Mana bonds: an anchor for Koinos’ financial system and a way to approximate the fair value of KOIN
This article was meant as a ‘twin brother’ for the previous article in which I proposed Emporia, a stablecoin framework using a fractional rebase. When writing the previous article, I considered the organization of an open Mana market in the Koinos ecosystem just as important as creating a ‘pure’ medium of exchange. By that I mean a stable coin which is always traded at a certain price, no price deviations possible. After receiving feedback (thanks everyone!), I now see that the Mana part is actually more important and that the market price of Mana should be used as a starting point and the way we organize that market should influence the design of our ‘stable coin’ / medium of exchange.
In this article I clarify some aspects of my previous post (especially the ‘hidden values’, their meaning and function, my motivation for using them and possible improvement after the initial feedback I got. However, I start by explaining how I picture the financial system as a whole would look and how the price of mana serves as an economic anchor. As you have a clearer picture of the market in its entirety, I think it will be easier to understand the motivation behind certain design ideas I proposed for Emporia.
The concept of Mana bonds
As mana is needed to use the network and a lot of people won’t always have the mana at hand that they wish to use, it makes sense to organize an open mana market. Some KOIN holders have excess mana and can sell it at the current market price. They can delegate their mana to the buyer for a period which is agreed upon. Let’s call those derivatives ‘mana bonds’. KOIN holders can for instance delegate their tokens for 1, 5, 10, 25 or 50 epochs (i.e. the cycles it takes to recharge the mana. Unless I’m mistaken a cycle would be 5 days, so this is 5, 25, 50, 125 and 250 days respectively). This way bonds with different prices can be traded on the open market and we can deduce how much value people attach to access to mana, now and in the future. For instance person A:
On the left hand side, the red graph will start at the current market price of mana. The price of mana is inelastic in the short term, meaning that it’s more or less fixed and has little room to fluctuate. For the price of mana to increase, the network has to grow and become more valuable by companies establishing new businesses and people offering new services. A huge increase in value of the network is unlikely to happen in 5 days time, so the perceived price for a 1 epoch mana bond is pretty much the same for every market participant.
Person A assumes the network won’t grow that much and its value will remain stagnant. The reason the red utility curve of Person A is downwards sloping is because the value he attributes to his future access to mana is discounted, much like in the discounted cash flow model. This basically means that in the present, you are willing to pay less for a future unit of mana than you are willing to pay for a unit of mana you have instant access to. The area under the curve is the total price person A is willing to pay for all future access to one unit of mana. This is in essence how much he is willing to pay for a KOIN token. Let’s compare him with person B:
As the value Person B attaches to a 1 epoch mana bond is equal to the market price, both curves start at the same point on the left. Because Person B expects steady growth and thinks future units of mana will have more value he is willing to pay more. The area under the green curve is the price B is willing to pay at this time for all future access to one unit of mana, i.e. one KOIN token. Let’s have one more person C:
Person C is expecting exponential growth of the network. Notice the upward bump; apparently he is expecting a sudden major increase in the value of mana (perhaps a highly anticipated game launching on the network).
(added 18/01) We can compare how much each of the three market participants are willing to pay for a mana bond with a specific maturity date by calculating the area under the curve between 0 and the maturity date on the x-axis. For instance, the total price person B is willing to pay for a 25-epoch mana bond is the area under the green curve until the x-axis reaches 25. As those bonds get traded on the market, an open market price will be reached, a price which includes some degree of speculation, but which has been agreed upon by the market.
As we’ve seen the area under the curve approximates how much value a certain person attributes to holding one KOIN token, now and in the future. In an open market system, the current market prices of 1, 5, 10, 25 and 50 epoch mana bonds can be used to approximate a market consensus of how much a KOIN token is worth:
The available market prices are used to generate a graph and the area under the curve approximates the price the average market participant is willing to pay for one KOIN token. There is still some speculative value included in this but it has been lowered significantly. Most importantly the value of the KOIN token is anchored in sound economic ground as it is linked to something which can be expressed as a monetary cost; the current mana price.
A stable KOIN: sKOIN
This provides us with a price we can use to model a stablecoin which can fluctuate around the normalized KOIN price (thanks Andrew for suggesting this). Such a token would be a great option for people not wanting to hold a dollar-pegged stable coin, but also don’t agree with certain speculative value the KOIN token might have. This sKOIN has a lower speculative value, but also upside potential linked to the growth of the Koinos network.
When it comes to the token system, a global rebase system where the rebase is smoothed out over time, like Ampleforth, would work great for this. The price of the token hovers around the calculated price of sKOIN in a cyclical fashion. Since such a token is meant as more of an investment and meant to be held mid- to long-term, the peg doesn’t have to tight, but also not too wide because we want to limit too much speculative value.
A positive side-effect of having a token like this is that it sends a signal to the market, telling us when the price of KOIN is too high, in this way reducing part of the speculation priced in and lowering the price of KOIN to a more market-conform level. This is great because it takes us out of the Nash equilibrium where speculators hold on to their tokens and developers can’t acquire KOIN at a reasonable price to kickstart their business on the network. Speculators shifting to sKOIN instead of KOIN leads to faster adoption and growth while still giving them the potential gains they are looking for.
