship-resistant network.
The vision behind Skywire is that the individual access nodes are run by normal people, pulling the power away from ISPs, governments, and corporations, and putting it back into the hands of the people who will use the network. The nodes are hardware agnostic, meaning they can connect to each other using fiber optics or copper cables, or even directional antennae in places where cables don’t make sense.
The nodes will route the traffic by using MPLS (Multiprotocol Label Switching), a faster and more intelligent software-defined routing algorithm than the normal Internet and will consequently provide lower latency and faster throughput given the equivalent bit rate. Routing will be accomplished using public keys instead of IP addresses. This is a significant advantage, as IP addresses are connected to a physical access point and therefore traceable, while public keys are not. It will not be possible to conduct surveillance on a Skywire network.
The Skycoin development team has provided hardware-based solutions for the Skywire nodes, but design the system in an open and transparent way so that those who are technically inclined are free to set up a Skywire node by using basic, off-the-shelf hardware such as Raspberry Pis and free open-source software provided by the Skywire team.
Ordinary users will connect to the network via WiFi using their regular computers or mobile phones, or over short-distance cables. Instead of paying an ISP a monthly fee, Skywire users will pay Coin Hours for the amount of bandwidth they actually use; that is, the number of data packets they access or transfer. This means that a Skywire user will either have to purchase Skycoin in order to generate their own Coin Hours, or purchase Coin Hours directly via an exchange using fiat or another cryptocurrency. In any of these cases, Skycoin will be the source of the means of payment, which will drive the demand for the core currency and therefore its price.
Assumptions
The remainder of this article will explore the connection between Skycoin, Coin Hours, and the economics of Skywire. Because it involves speculating on future prices, naturally some assumptions have been made. We have tried to err on the side of caution, choosing figures that reflect a conservative outlook. This may lead to a lower valuation than we might actually anticipate.
Skycoin Price and Coin Hour Valuation
First, let us establish a connection between the price of Skycoin and Coin Hours. Owning Skycoin generates Coin Hours continuously, and Coin Hours are a cryptocurrency that can theoretically be used to buy anything, including new Skycoin. There are already a number of people who are offering their Coin Hours for Skycoin in peer-to-peer sales, and the prices differ significantly between different deals. What is a reasonable assumption of the future price?
When you use Coin Hours to buy Skycoin, you can think of this as similar to accruing interest on your Skycoin. So, what would be a reasonable interest rate? Put another way, how much Skycoin would you be able to buy back after generating Coin Hours for one year?
It would be difficult to motivate a higher interest than 2% per year in the current economic situation. (With less interest than 1%, we think that it would not be interesting to sell your Coin Hours for Skycoin at all.)
At an interest of 1% you will be able to buy 1 Skycoin with the coin hours generated by 100 Skycoin over 1 year. Since 1 Skycoin generates 365 days * 24 hours/day = 8760 Coin Hours per year, that means that 1 Skycoin would cost 876,000 Coin Hours. At 2% that would mean 1 Skycoin would be worth 438,000 Coin Hours. Table 1 shows the price of 1 Skycoin in Coin Hours for different interest rates:
For the subsequent calculations, we have chosen to use 2% as a reasonable interest rate, but you are free to run the same calculations with a lower or higher rate.
Now, let us move to Skywire. Access rates will likely be set by Skywire node operators, and so may vary by location. But it’s a logical assumption that the cost of access will be well below the current cost of Internet access through an ISP. Significantly less expensive network access is one of the selling points for Skywire.
To estimate what price a Skywire user might have to pay, look at the following table comparing average monthly broadband Internet fees by country. In this summary, broadband is defined as 60+ Mbps, which is probably more than the first versions of Skywire will deliver.
Since Skywire will be a global network, and the prices for the end user will probably vary significantly between different parts of the world, it is difficult to guess what the average price will be. But since we expect that the initial market will be in developing countries with bad ISP coverage, we believe that the price will be quite low. We have selected an equivalent Coin Hour price of $5 per month as our arbitrary starting point.
So, let us now connect the assumed average price of Skywire of $5 USD with the price of Skycoin and Coin Hours. (Again, if you feel this price estimate is too high or low, feel free to plug your own figures into the formula.)
The price of an asset is always connected to the availability/scarcity of that asset. The relationship between the demand and availability defines the price.
For the sake of discussion, and since not all openly circulating Skycoin are effectively available for users of Skywire we have chosen some arbitrary number of available Skycoin for our calculations. It is almost impossible to deduce the actual percentage of available Skycoin that will be put toward Skywire fees. However, if fewer Skycoin are available for generating Coin Hours to pay for Skywire, then the availability would be lower and therefore the price higher. So once again we try to err on the side of caution.
