Zhu Jiaming recommended: CFMI pass financial model and stable currency mechanism

[Introduction] Basic Evaluation of Long Baisong's "CFMI Pass-Through Financial Model and Stabilizing Coin Mechanism" – Zhu Jiaming

Long Baixuan’s paper “CFMI Pass-to-Financial Model and Stabilizing Coin Mechanism” written in 2018 is not long, but has many originalities:

(1) Under the premise of describing the “standard CIS economy model”, a more complete improvement idea is proposed, including changing the deflation as the core economic model, establishing a financial benchmarking unit, and establishing a stable currency issuance mechanism. Develop indirect financing (coin) services to meet the different risks and benefits of investors. Among them, it is particularly important to “establish a benchmark financial accounting unit”.

(2) Summarizes the characteristics of the traditional “stabilized currency” in the contemporary monetary system, and then explores the basic issuance mechanism of “stable currency” because of the generation of encrypted digital currency, especially the comparison of “centralized asset mortgage” and “decentralization”. The difference in asset collateral, and then proposed several improvements to the “decentralized asset mortgage model”.

(3) Discussed how to control the “floating risk of stable currency” and realize the design of “stability mechanism”, pointing out that “the biggest problem is to determine the appropriate valuation discount rate”, emphasizing the “exogenousness” of assets, and introducing the measurement The “La_VaR” approach to market risk and liquidity risk.

(4) Taking Havven's stability mechanism design as an example, it deeply analyzes the market's return to the “confidence” of the currency value after the fluctuation of the stable currency and how to improve the return speed.

(5) Touched on major issues in monetary theory: “stable currency issuance and redemption” and “debt issuance and repurchase”, and tried to answer “collateral risk of collateral” and “valuation discount rate”, and “CDP” The relationship between the actual mortgage multiples.

In general, this paper provides a framework for the overall interpretation of the deep structure and mechanism interaction between the certificate, currency, and stable currency.

The author's original ability is based on three aspects of ideological resources: first, the core idea of ​​traditional monetary and financial theory; second, the recognition of encrypted digital currency; third, the science and engineering analysis method.

This article was drafted in August 2018. After a full year, the ideas and methods of this paper are not outdated. This is a paper that has both academic and practical value in the field of cryptographic digital currency theory and methods in recent years.

Finally, I need to say that I hope that the author will supplement and improve this paper in due course according to the evolution of the monetary and financial system, especially the new progress of encrypting digital currency and the pass-through economy.

July 23, 2019

About the author: Long Baiyi, Bachelor of Computer Science, Master and Ph.D. I like to study blockchain and cryptocurrency technology and monetary and financial theory. Continuous entrepreneurs. He founded Zhixiang Technology, which focuses on financial cloud computing, quantitative investment, and machine learning. He obtained 27.5 million RMB investment from Qifu Capital; he served as chief technology officer of Zhongjin Jiazi Investment Fund before starting business; Data co-founder and chief strategy officer; previously a senior executive in financial services at Accenture Consulting and IBM Global Consulting Services, providing long-term technical, business and strategic consulting services to clients in China's financial services industry, representing Accenture as Shanghai Securities Chief designer of the Exchange's new generation trading system project.

The following is the text:

This chapter first reviews the standard certificate model, analyzes its shortcomings, and proposes the CFMI certificate financial model accordingly, and proposes the necessary capabilities of the cryptocurrency financial market infrastructure to support the pass financial model.

As we will see, the stable currency issuance and stabilization mechanism is the necessary infrastructure capability to support the CFMI Passport financial model. Therefore, this chapter will also review the typical stable currency issuance and stabilization mechanism, analyze its advantages and disadvantages, and propose the CFMI stable currency issuance and stabilization mechanism.

Review of Standard Certified Economy Model

Referring to the "White Paper on Model and Practice of the General Economics", the general model for the design of the economic incentive mechanism is as follows:


Figure: A generic model for the design of the economic incentive mechanism

The commercialization of the blockchain will push the blockchain to the 3.0 stage. In the blockchain 1.0 (currency) and 2.0 (asset) phases, the blockchain should be presented as a financial-like operation, with “price discovery” in market transactions – the asset-certificate table is a digital asset that enables it to Flowing and easy to exchange, and pricing it by market transactions. However, some problems have also been exposed in the development. In addition to high speculative and price fluctuations, the main problem is that the digital assets represented by the CSI are only “idle” in the digital currency world, failing to associate with the connected ordinary users, and failing to enrich the real economy.

Saying goodbye to "idle" is a key issue to be solved in the new application of the certificate economy. Existing exchange transactions are dominated by investors and speculators, and the leader of the ecosystem is the external exchange. The new application of the pass-through economy is to return to commercial land, using the pass as the connection medium, integrating the exchange of exchanges, platform functions, industrial functions, and user communities to form a new industrial ecosystem with a comprehensive application of certification. At the same time, the community and governance are also operating under the unified logic of the evidence and in the blockchain. The new application will integrate the core business of the Internet platform with the blockchain pass-through economy into a closed-loop cycle, allowing the pass to be integrated into the actual business process rather than “idling”.

The general economic model can be improved from the following aspects.

First, change the deflation as the core economic model.

In order to reduce the tradable digital assets in the trading market (to curb excessive speculation), the CIS model encourages users to hold the certificate for a long time, emphasizing the “use value” of the certificate to the user, and even more clearly describing that “the certificate also represents User's right to use products and services." We must make it clear that emphasizing the use value of digital assets, even as a proof of the right to use products and services, is essentially a deflationary economic model.

In the deflationary economic model, the supply of goods and services is limited, whether this limited supply comes from insufficient productivity (such as masterpieces of art masters, or gold or bitcoin through mining) or artificially restricting its supply (such as government Controlling the production of salt, limited production of luxury goods, or limiting the non-excessive cryptocurrency through smart contracts) and demand continues to rise, so in the long run, the supply and demand of products and services are seriously out of balance, so products and services ( Or the price of the certificate representing their right to use) is rising.

From a financial point of view, it is more difficult to accurately price rare items because their pricing principles are not based on cost profits. If rare things have practical use value, such as salt, then the price depends on the degree of greed of the authority and the extent to which the people suffer – that is, the willingness to pay for the necessities of life; if the rare things lack the actual use value, they need to create a "consensus To maintain its value, such as the artistic value of famous paintings, the rare value of gold, stamps and bitcoin, the establishment of this consensus system is basically similar to the process of religious establishment.

