Currency Flows into the Abyss——A Brief Discussion on the Significance of Bancor
Foreword: All digital currencies have been fighting a terrible enemy since the first day of their birth, which is both death and a curse. Imagine that, many years from now, Bitcoin's decentralization proclamation may have become a laughing stock. Because in the world at that time, wealth was controlled by the earliest Bitcoin miners, and their first-mover advantage could never be smoothed out with hard work. Will people abandon the king of digital currency and reshuffle the cards? This threat of liquidity has been lingering in the minds of all digital currency players, because centralization and decentralization are always relative terms, and people first need to recognize its value. When Bitcoin was first used to redeem two pizzas, it was a dying thing. It was geeks and global evangelists who brought him back to the world, and tirelessly publicized it, making it gradually become powerful. Except for Bitcoin, all other digital currencies will always live in the fear of dying out next week. This is not alarmist. The top 100 market capitalization currencies on the CoinMarketCap list will never be the same every year. Those who invested in Bitcoin a few years ago will look back What they see is skyrocketing, but they are also optimistic about any other currency, but what they wait for is that the value returns to zero, and no one cares about it. Blockchain is a great technological revolution, and digital currency is also the future direction of the economy, but many promising projects have died too early. Even if the founding team of the project does not want to cheat a wave of listing and retreat, the capital will be drained every day. The theme and story of a new project, after harvesting the investors, left lightly, leaving a dry well that no one cares about forever. So is there a way to curb this kind of crazy speculation, and really restore the beautiful route of fundraising-doing projects-projects producing results-project scale growth? This article will attempt to answer that question and explore what Bancor might bring about.
【Super-sovereign will】
Those who cannot take orders from themselves must take orders from others. - Nietzsche, "Thus Spoke Chartres"
The term Bancor comes from the concept of a super-sovereign currency proposed by Keynes and Schumacher between 1940 and 1942. In the plan proposed by Keynes, the Bancor could be used as a unit of account in international trade, denominated in gold. Member states can exchange gold for Bancor, but cannot exchange Bancor for gold. The currencies of various countries are priced in Bancor.
In the words of Benn Steil, Bancor is not an international currency, but a ruler for the unit of account that tracks the flow of international assets and liabilities through the Union for International Settlements. Individuals also cannot hold or trade bancor. All international trade will be valued and made clear. Both countries with excess bonded asset surpluses and overburdened deficit countries will be provided with symmetrical incentives to act to restore balanced trade.
John Maynard Keynes (John Maynard Keynes) proposed an explanation. He believed that monetary policy could not fundamentally contain the depression, because the depression was more rooted in non-monetary reasons. Keynes argued that in times of high unemployment, monetary policy cannot lower interest rates, and the ability of capital to move between countries seeking the highest interest rates makes Keynesian policies vulnerable to frustration. Keynesian policies would be more effective at stimulating individual economies through closer government control of international trade and financial flows.
Under this system, each item that a member state exports adds Bancors to its ICB account, and each item it imports subtracts Bancors from. A country can limit the amount bonded in some countries by selling more products overseas than it buys, and the amount of bond that may increase by buying more than it sells. This prevents countries from running excessive surpluses or deficits, and each country's limit will be proportional to its share of world trade. Once the initial limit is violated, deficit countries will be allowed to devalue and surplus countries will be allowed to accept the devalued currency. This would make goods in deficit countries cheaper and goods in remaining countries more expensive, with the aim of facilitating trade rebalancing. Further Bancor debits or credit defaults will trigger mandatory action. For long-term debtors, this will include currency devaluation, increased interest payments on ICB reserve funds, mandated gold sales, and restrictions on capital exports. For long-term creditors, it will include currency appreciation and interest payments of at least 5% on excess credit, and up to 10% of the ICB Reserve Fund for larger excess credit. In this theory, Keynes never believed that creditors would actually pay the fines, but instead believed that they would do what was necessary to avoid them. Such an ideal global monetary system will likely lead the world to escape the cycle of economic recession.
However, because the United States was thriving after World War II, the British plan represented by Keynes was not adopted at the Bretton Woods Conference. Going back to the Bancor protocol, the Bancor protocol is proposed and applied by the Bancor Network project, which aims to use a formula to set the exchange price between digital assets. This Bancor is not the other Bancor. On the surface, both are the pricing of currencies, but the principle has not been fully inherited.
