Token with Stable Value

In the first post on Token Economics, we economically investigated why the token economy is needed. In that post, we looked at the economic basis of tokens that serve as payment instruments with a limited role within an economy. Based on that discussion, this post will investigate what benefits we can gain from tokens which is applied to the token economy.

Tokens generally play a limited role in the payment system within an economic system as described above, but on the other hand, people perceive tokens as investment assets traded on the exchange. For this reason, the token has one dilemma. A token, which plays a role of payment in its own ecosystem, is required to stabilize its value because it plays a limited role in the environment where fiat currency exists. The severe fluctuation in value in functioning as a transactional medium is an obstacle to the formation of trust. Let’s take an example. In the 1997 financial crisis, the Korean won depreciated sharply. The collapse of this value makes the statutory currency lose its credibility, not to mention the token. If a token is to function as a payment instrument, then value stability is essential. On the other hand, tokens are traded on exchanges and are therefore recognized as investment assets for many people. Unlike normal currency, investment assets must be somewhat volatile. This is due to the different expectations of people for the direction of volatility which can result in transactions and capital gain of investors. For example, if the stocks traded in the stock market do not have price volatility, no one will buy or sell these stocks. This is because dividends might be received but not capital gains. Of course, too much price volatility is the reason why people are reluctant to invest because of the risk, but the appropriate level of volatility is a prerequisite for investment.

The two different roles pursued by tokens cause a dilemma: whether to pursue price stabilization or volatility. As we have already experienced a surge and plunge in token prices, many projects are now designed with a token, called stable coin, that seeks to price stability. The token economy is essential for designing such a stable coin. This is because price stability can be achieved not through a simple blockchain or smart contract mechanism, but through a complexly designed market mechanism and central intervention. This can be understood simply by considering the efforts of central banks to stabilize the value of their fiat currencies.

In conclusion, by applying the token economy, we can design stable coin with stable price, which can give value to our users.

In the following post, we will study more closely at the types of token economies and their mechanisms that apply to stable coins.

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