Therefore, there is no real source of value in the deflationary economic model. Or the value of the monopoly profit endorsed by the authority, or the value of the investor's "feeling" increases from the higher price that the latecomer is willing to pay. In the latter case, once the “consensus” is insufficient to support the latecomers to pay higher prices, the entire economic system will collapse.

If “passport represents the user’s right to use products and services”, the implied premise here is that the supply of products and services is limited, and some users will continue to hold it because of the use value of the certificate, so the market is on the market. There will be fewer and fewer passes in circulation, and new users will continue to push up the price of the pass because they want to use the products and services to obtain a certificate from the trading market. The price of the pass is difficult to define precisely. In the short term, the price of the pass is influenced by market sentiment and market manipulators at the time; in the long run, the price of the pass depends on the degree of consensus reached by the user group and the price level that the user is willing to pay for the pass.

Deflation is not a healthy economic model, and Ethereum is a living example. At the beginning of Ethereum's founding, its goal was to become the basic public chain supporting large-scale commercial activities. The core of its economic model is the limited supply of GAS combustion. When DAPP based on Ethereum was a little bit more, DAPP competed for a limited GAS, causing its price to soar, which led to the large-scale commercial application running on Ethereum, which became economically unfeasible. It's hard to imagine that an infrastructure, such as Amazon or Alibaba Cloud, the more users, the more expensive the price.

To sum up, the deflationary economic model has three characteristics. First, create a rare thing, either productivity can not support its large-scale production, or artificially limit its supply; Second, from the financial point of view, rare things are more difficult to accurately price, because its pricing principle is not based on cost profit but based on user suffering The degree, or based on "consensus"; three, rare things will significantly encourage hoarding speculation.

Based on the above characteristics, the central government's salt tax, luxury goods, precious metals trading, speculative stamps, all fund financial scams, and the standard-passenger economic model are all in line with the characteristics of the deflationary economic model.

Although there are business scenarios in which it can be used, we believe that the deflationary economic model is clearly insufficient to support the construction of a digital new economic world that is equivalent to the real world of business.

In a rational economic model, as productivity increases, the prices of products and services become cheaper, and the source of value should be to meet the ever-expanding demand for products and services, as well as to provide reasonable profits for these products and services (price minus cost). ), these reasonable profits can be reflected in the form of dividends or taxes. In the healthy certificate economy model, the certificate is not a certificate of the right to use goods and services. The user holds the certificate because of its economic value rather than the value of use . Therefore, it is necessary to clarify the source of the value of the certificate and consolidate its value base.

Second, establish financial pricing benchmarks and accounting unit.

Although the certificate has strong liquidity and is easy to exchange, it is too volatile, so it cannot be used as a standard accounting unit to support pricing, payment and value storage. Therefore, similar payments and deposits cannot be carried out. And other basic financial services. Although the current CIS model can support the exchange of value within the CIS economy to a certain extent, it is virtually impossible to conduct pricing, payment and value storage of products and services in the CIS economy on a large scale. At present, the industry has reached a consensus that stabilizing the currency is the way to achieve standard accounting unit.

Third, establish a stable currency mechanism for the pass-through economy.

Although the currency model has already mentioned stable currency, it does not describe the stable currency issuance and stabilization mechanism. In addition, some practitioners of the frontier of the economy are exploring the “dual-currency” structure of the certificate, that is, a certificate-based project can simultaneously issue equity-based certificates and payment-type certificates, the latter being stable coins. However, mature mechanisms have not yet been developed to guide the issuance of dual currency. The value of the equity-based pass and the payment-type pass, the total value of which represents the value of a pass-through economy. Generally, the equity-type pass is not issued, and its value is expected to increase; the issuance of payment-type certificates can be changed, and its value is expected to be stable. The issuance mechanism of payment-based certificates can be centralized asset collateral, de-central asset collateral, and algorithmic banking. Meng Yan, the author of the general economics, "is more optimistic about the future of algorithmic banks."

A pass-through certificate for a pass-through economy is first of all a liquidity and tradable digital currency in the whole market, and secondly represents an accurate financial accounting unit. Therefore, it can not only support the exchange of products and services within the economy, but also support transactions within other economies or across economies. If the payment-type pass is imagined as "currency," this is equivalent to the fact that each of the general-purpose economies can issue their own "currency." This reflects Hayek’s philosophy in the “Nationalization of Currency”, where money is issued by private banks and multiple currencies compete freely.

Fourth, the development of indirect financing (coin) services to meet the different risks and benefits of investors.

A cryptocurrency exchange is essentially a direct financing service. In the traditional financial world, indirect financing through financial intermediaries such as banks or funds is actually the most important channel for corporate finance. For example, the size of US financial market bond financing is 10 times that of stock financing. ("Monetary Finance", p32)

In the general economic model, unless the investor is a consumer of products and services in the generalized economy, the certificate has a use value for him; otherwise, the only way for the investor to hold the pass is to speculate on the exchange. In reality, investors may hold a pass because they are optimistic about the future of a generalized economy and not because they need to use the products and services of the economy. Therefore, what investors may expect from a pass is only a relatively stable and safe low return. In addition, investors may also want to diversify their portfolios because of transaction costs and risk sharing considerations. These demands reflect the demand for indirect financing services for cryptocurrencies. The current exchange-centered direct financing services not only fail to meet the diversified investment needs of investors, but actually increase the demand for speculation.

To sum up, the standard CIS economic incentive model needs to change the deflation-based economic model, establish a benchmark financial accounting unit, establish a stable currency issuance mechanism, and develop indirect financing services such as cryptocurrency deposit institutions or investment intermediaries. Before discussing the stable currency mechanism of the pass-through financial model, we first review the existing typical stable currency mechanism.

The status quo of stable currency development

What does “stable” specifically mean?

