Introducing a fair price model for Radix
by Kai Hemme-Unger, @rotane
The author is convinced that Radix deserves an Economic Model (EM) that is in the same class as the underlying distributed ledger technology: Simple, fair, scalable, superior to peers and designed to foster adoption.
This EM suggestion leverages the ideas and feedback received for the earlier suggested [Economic Model Suggestion] Fiat engine and XRD gas. While there are similarities between both models, the effect of this EM is much different and more in line with the goals of the EM as published in the white paper draft v1. Especially with regards to the assumed high volatility of XRD in the before mentioned model [Economic Model Suggestion] Fiat engine and XRD gas the following suggestion is advantageous. The earlier model created an inherent price up-trend through scarcity. The side effect of which would be volatility. The current model creates an inherent price up-trend through maturity. Maturity is accompanied by predictability and stability as shown in this article.
From the author’s perspective the EM as suggested in the published white paper draft v1 has following issues:
- Much friction in the process of minting XRI. As a result users will prefer paying with fiat tokens anyway. Why going through the process of minting when you just want to pay your lunch with it?
- No simple narrative
- Despite the fact that the price of XRD has a guaranteed price floor (pMin) and price ceiling (pMax) there is no way to tell the fair price of XRD at any point in time.
- The price of XRD would certainly be very volatile within the range of pMin and pMax as it primarily depends on money inflow which again depends on the price trend. This feedback loop in the price model will inevitably lead to high volatility just like you find it with Bitcoin or Ether.
- Mass market has no demand for a digital world currency. It will take another financial crisis like in 2008 to create demand for an alternative world currency as outlined in General Economic Theory of Radix – Radix DLT – Medium.
- Fixing the feedback loop in the XRD price model
- Make XRD approximate to 1 USDT in the long term, yet not pegged, i.e. “relative stability”
- This EM takes into account that the DEX will not be ready yet when the Radix network will go live, though it works just the same if DEX was already live at day 1. There is no reason for phase 1 other than the fact, that the DEX will take more time to finish
- Make fiat tokens the primary payment medium on the network and scrap the synthetic XRI basket token.
- Introduce a fair price model for XRD
- Give a simple answer to the question “What is XRD and why is it relatively stable”?
- Approved Minters mint fiat tokens
- Fiat tokens are backed by reserves
- Phase 2 starts with launch of the DEX
- Make XRD a fixed supply coin
- Define an Economic Period (suggested duration: 1w)
- Calculate a coin’s maturity (the time elapsed since an XRD coin has last been moved around)
- Implement an algorithm that converts XRD to USDT at maturity
- Two phases only
** Phase 1: XRD holders must hold at least until DEX goes live
** Phase 2: XRD holders can sell at DEX
The author assumes that the uptrend of network activity on Radix will be more sustainable than the money flowing onto the platform as this is the case for crypto platforms in general. For reference see The charts for Ethereum (Ether) Historical Prices and Ethereum Transaction Growth Chart in comparison. While the down trend for the Ethereum price chart is still unbroken, the number of daily transactions is now pretty stable at 500k.
- At golive: Genesis wallet holds ~70.000.000 XRD, no fiat tokens minted yet. XRD are ordered by maturity in a first-in-first-out queue. At genesis the XRD of early backers have greatest maturity, ordered by the timestamp of their contribution.
- Users ramp up: inflowing fiat tokens (USDT) backed by Approved Minter reserves
- Fiat tokens start to fluctuate. On creation of a fiat transaction a fraction of the fiat token goes into a conversion contract. At the end of every economic period the conversion contract converts the most mature XRD at a rate of 1XRD:1USDT.
- After conversion the XRD goes to the node runners that validated the transaction. Coin maturity is reset.
- XRD holders have two exit options:
** They wait for conversion (1:1) at maturity
** They sell early on the DEX at a discount.
- XRD will trade at the DEX with a price discount i.e. below the guaranteed conversion rate i.e. the fair price. The fair price is a function with 2 parameters: network activity (tps) and ROI expectation (%p.a.). See worked example.