Table 3 below shows the number of Skycoin available for different scenarios of available Skycoin and number of Skywire users who must share that available supply. Our calculations regarding the potential growth of these figures over time is addressed in the final section of this article. For now, we are only laying the foundation. Keep in mind that the number of Skycoin is capped at a maximum of 100 million coins, while the potential number of Skywire users is virtually unlimited.
At the time of writing, the number of circulating Skycoin is 18 million and the approximate number of users of Skywire mainnet is slightly more than 1000. Bandwidth metering with Coin Hours is not yet implemented so there is no actual market for Skywire usage, but it gives us a nice starting point for our calculations.
Next, let us investigate how many Coin Hours these Skycoin provide each year. Again, our assumption for this discussion is that all available Skycoin will be used to generate Coin Hours to pay for Skywire usage. The figures in table 4 are the number of Coin Hours per month per user generated by the number of Skycoin shown in table 3. (For reference, 1 Skycoin generates approximately 30*24 = 720 Coin Hours per month.)
Next, we have to connect the number of Coin Hours to the assumed price of Skywire access, namely $5 USD per month. Table 5 shows what the price would be per Coin Hour with the same combination of available Skycoin and number of Skywire users. (For convenience we have converted the dollars to cents to avoid an excessive number of zeros in the beginning.)
The following table extrapolates the value of Skycoin that results from the Coin Hours valuation in Table 5, (assuming the 2% interest rate figures established in Table 1).
Here you could argue that 2% is not the best selected value for the interest. You wouldn’t be able to get that much — or, alternatively, you should be able to get more. That would be a valid argument to make. You can calculate your own version of these numbers by using the formula:
PrSKY = PrSCH * SchPerSky
= (PrSkywire * 12 / NumSCH) * SchPerSky
= (PrSkywire * 12 / (SkyPerUser * 365 * 24)) * SchPerSky
= (PrSkywire * 12 / ((NumSky / NumUsers) * 365 * 24)) * SchPerSky
= (PrSkywire * 12 / ((NumSky / NumUsers) * 365 * 24)) * (8760 / Interest))where:
PrSKY is the calculated price of Skycoin
PrSCH is the price per Coin Hour at the selected number of users and available Skycoin
PrSkywire is the chosen price of Skywire per month
SkyPerUser is the number of Skycoin available per user
SchPerSky is the number of Coin Hours per Skycoin at the chosen interest rate
NumSky is the number of available Skycoin
NumUsers is the number of Skywire users at a particular time.
The input parameters in the formula is the number of available Skycoin to use in Skywire (NumSky), the number of Skywire Users (NumUsers), the interest rate (Interest) and the average price per month (PrSkywire). The rest of the values are derived from those.
The formula is derived by thinking that the Skycoin should be generating Coin Hours with a value equivalent to the price of using Skywire during that same period. Then in each scenario involving a given number of users and available Skycoin, deduce the final price by taking into account the chosen interest by the calculated price of Coin Hours.
It is interesting to note that the calculated price of Skycoin with the current number of users (~1000) and the available number of Skycoins (~10 million of the 18 million that is circulating) — $0.30 — is not too far from the actual price of Skycoin right now, which as of publication (May 25, 2020) is around $0.45. This is probably a coincidence though, because as mentioned before, bandwidth metering with Coin Hours is not yet implemented.
Number of Skywire Users
The last section proposed a number of different scenarios with varying levels of available Skycoin and number of Skywire users. But over time, which development of each is most likely?
It is likely that in the first year of Skywire deployment with automatic bandwidth metering, the payment for Skywire will completely dominate the market for Coin Hours. The other potential Coin Hour markets have simply not had time to establish themselves yet. But later it’s also likely that other markets will develop that accept Coin Hours as payment. We have already seen small offerings of digital services such as web hosting offered for Coin Hours. This means that as we go further into the future, the use of Skycoin and Coin Hours will evolve into something where our projections in this article become less accurate. But it will also mean that the demand will be greater and therefore prices will be higher than our estimates.
The Skycoin team controls the frequency of when another batch of 1 million “new” Skycoin is released into the market. After the first 25 million are released, the maximum that may be released per year is 5 million, but there is no requirement to release that many if the market is developing slowly. This means that they can exercise some control over Skycoin’s price trajectory. If they want a sharp rise, they will limit the release of new coins, and if they want a slower buildup of the price while the whole market develops in size, they can release the maximum 5 million Skycoin every year.