Before discussing the stable currency, let us first define what it means to be “stable”. Stabilizing coins generally correspond to the currency or legal currency (legal currency) in the traditional financial concept. So what is the stability of the legal currency? Generally speaking, the value of the legal currency is stable, which means that the purchasing power of its representative is relatively stable. An important indicator of purchasing power measurement is the inflation rate. The dollar, the world’s first currency, is valued by inflation . It is generally believed that the annual inflation rate of 2% is normal, so the stability goal of the US dollar is to ensure that the inflation rate fluctuates within a percentage point of 2%. Inflation is calculated by the price of a defined set of products and services (eg, eggs, pork, daily necessities, rent, etc.), similar to the CPI Consumer Price Index. In addition, as the world's first currency, the US dollar has become the anchor of many other legal currencies, such as the fixed exchange rate of Hong Kong dollar and US dollar 7.8, and the floating exchange rate of RMB and US dollar 6.x. Therefore, the stability of other legal currency anchoring the US dollar is to maintain its stability by anchoring the value of the US dollar. Therefore, we know that the stability of the value of the French currency is mainly achieved by anchoring inflation or the value of the world's major currencies .

For digital currency, can we also stabilize its value by anchoring inflation? There are many challenges here. First, there is a need to define a set of basic products and services in the digital currency world that represent the basic and general needs of the blockchain and digital currency world, and whose supply and demand are relatively stable and therefore have little value. The real world has experienced thousands of years of development. Countries around the world have basically reached a consensus on the choice of a set of benchmark products and services that represent the purchasing power of their domestic currency, and the level of productivity development has ensured that the supply and demand of this group of products and services is relatively stable. In the blockchain and digital currency worlds, there is no consensus on the services and value of the basic public domain, not to mention other business services that can serve as benchmarks. Second, to achieve the goal of anchoring inflation in the French currency, the central bank and the corresponding monetary and fiscal policies are needed. The digital currency sector currently lacks the most basic financial market infrastructure to achieve the goal of anchoring inflation. Third, the value of the digital currency world is basically anchored in the mainstream legal currency, such as the US dollar or the renminbi, although a small part is anchored in gold. Therefore, we can reasonably believe that there is no basis for discussing digital currency anchoring inflation until the basic public chain and commercial public chain in the blockchain and digital currency fields mature and become widely used. Therefore, the current digital currency stable currency can only be anchored to the value of the legal currency . Therefore, the stability of the currency stable currency discussed in this paper comes from the value of anchoring a certain currency. Depending on the investment needs, the value of the counter currency can be anchored to different legal currencies, such as the US dollar or the renminbi.

There are four typical stable currency issuance mechanisms, such as centralized asset collateral, decentralized asset collateral, algorithmic banks, and sovereign states endorsed by government credibility. The advantages and disadvantages are analyzed separately below.

Centralized asset mortgage model

Representative items include Tether (USDT), TrueUSD, and Centre, etc., using USDT as an example.

A Coin is issued for each dollar of dollars by absorbing the US dollar reserve by a legally held institution, and promises that each Coin can redeem the corresponding currency. For example, the USDT issued by Tether is anchored at $1 because it is behind Tether's dollar deposit.

The advantage is that the technology is simple to implement, only need to use the function of the blockchain, and does not need smart contracts or even public chain technology; it can quickly provide greater stability of currency liquidity, as long as there are legal currency deposits, you can issue coins. . The USDT currently accounts for 90% of the total market value of stable currencies.

The shortcomings of this model are very obvious, that is, the legal risks and moral hazard behind the company. The legal risk is reflected in the risk of a bankruptcy, a run of money, or a deposit being frozen by a bank. Moral hazard is reflected in the fact that Tether can arbitrarily over-issue USDT if it has not disclosed its legal currency reserves. At the beginning, Shuai claimed that “the USDT leverage ratio is as high as 100 times”; Tether is also highly suspected of using its legal currency reserves to manipulate the BTC/ETH market. BTC/ETH can be observed to violently oscillate each time the USDT is issued (see figure).


Recently, stable currency based on compliance-based centralized asset collateral has been rapidly developed, such as Gemini Dollar and Paxos Standard, which avoids the legal and moral risks of USDT, but also exposes digital currency directly to the US dollar financial system as a number. The monetary and financial world brings huge systemic risks. The stable currency issuance mechanism for centralized asset collateral will also limit its size. Imagine that the issue of a $10 billion stable currency requires a $10 billion asset to be escrowed in a custodian bank.

Decentralized asset mortgage model

Representative projects include Bitshares (Bitusd), MakerDao (DAI) and unlisted Havven (nUSD).

The principle of this model is to pledge digital assets on the smart contracts of the blockchain, thereby issuing digital currencies that anchor the price of the legal currency. In this mode, each issued Coin has a corresponding digital asset behind it, such as BTC, ETH, NEO and other mainstream digital currencies. However, due to the large price fluctuations of these digital assets, it is generally necessary to guarantee a stable value of US$1 each through a risk control mechanism such as over-collateralization and compulsory liquidation. At least one collateral worth $1 can be obtained in the process of liquidation. .

The main advantage of this model lies in its decentralization thinking. The collateral is locked in the smart contract, open and transparent, and cannot be misappropriated or frozen. No individual or institution can directly control the issuance of stable currency, so there is no centralized asset mortgage mode. Legal risk or moral hazard.

The main shortcomings of this model are three-fold. There is not enough incentive mechanism to issue stable currency. The floating risk may lead to system collapse and the stability mechanism is inefficient.

In this model, there is a lack of sufficient incentives (people go to mortgage assets) to issue stable currency. In this mode, the issuance or redemption of the stable currency generally requires payment. Secondly, the collateral price fluctuates greatly, and the mortgagor will suffer additional damage from the collateral liquidation risk. If the issuance of stable currency does not bring enough benefits, but also has costs and risks, this is one of the reasons why the stable supply of stable currency is currently insufficient.

This model has a large floating risk, especially since the market price of cryptocurrency often fluctuates drastically. Once the value of the collateral falls sharply, the smart contract may not be able to close the position and may cause the system to collapse. Therefore, the current model generally chooses a digital currency with high liquidity and relatively low market volatility as the underlying mortgage asset.

There are also differences in the stability mechanisms of stable currencies. MakerDAO relies on over-collateralization and forced liquidation to achieve stability. Compulsory liquidation will result in a large additional loss for the mortgagor, so in order to avoid compulsory liquidation, the mortgagor often over-collateralizes, and the over-collateralization will reduce the efficiency of the mortgagor's funds (coin). Generally, when the value of the collateral falls close to the compulsory clearing line, the mortgagor will perform the collateral or redemption operation. This process leads to a lower stability efficiency. From the actual data, the stability of DAI is indeed no better than the questioned USDT.

