Solving Price Discovery Of Non-Rivalrous Goods (with Curved Bonding)
How much should I sell my software for? How much should I sell this song for? How much is this e-book worth? This fundamental question is often asked about creators of non-rivalrous goods: goods where producing a copy of it are close to zero marginal cost. This is different to say a rival good, where consumption does not permit anyone else to do so at the same time (eg, a chair).
With tokenized curved bonding, we can potentially solve the problem of pricing non-rivalrous goods (eg, software, files, music, data). Over the course of a non-rivalrous good’s lifetime it would thus maximally fit to the best price the market is willing to pay for it.
It does this by essentially creating a “futures” market in coupons for access to the non-rivalrous goods backed up by a pool of collateral. Speculators (price curators) are afforded the opportunity to earn from predicting the usage of the non-rivalrous good. Consumers can participate by joining this coupon market, but they don’t have to.
This article assumes an understanding of tokenized curved bonding, explained in full in the following article. It’s a core component of Curation Markets.
Tokens 2.0: Curved Token Bonding in Curation Markets
Since introducing Curation Markets in earnest earlier this year, quite a few projects have started adopting some of the…
In short, Curved Token Bonding works as follows (modded to this context):
- With a specific token (eg ETH), you can buy a new token (eg #softwareCoupon) through a smart contract. The ETH is kept as deposit (collateral) within the smart contract. It’s not disbursed to any particular person or team.
- The buy price is determined by the current supply of the new token (#softwareCoupon). The buy price is hardcoded according to some algorithmic curve.
- At any point in time, someone can sell back their #softwareCoupon into the communal pool and get out an appropriate reward that is set by a sell curve.
If entering and exiting on the same curve, it would simply look like the following.
This can differ, however, with different curves going out (to incentivize different behaviours).
The article on Tokenized Curved Bonding explains it more in depth.
Pricing Non-Rivalrous Goods
Using Curved Bonding, we can more effectively price the non-rivalrous good. Let’s say in this instance it is a copy of an album, for personal use (eg, buying an album from iTunes).
Using a modification, the token (#albumCoupon) that is bought can be used to be paid towards the provider (person/group selling the album) for access to the non-rival good (the album) OR sold back into the deposit pool.
The provider (album creator) then earns #albumCoupons, which they can then decide to sell into the deposit pool and thus earn from their non-rivalrous good that they created (revenue).
Buyers of #albumCoupons can dispense their coupons for the album (giving it to the provider), now and into the future OR if they don’t want to hold the token anymore, they can sell their coupon back into the deposit pool.
This interplay changes the value of the #albumCoupon over time. As with Curation Markets, price curators (buying and holding #albumCoupons) may believe that in the future, the demand for the album will increase and thus they can decide to buy more #albumCoupons at an earlier stage (for cheaper), and then sell it back later if demand has increased. Thus, they can earn from predicting the usage of the album over time.
With curved bonding, if the supply of #albumCoupons decreases, the cost to buy an album decreases.
If consumers don’t want to participate in this market, they can simply buy an #albumCoupon at the current price on the curve and immediately dispense it for the album to the provider.
Thus, over time, the current cost of the album will increase and decrease, based on the belief that there will be demand for it into the future.
If the holders sell all their coupons into the pool, the price would go to zero.
Price Curator Feedback Loops
The individual needs of the price curators (buying and holding #albumCoupons) should be enough such that it regulates the pricing of the album.
Their goal is to buy #albumCoupons and hold them before new demand arrives. When new #albumCoupons are bought, they can sell their #albumCoupons back into the pool for a higher price (than they’ve bought into). Holding longer, implies the belief that more coupons will be bought before anyone (holders or the provider) sells it back into the pool.
Whilst they are holding the #albumCoupons, they are undergoing an opportunity cost (eg, their locked access to a proportional collateral). Thus, over time, if no new buyers of #albumCoupons arrive, it signals that the price is too high. At that point, not having the firm belief anymore of future demand, they will sell back into the pool and leave with a profit (having done the work of curating the price).
