BFAR Smart Contracts: Part 2 - Token Reissue Events — Role of a Decentralised Reserve
Tokens or Coins — Which is it?
Coins refer to the PoW (Proof of Work) reward granted to a blockchain node for its role in contributing to the network. For instance, the reward granted to nodes for playing a role in producing new blocks for the Bitcoin blockchain is a ‘BitCOIN’. As such, any work-produced reward from a blockchain network, are called coins i.e. ETH is a coin, ZIL is a coin, and QKC is a coin. PoS (Proof of Stake) blockchains also produce ‘coins.’
With PoW, new coins are difficult to produce as their creation is hardwired into the production of new blocks, which occur in a set epoch with a drip feed mechanism which pay nodes for their work in contributing to the network, a few coins (rewards vary per platform). Blockchain start-ups use ICO’s (Initial Coin Offerings) to raise seed funding for new protocols (so called ‘infrastructure projects’) by creating smart contracts to onboard users and investors.
You BUILD dApps on Coins; you CONTROL dApps with Tokens
Tokens are created in what is known as a TGE or ITO (Token Generation Event or Initial Token Offering) and control the functions of a smart contract which can be as complex or simple as the contract creator likes. Most start-ups launching a new blockchain protocol use Ethereum’s blockchain to launch their ICO, as there is an abundance of Ethereum developers familiar with Solidity, the programming language of the Ethereum smart contract.
Developers are key to the widespread adoption of a blockchain.
Tokens differ from coins in that they are all ‘created’ at the same point as the creation of the smart contract whereas coins are ‘produced’ over time — however both are finite with the total amount determined by the protocol or contract developer.
The smart contract of most ICO’s are generally simple — store a MEW address and record ETH contribution amount in ERC 20 token equivalent, with the ERC 20 token acting as a receipt for when the start-ups own blockchain mainnet goes live and production of its own coin starts; at which point a swap can occur. Tokens used in this way are also known as ‘Security Tokens’ — they are securities against a promise to build a future ‘something’ and the source of great debate with regulators. The same is true for tokens claiming utility but by design (either deliberate or accidental) can become assets, rising in value over time due to scarcity.
Virtual land — Everywhere, yet Nowhere
Blockchain-based VR start-up, Decentraland launched their ITO last year, which controversially sold out in 35 seconds with large amounts of their native token MANA being allocated to pools, leaving lone investors and long-term community members, disgruntled and out in the cold. However, the project itself has grown into a success with the launch of Genesis City and coveted land parcels fetching prices of $200k USD as MANA rises in value, currently worth $0.10 USD heralding the arrival of the new real — estate of virtual space. Read our earlier article, if you are a newcomer.
Bubbled does this for real-world spaces with the arrival of augmented reality by wrapping up every individual latitude and longitude coordinate that makes up the planet as a non-fungible asset on the blockchain; transferrable by holders of the BBL token.
Role of the Decentralised Reserve
Our reserve serves two key functions, unlocked by the BBL token: to unpeg BBL from the value of ETH or other currencies and incentivise token holders to spend for circulation.
MANA, like most ALT’s, is currently pegged to the value of ETH and ultimately BTC, which means LAND valuations can fluctuate wildly as there is no mechanism in place to ‘unhinge’ and discourage MANA being used as a pairing token by traders uninterested in using the token on the Decentraland platform but using it as a tool to gather ETH.
Example 1: User A buys LAND for 1,000 MANA when MANA is worth $0.10 and puts up for sale at 60,000 MANA. MANA is worth $0.10 because it’s a relatively cheap token so the price can be easily manipulated to dump in exchange for ETH — not as a true reflection of buying activity for use in Decentraland. ETH is in the red because it is a popular pairing coin for ERC 20 tokens. When ETH turns green, MANA turns red as traders exit for ETH gains. User A bought LAND in the green period for MANA for $1k USD, user B buys it for 60,000 MANA for $600 USD during crypto bear season when everything is in the red and MANA drops to $0.01 USD each. User A loses money.
Example 2: It’s a bull season in crypto and everything is green. MANA is $0.55 each. LAND owners have put up their plots for sale for 100k MANA. These LAND owners are the ones who were early to market, latecomers — individual players are unlikely to have access to $55,000 USD so these plots may not sale; they have to wait for an affordable access point for MANA which may never come as the unforeseen bull season has turned the currency into an asset.
The rule of thumb is; a currency should be fluid, water that ebbs and flows in a ‘current’ based on use (utility) to ‘unlock access’ to value and an asset should appreciate or depreciate, based on demand and scarcity.
However, its early days for Decentraland and already there are other platform-centric values that are increasing value of one plot over another i.e. distance to roads and certain districts. We are merely using them as an example as they are a similar premise: selling virtual land, to highlight the issue — how do you separate the use of your platforms token based on platform users rather than 3rd party ETH traders?
Our reserve solves this by deflating the token value in times of scarcity.
Scarce times — Don’t HODL BBL, Spend It
The price of BBL at the ITO will be $0.0567. Rather than create a large supply of BBL (which can encourage it to be used to manipulate its price and dump for ETH) we opted for a relatively small total supply (400m) which once spent to buy land parcels is sent out of circulation to a reserve. The reserve is decentralised and controlled by smart contract with a key command: once the reserve holds a certain amount of BBL it will be reissued (Token Reissue Event) and available to buy at the original ITO price.
This discourages the practice of ‘HODLing’ (Hold On for Dear Life) to create scarcity for dumping later — there is also a function on the reserve to spend any ETH it holds, at decentralised exchanges for BBL which it will store until Token Reissue Events (TRE).
TRE’s will enable the currency to ‘live and breathe’ based on platform-based demand rather than be the sole plaything of traders on exchanges.
Example 1: User A buys land for 50 BBL ($2.84 USD — the initial price of each new land parcel) when BBL is worth $0.0567 and puts up for sale at 60,000 BBL. ($3,402 USD). This 50 BBL leaves circulation and starts to create scarcity — however it is a scarcity caused as a benefit to the platform as it encourages platform supporters to buy BBL whilst it’s cheap to buy desirable land parcels.
If traders use a decentralised exchange to manipulate BBL prices and artificially inflate prices; our reserve buys the BBL and stores it back on the platform for the pending Token Reissue Event. Platform users know they can buy it from the reserve at the TRE rather than on exchanges at inflated prices.
Scarcity is controlled to bring users back to the decentralised reserve and encourage for platform use only, something that would be easily enforced in a central platform in web 2.0. Traders buying BBL from the reserve with ETH to sell on exchanges end up getting their ETH back with negligible or no profit.
However, controlled scarcity still means that BBL prices are going up and newcomers are still faced with prices of, say, $0.55 per BBL. What happens?
User B is a newcomer and wants to buy user A’s land for 60,000 BBL but BBL is worth $0.55 each, meaning they’d have to spend $33,000 USD.
They will just have to wait for the TRE when BBL prices normalise. In the meantime, they can buy available land parcels at the initial fixed price of 50 BBL (which would be around $27 USD at these BBL rates) to expedite the next TRE.
Bubbled is building an AR platform whose framework is solving issues of ownership and governance within real-world spaces hosting augmented reality content. Join our Telegram and follow for updates on our Token Generation Event.
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