Based on MakerDAO, Havven introduced a debt mechanism to enhance stability. The principle is that when the value of the stable currency deviates from the face value, Havven issues bonds from the speculators to buy stable coins to reduce the market supply of stable coins and promote the recovery of the currency. When the stable currency value rises below the face value, Havven issues a stable currency to expand the market supply and thus the currency recovery. When the stable currency is issued, the bonds are first purchased, and the additional stable currency is distributed to the mortgager according to the priority of the mortgage ratio. Because speculators buy bonds at a par value, Havven buys bonds at face value, speculators can make a profit, so they have the motive to buy the bonds when the value of the stable currency falls. In the case of additional issuance, the stability of the additional issuance according to the priority of the mortgage ratio. The currency, which will motivate the mortgagor to over-collateralize. Havven's compulsory clearing mechanism ensures that when the value of the stable currency falls, the market has strong confidence in the return of the currency. Therefore, Havven's stability mechanism is much better than MakerDAO.

Currently Havven is not online yet, MakerDAO accounts for almost 10% of the total market value of stable coins outside the USDT.

Algorithmic Banking Model (also known as "Cutting Rights Model")

Representative projects include Basecoin, Nubits, and Caborn.

The idea is to automatically adjust the supply and demand relationship of the token in the market through the algorithm, and then stabilize the price of the token in a fixed ratio with the legal currency. This model draws on the reality that the central bank regulates the supply and demand of money. In reality, the central bank can maintain the relative stability of purchasing power by adjusting interest rates (deposit reserve ratio, base interest rate, etc.), bond repurchase and reverse repurchase, and adjusting foreign exchange reserves. In the stable currency, the algorithmic bank can also ensure that the price of the stable currency is relatively stable by selling/recycling shares and adjusting mining incentives.

The advantage is that, on the surface, stable currency issuance does not depend on the collateral behind it, and can quickly provide the liquidity needed by the market.

The deadly risk of algorithmic banks is the assumption that the future demand for stable currencies will continue to grow. If the stable currency falls below the issue price, it will need to attract people to buy stocks or bonds, which is based on the expectation that the demand for stable currencies will rise in the future. If the demand for stable coins shrinks or a crisis of confidence occurs, then algorithm banks will have to issue more stocks or bonds, which in the future will turn into more money supply, and in the long run will fall into a spiral of death . There is no corresponding asset collateral behind such stable coins, and it is difficult to deal with extreme runs. The figure below illustrates the complete failure of NuBits.


Under the pass-through economy model, the algorithmic bank's stable currency model may motivate the project side's cheating behavior. Under the dual-coin structure, the fundamental value of a project is equal to the sum of the two types of certificates, while the equity-based certificate is generally not issued, and the issuance of payment-type certificates is scalable. In the case where the fundamentals of a project remain unchanged, the project party can dilute the value of the equity pass by issuing additional stable currency. This is equivalent to the real world central bank to let the currency of the people's hands depreciate by printing money. So algorithm banks may motivate project parties to learn the evils of traditional central banks.

Due to the fatal flaw of its death spiral, the algorithmic banking model has very few projects that have actually landed. The market share of stable currency is almost zero. In addition, although Basecoin has not yet been launched, NuBits, which is similar in its model, has failed completely, and it has also put a huge question mark on the future of Basecoin.

Sovereign states are endorsed by government credit

Representative projects include the Venezuelan national digital currency Petro, and the national cryptocurrency number Rial, which Iran is planning to issue. Other major countries including China, the United States and Russia are expected to issue digital stable coins that anchor their national currency with the value of their own government. Generally speaking, the national digital currency is not likely to be mined, and it is not necessarily based on asset collateral. Its issuance will be issued based on the decision of the central bank.

Its advantage is that it will have inherent advantages in terms of stable currency circulation and stability mechanism, and application scenarios can be obtained immediately in the domestic economic activities of the issuing countries.

The shortcomings are also obvious, because its issuance and stability will be based on the decision of the central bank, so in the real world, all problems of the central bank's monetary policy may be reproduced in the cryptocurrency world. A country's national digital currency will eventually be linked to the country's economic fundamentals, so the national digital currency is likely to bring systemic risks to the cryptocurrency world.

In the end, the stable currency of the sovereign state will become an important part of the stable currency of the currency. Investors may choose stable currencies of different sovereign countries, such as anchoring the value of the renminbi or the dollar, because of different value anchoring claims.

In summary, we analyzed the mechanism of four stable currency issuances, in which the centralized mortgage model, algorithmic bank and sovereign state stable currency model are not suitable for the pass-through financial model because of its fatal shortcomings. Therefore, we will build a stable currency issuance and stabilization mechanism based on the decentralized asset collateral model . Combined with the advantages and disadvantages of the decentralized asset collateral model in this section, we will focus on the following improvements:

First, improve the incentive mechanism for stable currency issuance. At present, the supply of stable currency market is seriously insufficient. In order to expand the supply of stable coins, it is necessary to expand the collateral pool. Therefore, it is necessary to focus on stimulating active mortgage behavior. Incentives are improved in several ways, including the allocation of stable currency issuance benefits, the creation of value after the issuance of stable coins (such as through payment and deposit and loan services, or through investment management) and the reduction of stable currency floating risk.

Second, reduce the risk of floating. The floating risk mainly comes from two aspects. The liquidity and volatility of the underlying assets tend to choose the underlying assets with good liquidity and low volatility as collateral.

Third, establish an appropriate stabilization mechanism. At present, Havven's stability mechanism is relatively mature. When the value of the stable currency fluctuates greatly, the forced liquidation mechanism can ensure that the market has strong confidence in the return of the currency. When the value of the stable currency fluctuates slightly, the bond issuance and repurchase mechanism can ensure the rapid return of the currency. .

Overview of the Pass Financial Model

After the analysis in the previous section, we have determined that the pass-through financial model uses the “all-weather pawn shop” model to implement de-centered mortgage cryptocurrency assets (which can be pass certificates, cryptocurrencies or more complex digital assets such as cryptocurrency fund shares). Issue stable currency. The asset mortgagor of stable currency will be a balancing force in the cryptocurrency trading market. Their role is to help asset prices grow steadily and provide low-cost liquidity.

This section will introduce the revised model of the pass-through economy, discuss the source of the pass value of the pass-through financial model, the source of the stable currency issue collateral pool, the floating risk control of the stable currency and the design of the stability mechanism.