Mistiming this is always possible as a price curator, and that’s where this market comes to exist. Some price curators will be able to predict future demand, and others will fail to do so, and thus, when they want to leave (when they are under their buy-in price), they can either exchange their coupon for the actual album, or leave at a loss.
Ultimately, the value of the good will determine whether people buy the coupons or not. The market decides whether the price is good or not. Someone that arrives at a music store, and sees that the album is currently priced at ~$6.47 (eg, 1 #albumCoupon at that point in time) will have to figure out if it’s worth their money or not.
If no one buys it, it would start falling. If more people buy it, and there’s belief of more future demand, the holders won’t immediately dispense their coupons for a profit. The price would thus increase. If people buy it, and believe that this is the upper limit, the price would be stable as churn results in people exiting as soon as others enter.
Malevolent Price Squatting?
Curved bonding in general still suffers from potential price squatting. Someone who is willing to lock up a token to force others not to have access. In order words, hiking up the price so high that no one else can enter.
There are ways to mitigate this, but ultimately, as with most crypto-economic systems, it is only possible to make it more costly, but not completely remove this possibility (as with 51% attacks in in PoW blockchains).
Anchors: Normal Selling vs Bonded Selling?
As a provider, the option still exists to not use such a market pricing mechanism and just choose an accepted rate to sell the good (eg, album) at. Say, just anchoring the price at $9.99 for an album. In doing so, they are accepting that there might be buyers who are willing to pay MORE than 9.99 for the album, and leaving money off the table OR, accept that the album will be too costly, and thus not get customers who will pay less than 9.99.
This is less effort on part of the seller. If they choose bonded selling, then they will receive the coupons which they sell back into the collateral. If they don’t want to participate, they can directly just sell it back into the pool. However, the provider has the affordance to also predict the value of their own good. If they hold their own coupons, they can potentially earn more. This adds additional mental costs on part of the seller, and thus they might not want to do bonded selling. If they want to do bonded selling, but not accept the mental costs, they could potentially shift the burden towards a bot that according to their needs and risks, sells the coupon into the pool at certain times. These bots might inadvertently create price anchors. These price anchors might anyway come to exist that still adapt to how the market *thought* it should price specific non-rivalrous goods. For example, a provider might just sell any and all coupons if the price is higher than say $9.99: it’s own expected price of the album.
It’s uncertain how this would be adopted.
Pay-What-You-Want vs Bonded Selling?
PWYW schemes are interesting in that it allows individuals to price discriminate on their own terms. However, without any price anchoring, they need to determine the value of the good before they consume it. They just have to compare relative value they will get vs other potentially similar experiences. eg, buying an album should cost about ~$10. “If I like this more than I think I would like other albums, I’ll pay more.”
Bonded selling allows there to be more information in the market about the cost of the good: putting less burden on the individual. More interestingly however is that bonded selling sets the price discrimination according to the aggregate market, not each individual. In other words, it’s valuing the good based on what it thinks any buyer from the market would likely accept.
Could this work for the pricing of services or physical goods too (like a ticket to a show)? Maybe. It’s harder if it does not have marginal cost involved since there’s a definitive lower threshold. However, above a certain price (above margin), it seems this mechanism could be used as well. It does make it harder if there’s a definitive “end” to the good though, since after it isn’t valuable anymore, it will cause an exit rush. For example, a ticket to a gig will rapidly become worthless as the gig itself progresses. Perhaps this could be intentional, so that yield management will ensure that everyone who has tickets actually use them, and not just hold them during the gig itself.
Food for thought.
Curved Token Bonding: a model that serves to curate information, can be used to curate prices of non-rivalrous goods. This ultimately, efficiently allocate prices of these goods such that the market pays for it, exactly what it is worth at that point in time: earning the provider the maximal amount it would be able to achieve.
Price curators are rewarded for their work for predicting the demand of the good, and thus in turn set the price for the non-rivalrous good.
Curious to hear your thoughts!