- As network adoption grows, the maturity duration of XRD gets shorter and as a result the fair price will increase. XRD price will approximate to 1 USDT in the long term
Increasing Radix adoption = more network activity = more fees = increasing amount of XRD converted = shorter XRD maturity duration = increasing XRD fair price
- XRD will have a de facto price cap at 1 USDT
- Everybody must hold at least until DEX goes live
- The longer someone holds the more incentive he has to hold further until maturity, since the maturity of the coin is not inherited when the coin is sold or sent
- XRD circulation and fiat token circulation are untangled
- Early supporters (2014, and so on) are rewarded such, that they will have their XRD converted earlier than late adopters
The suggested EM can redeem diverse stakeholders:
- Joe the Plumber can do accounting in a familiar payment unit (fiat token)
- On-ramping becomes more frictionless for end users without XRI
- Radix becomes an easy-to-use fiat payment network for end users
- Fee prices can remain stable with regards to fiat which is a benefit for businesses
- XRD price can float and appreciate increasing network adoption which is a benefit for speculators
- XRD conversion rate at maturity is fixed which is a benefit for hodlers
- The Radix EM narrative becomes intuitive and simple enough for an elevator speech
- Early XRD backers receive a time bonus over late adopters as reward for their patience
- Radix can claim laurels for being the first DLT to implement a fair price model
- TTM := time to maturity
- Max TTM := time to maturity for the last-in-queue XRD coin assuming a total of 70.000.000 XRD in the queue. This is a conservative way of calculating the max TTM as it does not take into account that a certain amount of XRD will fluctuate and never reach maturity (i.e. sold early on the DEX).
Q: How long does it take until my XRD gets converted at maximum?
Network activity / daily conversion amount / yearly conversion amount / max TTM 4 tps 3.456 1.261.440 55.5 years 10 tps 8.640 3.153.600 22.2 years 100 tps 86.400 31.536.000 2.2 years 500 tps 432.000 157.680.000 0.44 years = 5.3 months
Q: What does the fair price look like as a function of network activitiy (tps)?
The worked examples do not take into account that there are many more ways to raise fees which will speed up the overall maturity duration. E.g. fees for asset creation. We can assume that developers are willing to pay a rather huge fee, if Radix provides a simple, save and convenient process for asset creation. Lets say the fee was 500 USDT and there were 5 assets created every day within the first year. That makes 2500 USDT per day and would be a big contribution to the conversion contract.
The narrative uses an analogy from the world of finance: Discounted Securities.
Q: “What is XRD?”
A: “It is a discounted security with dynamic maturity. Think of zero bonds.”
Q: “How can XRD have a relatively stable price?
A: “Because users know the fair price of the coin and will most likely not buy or sell much higher or lower.”
Q: “How can XRD have a fair price?”
A: “Radix has a fixed face value. The conversion contract will convert 1 XRD at maturity for the fixed rate of 1 USDT. You can estimate the maturity date based on the network activity. With the maturity date and the current market price you can calculate the expected ROI. If current ROI meets your expectation, the market price is fair. If the ROI is above your expectation the market price is too low and you will likely buy. If the ROI is below your expectation the market price is too high and you will likely sell.”
Q: “Why would developers want to develop their applications on top of Radix?”
A: “Radix provides an unmatched platform to implement smart contracts. Most of the common features of decentralized applications can be implemented in a declerative way, which increases the quality of the code and speeds up the development. On top of that developers can directly create revenue from their contribution to the network activitiy by investing in XRD coins. As they bring more tps to the platform the fair price of the coin increases.”
- This EM creates an opportunity for institutional investors and asset managers. The predictable ROI of XRD investments will attract cheap external capital that is looking to leverage interest rates. E.g. An investor lends 1000 USDT (tokens) for 5% interest with 100 USD (fiat) collateral and buys 1000 XRD with expected ROI of 25%. At maturity his 100 USD investment creates revenue of 200%.
- Developers who build on top of the Radix platform contribute to the growth of the overall network activity. This EM creates an opportunity for them to create revenue from their contribution.
- XRD incentivises holding therefore hodlers will need to refund with external capital. This creates an opportunity for pawnshops. Pawnshops will lock immature XRD as collateral and lend USDT. They will be refunded once the XRD is mature.
- This EM creates a market for swapping. Hodlers who want to speed up the maturity process of their coins can swap with coins that are closer to the top of the queue. “I want to swap 100 XRD with estimated maturity 15.04.2020 against 70 XRD on top of the queue.”
The success of any working EM is based on convention. Therefore it needs to be spread to change people’s mindset.
- Include the narrative in every public communication
- Creating a community process with bounties for “Burning down the TTMmax”
- Add a feature to the network explorer that allows users to calculate the fair price of XRD given a) the estimated maturity date based on the average network activity (tps) of the Economic Period and b) an input parameter for the user’s ROI expectation (%p.a.)
- Add a feature to the Radix Wallet that tells the user the estimated ROI (%p.a.) for his XRD based on the current average network activity
This proposal introduces a fair price model for XRD and clarifies what the nature of the XRD coin is. The value of the XRD coin is backed by collateral and has an inherent price uptrend driven by network activity. The onramping process for users is much simpler and more frictionless than in the whitepaper proposal. The long term effects of this EM are fairly predictable given a certain amount of network activity. It creates business opportunities that derive from its unique aspects and are hard to match.