Revised pass-through economic model

A pass-through economy can issue equity-based certificates and payment-type certificates, of which the former can be issued directly or through mining, and the latter is derived by mortgage the former , as shown in the above figure.

Each pass economy is a decentralized autonomous organization DAC. Among them, the certificate is issued by the project party to raise initial funds for the development of a project. The project side uses initial funding to create and operate a range of goods and services to create value for users and communities. The project side can also inspire other people in the community to provide goods and services through the form of rewards/gifts. All goods and services in the economy are priced in stable currencies ( non-pass ). The user pays a stable currency to the project party or other service provider to purchase goods and services. The project party allocates a portion of the income from the provision of goods and services (in stable currency) to the holder of the certificate in the form of dividends. Investors can purchase and hold a pass through the cryptocurrency market. Users can also be assigned a new pass through mine mining. The project party will issue a new certificate (ie “mining”) based on the economic value created by the user's behavior (in stable currency) to ensure that the newly issued certificate does not dilute the economic value of the issued certificate. As the core and lubricant of the project side, users/communities, investors and goods/services, the certificate represents the holder’s right to claim the rights of the economy, the right of the economy to create economic value dividends, and Participate in community governance and voting rights. Note that the certificate does not represent the right to use the goods and services of the economy . Anyone must use a stable currency to purchase the right to use goods and services in the economy.

In the dual currency structure of the pass-through financial model, the project party can issue equity-based certificates and payment-type certificates. The equity pass carries the fundamentals of the value of the pass-through economy, and the payment-type pass is responsible for the measurement, transmission and storage of value. Without the mortgage of the former, there would be no derivation of the latter. Therefore, all equity (including the mortgaged part) of the equity pass represents the full economic value of a pass-through economy; or all circulation (excluding the mortgaged part) equity pass plus all payment-type certificates, It also represents this value. Considering that the payment-type pass is derived, the equity pass is a discounted mortgage, so strictly speaking, the latter represents a slightly smaller value than the former.

In theory, each of the generalized economies can establish their own stable currency issuance and stabilization mechanism in accordance with the above principles. Similarly, each economy can also establish its own exchange. If each economy establishes its own independent exchange or stable currency system, this will not only cause a lot of waste of resources, but also unnecessary. Because exchanges and stable currencies are actually only a part of a complete and complex CIS financial system, which requires long-term, continuous and professional construction, which is an excessive burden for the CIS economy with the application scenario as the primary goal. Therefore, we believe that individual CIS economies do not have the need to build an independent stable currency system. Stabilizing coins are part of the public infrastructure of the CIS. In the following, we will not mention the "Payment Pass" separately and replace it with a stable currency; unless otherwise stated, the "pass" is also the "Equity Pass".

further discussion:

Question 1: Why is it necessary to measure economic value in stable currency?

The use of stable currency to measure economic value is to clear the economic account of incentives from a financial perspective and avoid unintentional or intentional scams. If the economic value of the incentive is measured by the pass, most of the projects are issued/mining with little cost, and the project party may be encouraged to over-issue but the actual economic value is not high to motivate the user, which is close to a cheating behavior. At the beginning of the project, because the supply is limited, or the market is operating properly, the certificate may be maintained at a relatively high price level, thus creating a expectation that the price of the certificate will continue to rise; as the project progresses, the certificate may be super The market and operating costs have increased, and the price of the license that lacks fundamental support may fall rapidly. Therefore, in the form of a dividend, the economic value obtained by the user cannot be locked; but in the form of a stable currency, the economic value obtained by the user is permanently locked. The economic value created by mining must also be locked in stable currency, and the number of newly issued certificates will be determined based on the price of the certificate to ensure that the mining results will not dilute the existing economic value of the certificate.

For example, suppose the platform currency of an exchange (ie, the pass), the incentive mechanism is designed to account for 20% of the daily transaction fee income for dividends, 30% for mining, assuming a transaction fee income of 1000 for a day Ten thousand dollars (calculated in stable currency, or other "rigid" cryptocurrency such as Bitcoin or Ethereum), the price of platform currency on the day is $10. The correct approach should be that the $2 million dividend is allocated to the holder of the platform currency in the form of a stable currency, and the economic value of $3 million needs to be injected into the newly distributed 300,000 platform coins.

In summary, income is obtained in stable currencies or “rigid” digital currencies (such as Bitcoin and Ethereum), but dividends are distributed in the form of a pass, and there is a high probability of being designed as a financial scam. Incentive economic value measured in stable currency reduces the possibility of project side cheating.

Question 2: Can the payment-type pass not be issued in the form of a mortgage-type pass?

If the payment-type pass is not issued through the mortgage-type pass, the payment-type pass can only be issued in the form of an algorithmic bank or a mortgage of other assets. Once the payment pass is issued, it represents a basic value unit that can be circulated, and the user must be given confidence as a unit value storage tool. Where does this confidence come from, credit, algorithms, asset collateral? In the field of cryptocurrency, credit is currently a very scarce resource, and the birth of a certain credit-based stable currency has not yet been seen. In the previous chapter we have discussed the "death spiral" of algorithmic banks, and there is no successful case for Algorithm Bank so far (the only NuBits on the line have declared a complete failure). Another method is asset collateral. The project party can claim that it “collateralizes” certain assets to support the payment-type certificate. This centralized and lack of transparency of asset collateral is far less reliable than USDT. Although the USDT has been widely criticized for its lack of transparency, it has gained wide acceptance. There is no reason for the user to abandon the USDT and choose a payment pass that has no transparency but no acceptance. Therefore, the only feasible method is the de-centered asset mortgage (or some kind of deformation). The project party can indeed mortgage any digital asset to issue a payment-type certificate, but its own equity certificate may be the best choice because of creation. The new (locked) demand for equity-based certificates reduces its supply in the trading market, and the actual result is that it may push up the price of equity-based certificates. Therefore, it is a good plan to issue a payment-type pass for the mortgage-type pass.

Question 3: Is there an upper limit for the issuance of equity-based certificates?

The issuance of equity-based certificates is mainly achieved through initial token issuance and subsequent mining. As mentioned above, the principle of mining is to measure the economic value of mining with a stable currency, and the number of newly issued certificates guarantees that the economic value of the existing certificate is not diluted. Under this premise, there is no need to set an upper limit for the newly added pass for mining.

