Token volatility / stable coins
By: Sergey Shenderov
Tags: Cryptocurrency, Bitcoin, Token Economy, Blockchain Technology, Dapps

Background

In consideration of the Mom.life tokenization/monetary system design, we have come across an idea of dual token structure utilizing a stable coin. This is adopted by a few notable projects in the market and aimed at assuaging the potential problem of token trading volatility as the strongest possible inhibitor of token usage. Most common stable coin “anti-volatility solutions” rely on coins pegged to fiat currency (USD, most commonly), others use crypto (which hardly makes them stable) or other collateral, like gold or something more subjectively stable and detached from platform utility. I would suggest this recent overview and the linked resources at the end of it on the subject of stable coins for background reading.

We considered specifically the basic dual token structure adopted by “Project X” below as benchmark in using a stable coin structure in a consumer marketplace and would like to offer some high-level commentary with respect to the relevant vision within Mom.life, including specific remarks on potential problems the structure is designed to prevent or resolve — and how we expect to deal with those issues here.

The idea is explicitly NOT to judge the choices made by Project X. It is run by some very accomplished entrepreneurs and blockchain practitioners and offers a viable service within a marketplace that we believe will be successful. We discuss the structure that they have adopted and some pundits have advocated — strictly within the context of what we are building at Mom.life, its considerable range of tokenized marketplaces, related execution considerations, as well as our view on what the relevant tested precedents are.

The benchmark structure

Project X is a two-sided marketplace where individuals provide services to 3rd parties, that are paid for in platform tokens. Two key tokens are used for transacting:

1. A USD-pegged stable coin, that represents $1 payable to the service-provider

2. A network token X that is used to incentivize growth, buy traffic, get discounts on fees and acquire rights to use the protocol

The structure is adopted, instead of a single universal currency, for the following reasons:

· buyers of services do not want to face the risk of funding their accounts with a coin that could suddenly face a loss of purchasing power

· sellers also do not want to deal with price volatility on the money they make from work. Given that a typical job could last a week or more, a substantial amount of money could be at stake

We have also considered Gnosis, Vechain, Tendermint and Sia as potential benchmarks for dual token structure — they are less directly relevant, in our view, given specific business models. Project X compares directly with the freelance services for moms, as well as several other large existing marketplaces that we are tokenizing within Mom.life.

Mom.life strategy

We are proponents of starting from an unencumbered free (albeit deflationary) monetary system, where the single currency price fully reflects both supply/demand within the platform economy, as well as the potential speculative forces at play in the token “forex” market. The reasons for our position are dual.

First, our strategy and value proposition are focused on maximal wealth creation opportunity for users and according wide and rapid adoption.The overall aim of the digital economy we are launching is to build a direct transfer of value from transactions and rewards for work that the users perform within our platform — to the overall “GDP of the network” defined as the total number of native tokens multiplied by the total number of transactions powered by them within a given period. All marketplaces — community work, attention (monetized by moms via ad product), data, content and purchases/other user spend — would contribute fully to the value of network GDP that is shared with users via tokens (fixed, while the economy grows), without any prejudice to the relative size of future value input from any specific one of those sources. Running a stable coin to power part of the platform transactions is not viable in our view:

It decouples a range of transactions from platform value to be shared among users. Users are effectively paid in fiat (a stable coin pegged to) that does not reflect changes in network value from adoption, broader growth of community and introduction of new use-cases. It appears to be founded largely on a dogmatic principle of volatility being potentially prohibitive to token usage. This may be the case for tokens with poor utility — but then, that is the more fundamental problem than volatility in the long term. It also contradicts what we consider relevant precedents — majority of sovereign economies It relies on a stable coin pegged to fiat which once needed to be pegged itself — remember the Gold Standard? And for similar, but more broadly negative reasons vs crypto — to hedge volatility and inflation of fiat, as well as to shield consumers from policy mistakes of central banks. The Gold Standard has been, of course, universally abandoned by the world’s leading economies in the 20th century. Here is what a very representative panel of very qualified traditional US economists think of the Gold Standard today. Interestingly (to me), one of their common sense insights is that the real prices for gold vs other goods/commodities are not stable. Common sense, basic understanding of history and economics are much needed in the crypto experimentation space, but they are considered somewhat boring. It contradicts the ultimate objective of the crucial next phase of the consumer currency experimentation “post-Bitcoin” — to fully decentralize the economic environment and free the supply / demand forces. Are we about to put transactions in a decentralized economy on a stable coin value that is driven by a monetary policy of a central bank? Is the reason for it — that we are trying to limit volatility — to artificially reduce velocity of money within a “less valuable” marketplace (as we deducted a chunk of GDP, by taking it off the network currency)? It makes an arbitrary choice of specific future income streams to users to direct away from network’s capitalization in tokens. Most of the relevant criteria for such choice relate to future circumstances that cannot be compared objectively at present, making that choice extremely risky. We believe that in our case it is also unnecessary — more on that below The benchmark token economics of Project X appears to make that choice solely to risk manage the impact of token volatility on the 3rd party buyers of services (other factors, like user earnings’ exposure to volatility, are equal across the network transaction streams, both those that are and are not powered by stable coins). For us, the 3rd party marketplaces (advertising, data and freelance) are ones that will take longest to proliferate globally (compared to p2p, content, virtual goods, charity etc.), as much of their development will require a market-by-market onboarding of brands, retail and other 3rd parties. Therefore we are unlikely to understand the relevant volatility and user response in these until after the other marketplaces (like p2p trading) have proliferated significantly during the early period of maximal expected volatility in the native tokens.