Skywire bandwidth metering using Coin Hours may happen as early as 2020, so for the sake of argument, let us assume that the end of the year 2020 is the starting point for metered Skywire and that the current number of users (~1000) will carry over to that starting point. As a starting point for all the calculations below, we have assumed 12 million Skycoin available for use producing Coin Hours for Skywire. The rest of the circulating coins are assumed to be held in store by exchanges, long-term investors, and the founders’ private wallets.
The question then becomes, how will the number of users increase, and how many coins will the team release to the market? If the team releases new software and inexpensive plug-and-play hardware to set up a Skywire node for ~$100 USD or less, then a five-fold increase every year is not implausible over a five year period. (Remember that the Coin Hours are paid by the end users, and one Skywire node can serve at least 10 users, maybe more.)
It is difficult to know how many coins the team will release, and when. We can outline one scenario with a careful strategy, releasing 3 million Skycoin per year and another with the full 5 M Skycoin released per year. The prices will then develop as in the chart below:
With a release of 3 million Skycoin per year the price at the end of 2025 will be $347 USD and with a release of 5 million Skycoin per year the price at the end of 2025, it will be $253 USD.
A more careful scenario with a three-fold increase of users every year looks like this, with everything else unchanged.
The price of Skycoin at the end of year 2025 will then be $27 and 20, respectively. That is still almost a 50-fold increase over the current price, and it seems to us to be a very conservative estimate of the future number of Skywire users. If the technology delivers on its promises, we could easily see user bases in tens of millions.
For comparison, if we turn up our expectations so that the user base increases tenfold every year until the end of 2025, we get the moon-dream prices of $11,111 and $8,108 per Skycoin, respectively.
Other Factors Affecting Price
Please note that all calculations above only take into account the use of Skywire as a factor leading to an increase in Skycoin price. There are many other factors, especially other types of use that the Skycoin ecosystem supports and will support. Here are a number of such services and how we think that they will affect the price in addition to Skywire itself.
Services on Skywire
In addition to using Skywire to access the legacy Internet in a safe and anonymous way, Skywire will also host a growing number of Services inside itself. Several of these are already being developed by the Skycoin team or members of the Skycoin community. These services are expected to drive the use of Skywire and therefore increase the demand.
One of the most interesting applications is a file publishing protocol called CXO, an immutable object library. CXO allows users to subscribe to a publisher and receive both a notification whenever a new file is published, and also the file itself. The files are cached on Skywire nodes and are distributed between subscribers in a manner similar to how BitTorrent works. The difference is that while BitTorrent has a known seeder, CXO is completely distributed, completely anonymous and untraceable.
It is easy to build services on top of CXO, and it is expected that services similar to Twitter, YouTube and other social media are going to be created using CXO technology.
How Services on Skywire Will Affect the Price:
Services will increase the traffic on Skywire and therefore the demand of bandwidth. The more services that are available on Skywire itself instead of being accessed through Skywire into the legacy Internet, the more Skywire bandwidth will be in demand. This will drive the demand for Coin Hours and ultimately Skycoin
Fiber and CX
One of the key components in the Skycoin ecosystem is the technology called Fiber that allows anyone to set up a blockchain of their own. These blockchains can be simple chains with addresses, coins and even a parallel ‘Coin Hour’ currency, just like Skycoin itself. They can also be more complex, controlled by the Skycoin programming language CX. CX can be used to set up so-called smart contracts, much like the Solidity language that works on Ethereum. But in contrast to Solidity, CX is a full-featured programming language in which you can write any type of program, which means that the systems that can be built on Fiber and CX can be more advanced than those on Solidity and Ethereum.
Furthermore, all tokens and smart contracts on Ethereum share the same blockchain, which means that it is not scalable. Fiber chains, on the other hand, are all set up separately and can have any block size or block interval. This makes the full set of Fiber chains unlimited in scalability.
How Fiber chains will affect the price of Skycoin:
It is expected that most Fiber chains will be using Skycoin as their main trading pair, as Ethereum is to most ERC20 tokens. This means that for each Fiber chain there will be a number of Skycoin tied up on exchanges. If there is an active market maker, then potentially tens or hundreds of thousands of coins may be tied down for this purpose. This will lower the number of available Skycoin and increase the price.