In many business environments, user behavior contributes to a prosperous ecosystem but does not directly create economic value, such as adding new users and increasing user activity. Therefore, there must be a reasonable economic model to evaluate and calculate the economic value of user behavior.

At this point, we can find:

First, the characteristics of stocks and traditional financial stocks are very close, for example, they represent the claims, dividends and voting rights of an economy. But their main difference is that the universal convenience of the value transfer brought by the cryptocurrency attribute of the certificate can make the incentives such as gift-giving, dividend-sharing and mining become extremely convenient.

Second, because the cryptocurrency world lacks “funded currency”, we have the opportunity to use the collateral mortgage to issue stable coins, which is a “dividend” that is different from traditional stocks.

The source of the value of the general economic model

According to the above analysis, the certificate has the dual attributes of the stock and the currency in circulation (after the stable currency is derived).

The most primitive definition of a stock is that a holder can expect to receive a dividend (ie, a dividend) each year. Therefore, the price of the stock is the embodiment of the net present value of all expected dividends in the future. By the same token, one of the sources of evidence is the expected dividend income in the total value of products and services created by the project party in a generalized economy. If in this economy, the value creation of certain products and services does not involve dividends, then they have no influence on the fundamentals of the certificate value.

In addition, after the certificate is derived from the stable currency, it becomes the currency of circulation. Its functions include pricing, payment and stored value. The most direct value of money is reflected in interest rates. Therefore, the second source of the certificate value is the risk-free rate of its stable currency. In actual operation, after the stable currency enters the circulation system, it may be used in various scenarios such as trading, payment, and savings, and the calculation of its value is diversified. We will discuss it in a special section.

The stable currency mechanism of the pass-through financial model

This section will discuss the floating risk control and stability mechanism design of the Stabilized Coin.

The CFMI stable currency issuance and stabilization mechanism, in essence, is the cryptocurrency “central bank” of the former central bank governor Mo Wen Jin, who proposed the “all-weather pawn shop” model in the “End of Financial Alchemy”. The authors argue that the only way to provide sufficient liquidity in the event of a financial crisis is to lend on the basis of poor mortgages. The risks in the overall system are highly correlated with banks, and the classic final lender concept needs reform. The author replaces the lender with an all-weather pawnshop. In extreme uncertainty, pawnshops can lend to almost everyone, as long as the borrower's collateral is sufficient to cover the value of the loan. If the CFMI Stabilization Coin mechanism is to play the role of an all-weather pawn shop, the biggest challenge is to determine the appropriate valuation discount rate.

The difference between the amount of money the central bank lends and the value of the collateral obtained is described as the “valuation discount rate” for such collateral. The valuation discount rate has a large range of fluctuations. When the collateral is a highly liquid financial asset, such as a government bond, then he may only have 1% or 2%; and when the collateral is a personal loan with very limited information, That could be a high discount rate of 50% or even higher. The higher the liquidity of the collateral, the lower the volatility, and the lower the value of the valuation discount rate.

The core idea of ​​the “all-day pawnshop” model “central bank” is that there is no financial leverage, and all currency issuance is based on actual asset collateral. The “all-day pawnshop” model of “central bank” is a healthy and system-free risk currency issuance system. The core elements of its focus are mortgage valuation and valuation discount rates.

The valuation discount rate is essentially the embodiment of the floating risk of collateral assets. The asset floating risk is mainly reflected in market risk and liquidity risk. The current mainstream market risk and liquidity risk measurement method is still the VaR method.

The actual transaction price of an asset is divided into two parts, representing the intermediate price of the intrinsic value of the asset, and the transaction cost due to market liquidity factors. The traditional VaR method only measures market risk based on intrinsic value, and actually only considers the fluctuation of the intermediate price. The risk value method of liquidity adjustment, namely the La_VaR method, takes into account the risks of the above two parts. Therefore, we can see that La_VaR contains market risk and liquidity risk in the calculation of valuation discount rate.

The market liquidity factors mainly include: the bid-ask spread factor —reaction assets and market characteristics, exogenous; the number of asset transactions and the time of liquidation —only affect specific investors, and are closely related to the investor's trading strategy and endogenous.

Therefore, the market liquidity risk considering the bid-ask spread factor becomes the exogenous market liquidity risk, and the VaR value calculated by incorporating the bid-ask spread factor into the traditional VaR calculation framework is called exogenous La_VaR . The calculation method is called exogenous La_VaR method. Similarly, the market liquidity risk considering the number of asset transactions and the time of realization is called endogenous La_VaR , and the calculation method is called endogenous La_VaR method .

Our model uses the exogenous La_VaR method (the endogenous La_VaR method can also be used). Based on whether the bid-ask spread is fixed, the corresponding calculation formula can be derived.

The derivation process is temporarily skipped and the results are given directly here.

The exogenous risk value La_VaR when the bid-ask spread is fixed is:


Where W is the initial capital or portfolio value, σ is the volatility of the mark-to-market price, s is the bid-ask spread, and α is the quantile at a certain confidence level.

When the bid-ask spread is not fixed, assuming that the log-return rate follows a normal distribution and the bid-ask spread has stochastic volatility characteristics, the exogenous risk value La_VaR at a certain confidence level is:


Where α is a quantile at a certain confidence level. 7 , 8 Represents the mean and standard deviation of the bid-ask spread, respectively.

If the asset's daily rate of return is used instead of the mark-to-market price volatility, the exogenous risk value La_VaR is expressed as:


Where μ and σ ̃ are the mean and standard deviation of the daily rate of return, respectively.

According to the exogenous risk value La_VaR, the valuation discount rate ValDisRat can be obtained:


It can be seen from the formula that at a given level of confidence, the valuation discount rate of the collateral is directly related to the mean and standard deviation of the asset's daily rate of return, and the mean and standard deviation of the bid-ask spread. specifically,

  1. The smaller the standard deviation of the daily rate of return, the more stable the daily rate of return on assets, the smaller the market risk of assets, and the lower the discount rate of valuation;
  2. A positive daily rate of return means that the asset tends to appreciate; the greater the average yield, the greater the appreciation. The more obvious the trend of asset appreciation, the smaller the market risk and the lower the valuation discount rate. If the mean is negative, it means that the asset tends to depreciate, the greater the market risk, the higher the valuation discount rate;
  3. The bid-ask spread directly reflects the degree of divergence between the long and short sides of the market. The smaller the bid-ask spread, the lower the cost of providing liquidity (the market maker), and the lower the liquidity risk of the asset, so the discount rate is higher. low.