Second, we simply do not consider the threat of volatility to be grave for the network or the economy of Mom.life in the long term:

High volatility typical for all existing cryptocurrencies of today is an element of the growth/adoption in relevant marketplaces and associated uncertainty in respect of the size of demand/total addressable market and to what extent a token satisfies a need/has value/will survive, etc. The greater the adoption/the lesser the uncertainties — the lower will be the volatility which eventually settles into amplitudes typical for the conventional currencies. We need to overcome the growing pains of an emerging currency/economy — it is a crucial quest to prove the viability of the entire system and align forces of supply/demand. Putting the monetary system on value-dilutive life support at a young age hides symptoms and delays the inevitable moments of stress that need to demonstrate users’ response at early stage with lesser values at stake and be resolved by market forces Participation in the economic relationships, community work and 3rdparty paid engagements is completely optional for our users, most of it has been done for free by them to date. Any volatility does not threaten any of their real-life earnings — only what they earn in tokens on the network. We believe, based on our decade of experience with that audience, that the freedom of choice and the overall size of economic opportunity are more important for our users, than episodic volatility early on. We also believe it is necessary for them to understand practically all components of the token price — including that the forex market sentiment is temporary and cyclical and that growth of engagement and size of the network will inevitably deliver through-the-cycle token value growth and revenue opportunities for entrepreneurial moms whose influence and monetized community will increase, ad long as they put in engagement and work Volatility will be assuaged by substantial institutional support for the currency in the forex market by the brands, retailers and other advertisers, data and user work purchasers who would have to fund their platform accounts with growing amounts of tokens (as the user population expands) within their regular advertising campaigns and data acquisition cycles — to pay the users. We expect this to become a significant and organic volatility hedge The current team has more than a decade of traditional capital markets experience and intends to employ world-class resources — both in-house and outsourced — for the market-making support and listing/secondary market strategy as the foundation for a healthy and robust token trading environment. This should serve to limit volatility, provide users and investors with a viable exit opportunity and the platform — with an ongoing funding pool Volatility will be further assuaged by more market-driven counter-measures and should be looked at as an economic opportunity unlocked via financial derivatives and consumer finance marketplaces that will allow both users and vendors on the Mom.life network to sell risk/volatility to 3rdparties for a fee, increasing the liquidity of platform tokens and potentially contributing to the GDP of the network. The sooner we start operating a free liquid market, the sooner the mechanics/opportunities crystallize Prices for goods and services offered on Mom.life platform (available elsewhere) will be pegged to fiat, to manage out the arbitrage opportunities related to volatility.

In conclusion

On balance, we believe that there is a compelling rationale for commencing the development of tokenized marketplaces with minimal artificial barriers to their GDP ramp-up. The magnitude of the new economic opportunity for individual users is directly driven by consolidation of the broadest range of tokenized revenue streams, which in turn is the biggest catalyst of user resiliency to temporary/cyclical speculative volatility of the native currency. This is informed by our current understanding of the user behavior and needs within the discussed marketplaces, as well as by observations from the markets in the key cryptocurrency markets with distinct store-of-value characteristics, like Bitcoin and Etherium. Once we have empirical evidence of the volatility dynamics and user behavior response within a live system and individual marketplaces, structural measures, like the transfer of part of the network revenue away from GDP/native tokens to a sovereign currency-pegged stable coin, will remain available.

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