The triangle of financial stability
What we think of as ‘money’ can have three different functions: a unit of account, a medium of exchange or a store of value. Currencies try to be all three together but fail. In my opinion we should have a financial ecosystem with multiple tokens, each offering a different combination of the three aspects:
- Mana bonds: serving as a price anchor, a tradable asset and unit of account, but unfit as a medium of exchange or store of value as the value of the mana bond starts to decrease right after purchase.
- KOIN: the ultimate store of value, but no very fit as a medium of exchange because of its growth potential. Also has a large speculative value (as discussed it’ll likely be lowered after the introduction on sKOIN).
- sKOIN: the middle ground between a store of value and a medium of exchange. Speculative upside in the long run, as well as a stable mid- to long term price correlation with KOIN.
- Emporia: a pure medium of exchange, as friction-less as possible. Doesn’t lose or accrue value over time. Similar to a stablecoin which is always 100 percent on it’s target mark. Dollar-pegged would make the most sense, at least for the foreseeable future.
Emporia; the reasoning behind fractional rebase and hidden values
I hope now it is clear why I opted for a rebase system and introduced the fractional (partial) rebasing of the stablecoin. Let’s sketch an ideal scenario for a pure medium of exchange. It came across my mind a few times the past week, but partly because of it’s simplicity I rejected it. However, the introduction of sKOIN as a third currency (mana bonds aren’t fit as a currency) creates a different market behaviour as opposed to a system having only two tokens.
The ideal scenario for a pure medium of exchange would be a dedicated ecosystem, a closed system in which every one of that token would be considered the same from the moment it got minted right up until it gets burn. Market participants assume that every token in the system entered in a fair way, inside the system there is (close to) zero friction when it comes to exchanging the token with other assets and people can also choose to redeem the token for an other asset as they withdraw them from the ecosystem. This would basically be something like your Steam account, but also with the added benefits of transferring dollars to other people, exchanging bought games back to dollars and the ability to withdraw money to your bank account (I haven’t play on Steam for a long time, forgive me if this is a bit cringy). Basically a system were ‘money’ has a constant value once it enters and that constant money is guaranteed / backed / justified by the system itself. A fiat currency in the purest sense of the word.
Governments / central banks and stablecoin issuers can’t do this presently. Governments print their way out of problems and use the seigniorage profits for God knows what. Issuers of non-backed stablecoins have to account for network and transaction fees, they have actual monetary costs and mostly also are looking for that juicy seigniorage income. To justify the holders’ trust in the token, both central banks and stablecoin issuers use supply and demand as a sort of balance sheet with assets and liabilities. As long as this within a certain range, the token is considered ‘trustworthy’. A dedicated ecosystem doesn’t have this problem. Gabe Newell doesn’t have to prove to you that your funds in your Steam wallet have an actual dollar equivalent.
A system like this seems a bit naive, but as the Koinos ecosystem grows, it can certainly radiate the trustworthiness and utility. Also, minting and burning tokens is an opportunity cost and not monetary, a cost which the liquidity providers is incentivized to carry (see previous article). Thirdly, the co-existence of KOIN, sKOIN and mana bonds provides the opportunity for a participant in the ecosystem to spread his value across different types of ‘money’, in this way the type of asset people use to make a transaction will be most fit to the nature of that transaction. In this way, value doesn’t flow across ‘money classes’ unnecessarily and a lot of the resulting volatility is avoided.
Currently, this seems to me the ideal financial system.
The reason I added the (fractional) rebase system is because I wanted to include some way of ‘balance keeping’, like central banks do. All hidden numbers combined are basically a decentralized balance sheet. Because I think a global rebase system could compromise the friction-less nature (reading up on that atm), I opted for a fractional approach. With a global rebase, the rebase has to happen after almost ever transaction, as otherwise arbitrage opportunities arise as the stablecoin deviates from its peg. The friction-less nature of mana can in this case be counterproductive and cause more volatility (because taking the arbitrage profits is only an opportunity cost). A fractional rebase smoothes out the rebase over time and also over different EIU’s, resulting in smaller cyclical fluctuations and a tighter peg. I intended the hidden values to be merely a control mechanism, a balance sheet, as I was looking for the system that would be as friction-less as possible, whilst having a self-containing ‘control mechanism’ to keep supply and demand balanced out.
As discussed in the previous few paragraphs, this might not necessarily be needed. Making the stablecoin an ‘actual fiat currency’ seems the simplest and most natural way to go about it and it looks like Koinos has certain advantages (mana) that could make it work. I haven’t been long enough into crypto to make an educated guess about this. But even if there’s the tiniest chance that this is a gold nugget, I’ll take the risk of looking like a fool for suggesting the idea :)
Hope I clarified my motivations behind Emporia, but most importantly the outline of the financial triangle system and the stability that it can bring. Let me know what you think. All feedback is welcome.
Come join the Koinos Discord server if you want to take part in the discussion. Feel free to reach out to me if you have any questions, feedback or want to help design the monetary and financial system on Koinos.