When the holder of the collateral exchanges the stable currency, it is natural to exchange more stable coins at a lower valuation discount rate. According to the above formula, the following behavior is encouraged to reduce the valuation discount rate:

√ Help assets to increase value smoothly, or; √ avoid violent fluctuations in asset prices, or; 提供 provide liquidity through market making, reduce bid-ask spreads, and reduce transaction costs.

Accordingly, the following behavior is suppressed and may push up the valuation discount rate:

√ Lead to asset depreciation, or; √ promote asset price volatility (standard deviation of yield), or; √ lack of liquidity.

For the projects that have already issued their own tokens, the above mechanism for converting the stable currency through mortgages provides opportunities for market participants (such as project parties or private placements) with a large number of tokens to trade outside the exchange to create value. In order to convert the tokens held by them to the most stable currency (to create other values, such as payment, deposit and loan, etc.), the project party or private placement agency will be encouraged to help maintain the stable appreciation of assets and avoid sharp fluctuations in asset prices. And provide liquidity through active market making behavior. It can be seen that the mechanism for issuing stable currency (ie payment-type pass) through the mortgage-based certificate provides a new balance of checks and balances for the current trading ecology. The role of this force is to stabilize prices and provide low-cost flows. Sex.


further discussion:

Question 1: What is the relationship between the valuation discount rate and the MakerDAO collateral mandatory clearing line?

MakerDAO's mandatory clearing line is a 1:1.5 collateral ratio that triggers liquidation when the value of the collateral falls to nearly 1.5 times the value of the stable currency. It can be understood that this 1:1.5 mortgage ratio corresponds to a one-third valuation discount rate. The difference is that the “all-weather pawn shop” model dynamically adjusts the valuation discount rate based on market risk and liquidity risk for each asset. The dynamic nature of the valuation discount rate means that as the risk of floating asset volatility changes, the mortgagor may be required to add collateral/redemption stable currency or distribute new stable currency for them. MakerDAO enforces a static valuation discount rate for all assets.

Question 2: Does this model work for different asset classes?

The model's pledged assets can be multiple types of digital assets, including digital tokens, or digital token fund shares. The concept of valuation discount rate applies to different types of digital assets, but different digital asset valuation discount rates may be calculated differently. For example, digital token funds generally have a liquidation line, so their most deteriorating market risk is predictable, so the calculation of market risk may be very different; the share of digital token funds is generally more liquid than digital currency. The difference is that the open redemption window may be calculated in weeks, months or years, or its share is mostly through OTC block trading, so its liquidity risk calculation may take a very different approach.

Question 3: Can I calculate the valuation discount rate on different time scales?

In the above discussion, the market risk is measured by the mean and standard deviation of the daily return on assets, so the market risk is calculated on a daily basis; the liquidity risk is measured by the mean and standard deviation of the bid-ask spread, and it is not explicitly On what time scale is required to calculate the bid-ask spread. In general, the measure of liquidity risk is related to the time interval in which an investor expects to observe the market and the number of time intervals the investor expects to realise the asset. Considering the general volatility of several currency assets, in order to assess and respond agilely to their floating risk in a more timely manner, market risk and liquidity risk can be performed on a smaller time scale (eg hourly or even every 5 minutes). measure. Both risks can be measured on different time scales. In general, the time interval for measuring market risk should not be too small, otherwise it may trigger frequent valuation discount rate calculations, resulting in a stable adjustment of the stable currency issuance mechanism; the time interval for measuring liquidity risk should not be too large, because measuring liquidity The purpose of risk is to assess the transaction costs of rapidly realizing assets, and the excessive time interval leads to the loss of the meaning of measuring this risk.

In a practical system, you can consider measuring market risk and liquidity risk every 5 minutes, respectively.

Stabilizing the stable mechanism of the financial model

In the traditional financial world, maintaining the stability of the value of the legal currency is a rather complicated system project, relying on the central bank to adjust the money supply of the commercial banking system through monetary policy (such as adjusting the deposit reserve ratio, interest rate adjustment, open market operations, etc.). And with fiscal policies such as budget and large-scale infrastructure investment. In the field of digital currency, the financial market infrastructure is almost blank. Our model is only a central bank that implements a very simplified “all-weather pawn shop” model. Therefore, we only suggest some relatively primitive and rough stabilization mechanisms in this paper. We will describe a more systematic digital currency central bank and commercial banking system and stability mechanisms in a special white paper.

Here we first review Havven's stability mechanism design. The core idea includes two points:

1. By setting a compulsory clearing line to ensure a strong confidence in the return of the currency when the stable currency value fluctuates greatly;

2. Through the bond issuance mechanism and encourage over-collateralization, ensure that the stable currency value can return quickly when it is fluctuating in a small range.

The design of the stable currency stabilization mechanism of the general financial model will mainly draw on the stability mechanism of Havven. Before introducing the stabilization mechanism, first introduce several concepts, mortgage warehouse, mortgage multiple, clearing mortgage multiple, benchmark mortgage multiple, target mortgage multiple.

When the mortgagor wants to lend a stable currency, they first create a mortgage debt bin (CDP) and then use the digital asset as collateral to generate a stable currency. In this CDP, the ratio of the value of the collateral to the value of the borrowed stable currency is defined as the mortgage multiplier ColMul real . The mortgage multiple calculated according to the valuation discount rate ValDisRat of the collateral is called the clearing mortgage multiple ColMul liq .


If CDM's ColMul real is lower than ColMul liq , we need to perform the clearing process. In order to avoid frequent execution of the liquidation process, the CDP's collateral multiple should be slightly more than the clearing pledge multiple. We define the benchmark pledge multiple as:


Where θ is the adjustment parameter of the benchmark mortgage multiple, such as 0.05, which is equivalent to the minimum mortgage ratio required by the system. The greater the ratio, the better the system's scalability against the collateral risk of collateral, but it reduces the bourgeois's asset use efficiency. When creating a CDP, the system distributes the stable currency according to ColMul real , so ColMul real is equal to ColMul real . Later, the mortgagor can change the ColMul real to deviate from the benchmark by adding or subtracting collateral or redeeming the stable currency. In general, it is encouraged to increase the collateral or redeem the stable currency so that the pledge is out of the base (the corresponding incentive mechanism will be discussed later); reducing the collateral so that the pledge is lower than the benchmark is allowed but not encouraged because Below the benchmark will put CDP at risk of being liquidated.