【Coincidence of double needs】
All commodities are temporary money, and money is a permanent commodity. ——Marx's "Das Kapital"
Imagine if there is no currency, then a person who wants to exchange meat for rice must find a person who wants to buy rice and wants to eat meat, that is to say, to meet the double coincidence of demand; at the same time, it must be consistent in time , it satisfies the double coincidence in time, and in addition, it is impossible for the person who wants to eat rice to meet the person who has rice and wants to eat meat. It can be seen that the possibility of the transaction being successful in the vast crowd is very small , even if the transaction can be carried out, the transaction cost will be quite expensive. As a general equivalent, currency exists to reduce the transaction cost and opportunity cost of barter transactions.
The expression "double coincidence of wants" was first coined by Jevons in 1875. "The first and foremost problem with bartering is finding two people by chance who each have exactly what the other needs. The mechanism of exchange to complete the exchange of items between the two parties must require a double coincidence, which is actually very difficult to happen.”
We live in a world where anyone can easily publish articles, songs or videos; anyone can create a communication group, and also run an online store; we have even begun to witness the birth of "user-defined currency". Different types of stores of value (hereafter referred to as "currency") have been issued and circulated for hundreds of years in the form of banknotes, bonds, stocks, gift cards, merchant points, and community currencies. Next came the first decentralized digital currency, Bitcoin. The wave of issuance of various new digital cryptocurrencies followed closely behind. Recently, we have witnessed the rise of yet another emerging asset class called “tokens” that use smart contract technology and are issued through crowdsales (ICO). However, although these currencies have essentially formed the "Internet of Value", they have not been able to interconnect smoothly like the "Internet of Information". When the switches of Internet nodes (IXs) connect the Internet of information, the role of "switches" in the currency value network is actually played by traders who are active on major exchanges.
The current model of currency exchange has a serious hindrance in that a certain amount of trading volume is required to achieve market liquidity. This makes it almost impossible for small-scale currencies, such as community currency, merchant points and various custom tokens, to find a reasonable exchange price through the market and exchange them with mainstream currencies.
The Bancor protocol introduces a technical solution to this problem by using blockchain-based smart contracts and a reserve currency. This protocol allows everyone to create tokens that hold one or several other tokens as their own reserves at a pre-set ratio. These reserve tokens can be fiat currencies, digital assets such as gold, or other cryptocurrencies such as bitcoin, ether or others. By using these reserves, newly created tokens gain value directly, regardless of transaction volume. It also directly gets the exchange rate between itself and the reserve token, so it can exchange back to its reserve token at any time, with or without a buyer.
Such "essentially tradable tokens" use a simple mathematical formula with a constant defined by issuers when they create their new currency - the Constant Reserve Ratio, or CRR.
CRR stipulates that a portion of tokens (between 0% and 100%) will be held as a reserve to back newly minted tokens. If the CRR is set to 0%, it means that newly created tokens are not backed by any reserve tokens (as is currently the case with all newly created cryptocurrencies).
If the CRR is set to 100%, it means that this newly created token is just a "white label" token of the reserve token, like a digital dollar, ETF or casino chips, etc. If the ratio is set between 0% and 100 %, which means that a portion of newly created tokens are backed by reserve tokens - this is where "credit expansion" occurs, meaning new money is created (like today's fractional reserve systems) .
This formula calculates the relationship between reserve tokens and newly created tokens to set a unit price for new tokens. This is a new form of price discovery that does not rely on the participation of a second party to a transaction, nor does it rely on a third party acting as a broker to conduct the transaction. Instead, it utilizes transparent mathematical formulas in smart contracts. This creates timely liquidity regardless of volume.
【Money flows into the abyss】
Nowadays, cryptocurrencies are exchanged and traded on centralized digital currency exchanges. Currencies with high liquidity and high popularity can take advantage of this scale and allow large-scale players to participate in investment. But this is also very unfavorable to small currencies with low market value, inactivity, and lack of liquidity. The scattered trading pairs often make them uninterested or have no market. Buyers and sellers want to be able to find their relative buyers and sellers at any time in the market. In the traditional market, there needs to be a counterparty just in time to make a deal. With the rise of digital assets and the advent of the Token era, this gap has gradually brought together huge traffic.
For example, Bob placed a buy order on a centralized exchange, intending to buy EOS. Due to the huge capital flow of the entire EOS disk, with a market price and an unexaggerated trading volume, the transaction can be realized quickly on an exchange with sufficient depth. But what if Bob buys a relatively rare currency with a small circulation? If he places a buy order, he may not be able to complete the transaction for several days or even weeks, because the supply and demand have not reached a sufficient height, resulting in low liquidity. To not be able to support enough transactions.
