ConfusedObserver
confusedObserver101@gmail.com
https://www.peercointalk.org/index.php?action=profile;u=33113
November 04, 2016
Version 0.40, minor adjustments
Attributes of money1
- cash (medium of exchange)
- unit of account (measure of value)
- deferred payments (standard of deferred payment)
- reserve for future payments (store of value)
The world finance is dominated by fiat money, issued by central banks.
Those central banks issue as much of it as they think fit or as the responsible governments request.
This leads to tremendous inflation of material property.
Money is being challenged by blockchain technology and fintech.
Using crypto currencies to evade the inflation of fiat money is no simple solution, but blockchain technology provides tools to create a better solution than fiat money is.
Create a token denominated in an appropriate unit that holds the attributes of good money and handle that token on a blockchain.
To make a token good as reserve for future payments or for deferred payments, the value of the tokens needs to be based on commodities, raw materials, food, industrial products (finished and unfinished) and alike; things people want to buy with the tokens - now or in the future.
If the tokens keep the value stable measured in that basket of commodities and goods, they are stable and not prone to effects of inflation caused by central banks.
If the token transactions are processed on a blockchain they can have the benefits of crypto currencies while being more treasured than fiat money.
Some might perceive it as drawback that these tokens aren't stable in relation to fiat money. For others the reason for that is the reason to prefer them to fiat money.
At traditional exchanges there's trading of commodities, raw materials, food, industrial products including derivatives. It's easy to find a price index. It would be easy to base a token on a combined index. The fiat money price of that token would be floating. The composition in terms of commodities, raw materials, food, industrial products would change together with the change of the individual relative value.
But the token would at each time allow you to cash out the value of a% of commodityA, b% of commodityB, c% of raw materialC, d% of... etc. (keep in mind that a, b, c, d, etc., can change over time!), which would lead to stable buying power.
One reason to face the efforts is to make the world a better place.
This alone is a good reason, but rarely suffices.
There's a chance to make money from it by making buyers/customers happy with it.
That's why sooner or later it will be attempted.
How does the issuer make money, if the tokens are meant to be stable in relation to the index? And how does it make buyers happy?
In short: the tokens are sold for an offset and bought back at face value. They save the buyers from mirroring an index on their own.
The ETF2 issuer requests an offset when selling the tokens of quite a few percent. This offset will be like a one-time inflation effect opposed to an ongoing inflation effect. The Fed proclaims a low inflation rate, but depending on what you look at, USD had a considerable inflation rate during the last couple of years. The issuer saves the customers from creating a basket of all that commodities and goods, provide them with a token that's fungible and can be transferred in small units, save them from the exchange fees they have to pay when buying e.g. exchange traded funds (ETF) and offer a token that represents all those commodities and goods.
From that offset the operational costs are paid and on top of that revenue can be made.
In difference to a standard ETF the tokens would be "owned on a blockchain" and could be transferred just like crypto currency units. The path towards "good money" would be paved by creating such an index.
As more and more indices are created the better will prevail.
As long as customers buy/sell tokens from/to other customers they only need to agree on a price.
When a customer buys/sells tokens at face value from/to the issuer the underlying assets need to be bought/sold, because the tokens represent a basket of commodities.
Ideally 100% of the tokens in that basket are kept in reserve to make the token a reliable and trustworthy product.
That creates two problems:
- you have to pay the exchange fees when buying the ETF
- you need to keep the ETF
The first problem costs money and might require minimum purchase/sell amounts of tokens (not very convenient).
The second problem can lead to confiscated ETFs in case a government might not want such a business.
A solution that is less than ideal, but maybe a step into the right direction is right in the field where this token shall be placed: crypto currencies.
Instead of ETFs that represent a basket of commodities, goods, food a kind of crypto index gets created.
Tokens that represent ownership of (just as an example) a% BTC, b% LTC, c% ETH, d% XMR, etc. are sold.
BTC as denomination for the tokens is suggested.
To keep the reserve safe, storing them in multi signature addresses is recommended.
This means the tokens in the index need to support multisignature transactions.
In addition they should have a high trading volume at a tight spread.
When the customer pays with BTC (including offset), the issuer buys the underlying assets (crypto coins) and transfers the tokens to the customer.
The crypto coins are being deposited in publicly known multisignature addresses. The sale offset is accounted separately and operational costs are being paid from it. If there's money in excess, the revenue can be invested in development or distributed as dividend, e.g. as tokens (after the index crypto coins have been bough, of course).
That way customers can always verify that the tokens are backed by the crypto coins they represent.
