General Economic Theory of Radix

What is the Rad?

The Rad (currency symbol: XRD) is the native currency of the Radix platform.

What is the goal of the Rad?

To be used as a world currency.

Why?

If built correctly, a digitally native, decentrally controlled currency has the potential to be a more reliable form of money than that issued by a nation-state.

What Is Money

To be money, a prospective currency must be:

  1. A medium of exchange
  2. A store of value
  3. A unit of account

Medium of Exchange

A cryptocurrency is almost always a medium of exchange. This is because the majority of cryptocurrencies are the currency needed to use a specific platform or service, as well as the reward/payment made to those who facilitate services on that platform. For Bitcoin, this service is the facilitation of Bitcoin transactions. The payment of a transaction fee and the mining reward is compensation for the miner’s work validating and adding transactions to the Bitcoin ledger. For Radix this is currency is the Rad.

As you cannot use the platform without the underlying currency, or earn from the platform without agreeing to be rewarded in the underlying currency, almost every cryptocurrency is a medium of exchange for, at least, the services of the platform.

However, just because users have to use it, and service providers have to earn it, does not necessarily mean any user or service provider will want to hold it for any longer than it requires them to acquire the service or earn the fees.

If the service providers are selling back to the users, and that cycle is short, then even though a large amount of value might be provided by the platform, the value of the underlying token will remain low.

Radix partially addresses this problem by the network fees being partially deflationary: 50% of every fee spent on the network is removed from immediate circulation. This helps reduce the velocity of Rads within Radix, but is certainly not the entire picture.

Store of Value

Depending on its use, a store of value does not necessarily have to be stable, just retain value over time. Equity, bonds, gold, oil, property, Bitcoin and cheese can all be seen as stores of value in one form or another.

In the words of Willy Woo, a store of value is simply a bucket to hold value in. You may park it there for 1 week, 1 month or 1 year; but the better the store of value is, the more likely it is that the value you take out will be equal to (or better than) the value you put in.

A store of value can go to zero; if it does, it simply turns out to be a bad store of value. Being a store of value is not a property that is black and white, it is merely shades of grey. The reliability of a store of value is directly related to its future market price: why would someone buy the store of value from me tomorrow at the same or higher price as they would today?

The fiat currencies of most major nations are good at this function and are often the yardstick used when looking for examples of stable stores of value. Their liquidity and price predictability for buying goods and services in the future are why people choose to hold large amounts of value in these buckets.

A Unit of Account

The increase in the circulation of a currency is often intrinsically linked to its use as a debt instrument. This is where money moves away from almost all other asset classes. For people to want to create debt in an asset, the asset chosen needs to not move too much down or up in value.

Obviously, the lender does not want the asset they receive in the future (plus interest) to be worth less than it is today. Equally, the borrower does not want the asset they have to pay back in the future to be worth more than it is today. If a borrower borrows in an appreciating asset, they have the risk that purchasing back assets to repay the debt may cripple them.

This is why appreciating assets cannot be used as money — no sensible person should borrow in debts denominated in an appreciating asset. While the misuse of debt has much to answer for in the current system, it is also the way in which we fund the majority of corporate, government and individual spending, and plays an economically essential function.

Creating Money

To create a world currency, you must, therefore, create something that can be borrowed equitably in. For people to want to borrow in it, it must be a good medium of exchange so they can buy goods and services at a reasonable price with it. For people to want to accept it in exchange for goods and services, it must be a good store of value.

Therefore, a store of value must be the starting point for anything that aspires to be money. The more value stable over time, the better.

However, something is not valuable simply because it is declared to be. Something is only valuable when the market decides that it is and only continues to be valuable as long as people wish to buy and hold it.

This section will look at four different methods for initially ascribing value to something and how the scarcity of that thing can be managed to produce a predictable market value:

  1. Value via Collateral
  2. Value via Inheritance
  3. Value via Competitive Work
  4. Value via Utility
  5. Value via Managed Scarcity

Collateral

The simplest way to make something have value is by backing it with something that is already seen to have value e.g. fiat backed tokens. 1 Paxos Standard Dollar is worth 1 USD because it is backed by 1 USD in Paxos’ bank account, and by owning the Paxos Standard, I also own the right to that dollar. As long as people believe that Paxos will always honor a claim on that dollar, the token should always have a market value of $1.

This is similar to the way in which gold was used for letters of credit that eventually replaced the common use of handing over physical gold. The letter of credit was easier and more convenient than the metal itself, and as long as people trusted the institution that held it, there was no need to actually make a withdrawal of the gold.

Debt operates in a very similar way — my promise to pay you back $100 in the future plus interest of $5 is a form of collateral instrument, where the promise of money in the future is the collateral until the money itself arrives. How trustworthy the promise is will dictate how the market will view the value of the promise until the payment is actually made.

Inheritance

Providing value inheritance is the act of destroying or using up something of value, in some irreversible way, to create something else.

The simplest example of this is the manufacture of goods. If $10 of inputs must be used to create an output, is the output therefore worth $10+ dollars? The answer really depends on how the market views the output. Just because I spent $10 on paint does not mean my work of art is worth $10.