Due to the “long tail effect”, the top 10% of holders account for 90% of the cryptocurrencies in the entire market and 95% of the trading volume. In this case, the "long tail" is extremely scarce due to the inconvenient and effective trading mechanism. From the perspective of people's needs, most of the needs will be concentrated in the head, and this part we can call the main market, while the trading needs distributed in the tail are personalized, scattered and small quantities of demand. This part of the differentiated and small amount of demand will form a long "tail" on the demand curve. The so-called long tail effect lies in its quantity. big market.
Therefore, there are enough reasons for the use of the Bancor protocol. It manages transactions through code programs, and the algorithm calculation rate in it automatically keeps the market liquidity in a benign state, so that even currencies with poor liquidity and low transaction depth can maintain circulation. Simply put, bancor is an asynchronous price mechanism that adjusts prices through supply and demand. In this model, there are three important parameters: reserve pool r (or connector pool connector balance), leverage ratio (or CW connector weight or connector proportion), and smart token supply s (supply or transfer token) . According to the formula p*s*CW=r, the price p(price) of the smart token can be determined. In addition, there is a corresponding mathematical relationship between the reserve increment and the smart token increment.
EKT plans to use the bancor protocol to solve the exchange problem between multiple Token chains. That is, through the Bancor algorithm, a basket of other Tokens is filled in the reserve pool, and EKT is used as a connection token issued by itself, so that a currency exchange effect similar to a transaction can be achieved. As a connector, EKT can exchange tokens on all token chains through the bancor protocol. More importantly, developers need to use EKT to obtain the gas required to run dapps. When the dapp is launched, the gas is recharged by the developer to the dapp contract address. Every time the dapp is called, the gas currency will be deducted. After the deduction, the gas currency will be returned to the reserve pool. Corresponding to gas, thus forming a closed loop.
The development of traditional industries focuses on resource input, thereby driving investment in people, money, and materials, and various problems inevitably arise. With the development of information technology, the operating costs and transaction costs of enterprises have risen sharply. For the new economic era, we pay more attention to people's creativity and technological impetus. Therefore, in the new economic era, any subdivided category may suddenly explode on a certain day, and if an enterprise cannot grasp the opportunity well at this time point, and dare not make a breakthrough or pursue the victory, it will be quickly left behind. later.
The emergence of the mobile Internet has made people's ability to connect with others the strongest in history (breaking geographical restrictions), the cost of contacting others has reached the lowest in history (cheap network fees), and the efficiency of contacting others has reached the highest in the world after leaving their jobs. (Instant transmission of information). The characteristics of these mobile communication methods will inevitably make it easier for people to create groups and groups. People do not need to rely on traditional large organizations (schools, units, communities...) for life and entertainment outside of work. People are more inclined to rely on The Internet quickly discovers interested organizations or projects, and creates social and investment relationships with them. At present, the platform for decentralized applications and in-app assets developed, managed and traded in the blockchain ecosystem should take the needs of developers and users in this industry as the starting point for the design of the initial version of the project. After many projects are conceptually packaged, they are completely changed when they are actually implemented. This makes it very easy for the tokens behind the project to quickly slip into the abyss.
We believe that the Bancor protocol will become the mainstream direction of Token issuance in the future. Tokens with low liquidity can use the Bancor protocol to generate prices immediately and trade in real time. The project party issues tokens based on the Bancor algorithm, and the Bancor algorithm is announced in the white paper, and the exchange price of the tokens will be made public. If they are all sold, the price will drop. At the same time, the sell-off by the project party will also cause the price to drop sharply. This will eliminate many projects with low credibility, which is conducive to the complete ecology of the EKT multi-chain. The main technologies we can see now are also based on this starting point and serve this goal.
You can think of what functions need to be included in a minimized version of a product, and then you can derive other new functions and new gameplay on it, and even the mechanism is fair and changeable. The multi-chain structure and cross-chain value exchange can maintain the healthy operation of the entire ecosystem. In the structure formed by multiple tokens, the main chain will maintain the balance and use of all tokens, so that all tokens can operate normally and drive the harmonious development of sub-chain ecology.
Reference reading:
Reference reading:
George Monbiot．The Age of Consent ：Flamingo，2003
E. F. Schumacher . "Multilateral Clearing". Economica，1943
《EKT whitepaper》
《Bancor whitepaper》