Just as with creating a basket of commodities/goods, it saves the customers from putting all together on their own.
The easiest way for making it on the own would be to buy a lot of different crypto currencies and manage at least all the private keys for them, maybe even wallets, clients and blockchains. The alternative would be to leave them at exchanges, but that's not exactly one of the most safe places.
While this crypto coin ETF is not exactly "good money", it's a chance for people to participate in the (price) development of crypto currencies without the need to deal with all of them.
They can buy and sell ETF tokens for BTC. If they buy from the issuer, there's a buy offset. If they buy on the market, the spread will be somewhat smaller.
PeerAssets are still under construction, but the project has all required features of a platform on which that could be implemented.
You'd need (at least) two PeerAssets:
- stock like shares that represent the issuer (at the beginning distributed across the board of directors, who can use them for voting)
- the ETF tokens
- optionally: preferred stock like shares that entitle the owners to receive dividends, but that have no voting rights; those shares can come later or can be used to fund development
The target market for those shares depends on the way how the DAC is created, how it is founded and operated.
One option is to have a rather small group of people funding, developing and running the DAC. In this case there will be no open trading and no open market in the early days of the DAC for these tokens.
As voting rights are aligned with the tokens, it's prudent to have them in the hands of people who want to build rather than people who want to speculate.
All people who are interested in diversifying their investments belong to the target market of ETF tokens.
Be it
- people who already started creating their own crypto coin fund and realize how much effort it is to sync all those blockchains, backup the wallets, etc.
- people who have finished creating their crypto coin fund and struggle with keeping all the software up-to-date
- people who are relatively new to crypto currencies and try to get a diversified portfolio without much effort
- people who believe that a crypto coin ETF is really on the way towards the money F.A. Hayek3 thought of
Selling preferred stock shares are either used to fund the DAC with equity in an early phase (maybe a kind of IPO4) or ongoing to pay for development and operation.
As those tokens have no voting rights they don't require participation. To offer a return on investment they are eligible for revenue distribution, e.g. through dividend payments.
The beginning of the ETF will likely include hosting a lean trading website where customers can deposit BTC and trade them for tokens (or deposit tokens and trade them for BTC).
This trading website has an automated interface that connects to shapeshift via API and trades BTC back and forth with the cryptos that are in the index. For trading in a timely manner some funds need to be kept available at the trading website posing security risks. Only a small fraction of the funds may be kept there.
When a customer buys or sells ETF tokens (on that simple exchange website run by the issuer), the customer gets provided with a BTC price per ETF token. The price is provided by API data from shapeshift that considers the composition of the index.
An alternative to a trading website hosted by the issuer is to use OP_RETURN for embedding the receiving token address in the BTC deposit transaction. This way the multi signature BTC address could be used directly and a trading website wouldn't be required. That has important security benefits, but will likely overburden a lot of customers and is prone to mistakes that can't be corrected easily, e.g. typos in addresses.
If the ETF tokens are successfully, exchanges will list them sooner or later, which will make transactions from customer to customer easier.
Buying new tokens from the issuer can't be solved by getting listed to exchanges.
Room for automation:
the members of the board of directors have signing nodes for the crypto coins in the index. Each director runs his own node with his own private keys and access to the multisig funds is provided instantly due to the automation.
If a customer trades an ETF token on that exchange, the crypto coins get converted automatically in the background.
ETF tokens will see rising and declining demand.
As long as the price at the market is between face value and face value + offset, there will be transactions between customers.
With a token price approaching or dropping below face value, the issuer will be the preferred trading partner.
With a token price approaching or exceeding face value + offset, the issuer will be the preferred trading partner.
As soon as the tokens are approaching face value, it can be worthwhile for the issuer to buy tokens from the market. As long as the price at the market is above face value, only revenue is eligible for buying tokens. At face value or below, the reserve can be used for it as well.
This contracts the supply of the ETF. As soon as demand turns around, there's more revenue from offset to be made. If demand doesn't turn around, the ETF is being liquidated by that procedure.
The proposed ETFs don't include active management as there's no simple way to apply a management fee to the tokens.
If for whatever reason the composition of an ETF needs to be changed, a new ETF gets created and customers are allowed to swap ETFs at a discounted offset with the issuer.
1 https://en.wikipedia.org/wiki/Money
2 https://en.wikipedia.org/wiki/Exchange_Traded_Funds_(ETF)
3 https://en.wikipedia.org/wiki/Friedrich_Hayek
4 https://en.wikipedia.org/wiki/Initial_public_offering
Several posts at ALT-M, e.g.