This does, however, introduce the concept of a partial price floor — in that I, as the creator of the art, now have a vested interest in getting at least $10 for it to recover my costs, and may be willing to wait until I do, rather than lowering my prices to sell immediately. However, should the market stubbornly reject my art, I may end up settling for $2 to at least recover something — but will likely mean that I will no longer be producing art from that point forward.

Proof-Of-Burn to create new tokens has been used a few times where Bitcoin must be burnt to mint another token, with the implicit idea being that the value of the underlying Bitcoin would be ascribed to the newly created token.

For the same reason that my work of art is not inherently worth $10+, despite costing $10 to make, the value of Bitcoin and the value of the tokens created using Proof-Of-Burn did not stay close in value for long.

Competitive Work

Value via Competitive Work is related to inheritance but has the additional step that the amount of work/input required for a given output varies according to how much competition for the prize there is. This is the mechanism employed by Bitcoin with the Proof of Work mining algorithm.

This varies the number of resources that must be used to acquire a Bitcoin by varying the difficulty of acquiring the mining reward — the more competitors, the higher the difficulty, the fewer competitors, the lower the difficulty.

However, does the fact that I beat other people to acquire an asset inherently make the asset valuable tomorrow? The answer very much depends on how desirable owning that asset is to non-competitors after the competition itself, as well as the total supply available on the market.

Just because a large amount of effort went into creating something does not mean that it inherently has value.

Utility

If something is inherently useful then the market will ascribe a value to it. If a business or individual finds the functionality of Bitcoin or Radix useful, then the token that provides access/use of platform has value to that person.

How high the market price can go will depend on how many substitute/competitive goods/services there are. If there is nothing quite like your service, then you have a monopoly for that good or service and can charge a premium equal to the maximum value of the utility to the market. If there are many other goods like yours then maximum market price will be capped at the cost of the substitute good.

Equally, if there is a cost associated with creating the good (inheritance), then the sellers may be unwilling to sell below their cost of production and will simply wait until the price on the market rises to a point they are willing to sell again. If this point is above the cost of the substitute good, or above the long term market price, then the sellers will eventually have to exit the market.

Utility is not infinite, and each additional unit of utility will have a lower market value as the utility need of the market is fulfilled. Visa needs a network capacity of 2,000 transactions per second, and it places a very high value on achieving that capacity as it allows it to serve all of its clients. Each additional unit of capacity above that has marginally less value until eventually (say at 100,000 transactions per second) it doesn’t really make economic sense for Visa to add more capacity to its network until demand catches up.

Thus; if utility is finite but supply is infinite then the value of a useful token will still tend towards zero. The reason it does not tend towards its production cost (unlike the markets for other goods and services) is because the token is not destroyed when used, and can simply be recycled in the system.

This is the same dynamic as for money itself. Money is not destroyed in use, but has an intrinsic utility as a medium of exchange and store of value, meaning that money is self-referential — it is valuable because it is useful and it is useful because it is valuable. Too much money in a system (hyperinflation) destroys the value of money, and thus destroys its utility in an economy.

Managed Scarcity

This brings us to the concept of managed scarcity. If the only utility of an asset is that of a store of value (e.g. money) then it is essential that its supply is managed vs demand to make sure it stays as a predictable store of value.

However, just because something is rare does not make it more valuable. Morganite is much rarer than diamonds, but diamonds are much more valuable per carat on the open market.

It is a delicate balance to strike; too rare, and no one owns it, and therefore it has no market and little use as a store of value. Too common and oversupply may periodically flood the market, depressing the market price and reducing the asset’s use as a reliable store of value.

By managing the scarcity of something it is often possible to make the market price predictable, especially if you have enough reserves to buy up the asset when it is too common and supply it to the market when it is scarce.

Fiat money is the ultimate example of managed scarcity. Its use as a store of value and medium of exchange is so predictable that adjusting the quantity of money in an economy will almost immediately affect the value of the money in the system. This phenomenon is well defined by the quantity theory of money.

However, for managed scarcity to work, the asset itself must first be desired by a sufficiently large number of people in a continuous and predictable way.

Thus something is valued because it is desired. It’s value increases if the supply is less than demand to a point, but too little supply will mean that it’s circulation cannot cross over to become a general medium of exchange (e.g. not just used for a single specific good or service).

For something to cross from a specific medium of exchange to a general medium of exchange it must be widely accepted and widely circulated, thus the supply must be expandable but managed in such a way as to keep the price long term predictable and thus preserve it’s property as a store of value.

Radix Economics

The first value the Rad has is that of using the Radix platform. By managing scarcity within the system, the Rad value can also be made predictable; matching supply against the demand to reduce the volatility of the price. By making the Rad value predictable, it is capable of becoming a good store of value. By becoming a good long term store of value it has the opportunity to become a general medium of exchange. By becoming a general medium of exchange, it becomes viable to be used in agreements for future payments (e.g. debt/credit). By becoming viable to use to pay debts in, it has the opportunity to become a world currency.


Have questions about Radix? Join The Conversation …