Compared with the fixed liquidation ratio of MakerDAO, the collateral valuation discount rate in this mechanism will be dynamically adjusted according to the asset floating risk, so the actual mortgage multiple and the benchmark mortgage multiple of CDP are dynamically changed.

The stability mechanism of the stable currency is achieved through mechanisms such as compulsory clearing mechanism, stable currency issuance and redemption, and bond issuance/repurchase.

Compulsory liquidation

The valuation discount rate of the CDP collateral is calculated during each time period of the floating risk measurement, thus updating the clearing pledge multiple, the benchmark pledge multiple, and the actual collateral multiple of all collaterals. The operation of compulsory liquidation of the CDP whose mortgage multiple has been less than or equal to the clearing mortgage multiple.

The system mandatory clearing will sell the collateral to repurchase the stable currency, continuing this process until the CDP's collateral multiple is equal to the benchmark pledge multiple. In addition to the losses caused by the fall in the price of the collateral, the mortgagor will face additional losses in selling the collateral at a discounted price. Therefore, the mortgagor will be motivated to actively increase the collateral or redeem the stable currency to avoid the additional discounted price to clear the collateral loss.

After the system repurchases and destroys the stable currency, the reduction in the supply of stable coins in the market will help stabilize the recovery of the currency price.

Stabilizing currency issuance and redemption

The direct reason for the increase in stable currency is the insufficient supply of stable coins in the market. Discussed in two situations:

The first is the reduction in the supply of stable coins in the market, which leads to an increase in the price of stable currencies, thus motivating people to mortgage more assets to obtain stable currency earnings. Whether adding collateral to an existing CDP or creating a new CDP, the system will distribute the stable currency at the base collateral multiple of the time. Stabilized coin supply increased and prices stabilized.

In the second case, there is no increase in collateral, but because of the reduced risk of collateral floating, the discount rate of valuation is reduced, so the actual pledge of CDP increases and the benchmark pledge is reduced. In order to avoid one-time investment in excessive stable coins into the market (causing excessive price fluctuations), we recommend to add new stable coins multiple times. According to the following algorithm, a new stable currency is distributed to each CDP.

1. Determine the amount of stable currency issued; 2. Set all CDPs whose actual mortgage multiple is greater than or equal to the base multiple of the benchmark to form a queue according to the actual mortgage multiple; 3. If the queue is empty, go to 7, otherwise take the queue head CDP 4. Distribute the amount of stable currency so that the actual mortgage multiple of CDP is equal to the base pledge multiple; 5. Remove the CDP of the queue header; 6. If the stable currency issuance is greater than zero, repeat 3; 7. Exit.

It can be seen from the above algorithm that the higher the actual mortgage multiplier, the higher the priority will be assigned the newly added stable currency. CDP with a higher proportion of over-collateralization will receive a higher proportion of stable currency issuance compensation. This will motivate users to over-collateralize. The more users over-mortgage, the more stable the entire stable currency system will be.

When the risk of collateral float increases, the increase in the valuation discount rate leads to a decrease in the actual pledge of CDP and an increase in the benchmark pledge. The mortgagor is facing an increased risk of liquidation. The mortgagor can increase the actual pledge of its CDP by actively redeeming the stable currency or adding collateral.

Debt issuance and repurchase

When the value of the stable currency deviates slightly from the benchmark, we need a mechanism that is more agile than compulsory liquidation, which can prompt the price of the stable currency to rise back to the benchmark quickly. Therefore, the debt and its auction mechanism are proposed here.

When the value of the stable currency deviates slightly from the benchmark, the system issues bonds, recovers stable coins and destroys them. Debt is issued at a discounted price below the nominal value of the stable currency. Eligible market participants can participate in the auction of the debt, with the highest bidder. When the system issues new stable coins, it first repurchases all current debts; the longer the bonds are issued, the higher the priority is repurchased; after the repurchase of all the debts, the new stable coins are distributed to the CDP. .

Because the system sells debt when the price of the stable currency is low, and buys the debt when the price of the stable currency is high, the system is cost (losing money). The auction mechanism of the debt guarantees that this cost is reduced as much as possible.

The normal operation of the issuance of bonds and the repurchase mechanism depends on the market's expectation that the price of stable coins will rebound. Without this expectation, no market participants would participate in the bidding bond. The compulsory liquidation guarantees that when the actual mortgage multiple is close to the benchmark mortgage multiple, CDP will be forced to liquidate and repurchase the stable currency, so the market supply of stable currency will decrease and its price will rise. Therefore, the compulsory clearing mechanism guarantees that the price of the stable currency will definitely rise.

Stabilizing the incentive mechanism

The core element of a stable currency system is the quality (ie, the risk of floating) and size of the collateral pool. So the core of the incentive is to motivate more high-quality collateral as the underlying asset for stable currency issuance. We will return a portion of the proceeds from the stable currency issue to the owner who contributed the collateral for the stable currency issue in the form of dividends.

Because the current financial intermediary services in the digital currency financial market are still very scarce, the sources of income from stable currency issuance are limited. At present, the most important stable currency issuance income comes from the handling fee for stable currency transactions. The main incentives include: first, the transaction fee is free on the trading platform; second, 50% (or other ratio) of the stable transaction fee income on the trading platform (or other settlement period) The number of stable coins distributed is equally distributed to each CDP.

We expect rapid growth in indirect financing services in the digital currency financial markets, such as banking and asset management. The spread is the bank's most important profit model. A portion of future spread income will be returned in the form of dividends to those who contributed the underlying mortgage assets to the stable currency issue. We will describe the digital currency banking system in more detail in an additional white paper.

With the improvement of the digital currency financial market infrastructure, the issuance of stable currency will gain a wider range of revenue sources, such as transaction platform fee income, bank intermediary service income (payment and settlement, etc.) and spread income. Therefore, we expect the stable currency issuance system to receive stronger economic incentives in the future.

A basic principle of the economic incentives for the pass is that all economic incentives to stabilize the currency must be in the form of stable currencies . In the form of tokens (or equity-based certificates), it is possible to design a fund game or a Ponzi scheme. We will explain this in more detail in the “Certification Incentives” chapter of this article.

This article was authored by the author Long Bailu, the exclusive launch of Babbitt Information, please do not reprint without permission.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!


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