Other Uses of Skycoin and Coin Hours as a General Currency
Skycoin is a fast, efficient, and virtually fee-less cryptocurrency with an advanced technological base. It’s very easy to imagine that Skycoin, and especially Coin Hours, will be used for many other purposes. Reportedly, members of the Skycoin community (informally called “Skyfleet”) are working on Point of Sale systems for online and offline stores.
How Using Skycoin as a General Currency will affect the price:
Naturally, the more use Skycoin gets, the more demand there will be. For every person that has Skycoin in their wallet, be it for investment or daily use, scarcity will increase and the price along with it.
Speculation
Once it becomes obvious to people outside of Skyfleet that Skywire and Skycoin is going places, they will want to invest and speculate for even greater gains in the future. It is difficult to say how much this will increase the demand. However, as described in the first section, after the first 25 million Skycoin is released into the market, the maximum release per year after that is only 5 million per year. This means that there will be a maximum inflation of 20% per year (and only the first year). While this is far from negligible, it is not unreasonable to believe that once the genie is out of the lamp, there could easily be a 100% increase in interest in Skycoin very quickly.
When Skywire has proven itself and a few working mesh networks have been built, it is reasonable to expect there will be an explosion of interest in Skycoin.
How Speculation Will Affect the Price:
Obviously speculation investment will increase Skycoin’s price. The degree to which this will happen is difficult to say, but we think that there will be a significant bull run when Skywire has been proven to work reliably, securely and cheaply. Perhaps this could even lead to a bubble where the organic growth of Skywire will no longer be the main driving force behind Skycoin’s price.
Existing Coin Hours
Skycoin has been around since its first block was posted to the blockchain in March 2015. During the hours since then there have been an enormous number of Coin Hours generated. At the time of writing, the number of existing Coin Hours is 235 billion Coin Hours.
While this seems like a really big number, the fact is that it’s not as big as it seems. In particular, it will not have as big an impact on the number of available Coin Hours as might be expected. When Skywire takes off, there will likely be around 25 million Skycoin in the market. These 25 million Skycoin will generate 219 billion Coin Hours every year. So the existing Coin Hours from the last 5 years is actually not much more than will be generated every year from that point.
The reason for this is, of course, that during the first years, not as many coins were released into the market and that a lot of generated Coin Hours have been burned in transaction fees since then. At the beginning, the transaction fee was 50% of the Coin Hours generated by the Skycoin involved in the transaction. This has since then been reduced to 10%.
How Existing Coin Hours Will Affect the Price:
Existing Coin Hours increases the total supply which will lead to lower prices. How much is difficult to say, but we don’t expect a huge reduction since the number of Coin Hours generated each year is not too far from the number of existing Coin Hours. As time goes by, the existing Coin Hours at the start of Skywire will mean less and less compared to the new Coin Hours being generated each year.
Conclusions
We have forecasted how the price of Skycoin and its accompanying currency Coin Hours will be affected due to increase in usage of the Skywire mesh network. Based on this factor alone, we have calculated a price increase from the current (approximately $0.50 USD) to at least $25 at the end of year 2025. A more likely scenario places the price around $300 USD. A best-case scenario leads to a price over $8000.
In addition to this, Skycoin has a number of other use cases, which will drive the price even more. There is also an unknown variable in the form of a large built-up amount of Coin Hours from the first 7 years of Skycoin’s existence that may drive the value down temporarily when Coin Hour markets first become available.
FAQ
Wen Lambo?
The price of a new Lamborghini is between $200,000 and $500,000. If you are content with owning a low end “Lambo”, then you need to check what you can afford today in the form of a bag of Skycoin. If you buy 2,000 Skycoin today for a total of ~$1000, you should be able to afford a Lambo around midsummer of 2024. (That is not taking taxes for your great capital gains into account, of course.)
Wen Moon?
The price development is exponential, so you decide when the moon is reached. The moon can be different for everyone.
How much SKY do I need in order to live off of SCH?
If you want to live off of your generated Coin Hours, you will have to know your minimum cost of living. If you are able to live for around $2,000 per month, i.e. $24,000 per year, which should be possible if you don’t live in a very expensive area, then you need to generate Coin hours for that amount.
Using the same calculations as above (5 times user base growth, 5 million Skycoin released every year), then you will need $24,000 / 0.000578 $/SCH = 42 M SCH. 1 Skycoin generates 8760 SCH per year, so you will need $24,000 / 0.000578 / 8760 = 4740 Skycoin at the end of the year 2025.
The actual figure will likely be lower, though, since Skycoin has many other uses and the demand will be more than just Skywire.
Thanks to Fray for help with this article.
