It is often claimed in the securities clearing community that we need better projects to improve the cryptocurrency market. The author believes that this view is a bit short-sighted, because the author does not believe that the quality of the issuance of the certificate itself is sufficient to achieve marketization and liquidity in the securities pass ecosystem . In my opinion, the securities pass still lacks some basic building blocks to become a truly relevant financial mechanism. Fundamentally, we need disclosure and information symmetry mechanisms to achieve fairness in the securities clearing market. This article would like to explore the disclosure and information symmetry mechanisms that may be relevant to the current generation of securities pass platforms.
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For securities passes, the importance of disclosure agreements is conceptually obvious. How can we expect to get a fair pricing and trading model without information about crypto assets? However, we also have products like Bitcoin, which have no real disclosure model and are relatively fair in pricing. Another example is the CDO, which has a lot of relevant information disclosure, but the price may still be out of control. While disclosures are undoubtedly pricing drivers or a fair market dynamic, they also require sound distribution and consumption models to function effectively.
Friction between information disclosure, decentralization and network effects
A very interesting idea is to consider disclosure in the securities pass as a complement to decentralization and network effects. The core principle of this view is that there is a linear correlation between disclosure and its decentralization level in a given encrypted network. This theory is different from the traditional information asymmetric economic model, but seems to be very suitable for encrypted networks.
Decentralization and disclosure
Traditional thinking about disclosure and information asymmetry stems from theories of economists such as George Akerlof. As a winner of the Nobel Prize in Economics, Akerlof created a theory about asymmetric information in financial markets. In a 1970 paper entitled "Lemon Market," Akerlof considered an example of a seller who owns a private message of used car quality. A buyer wants to buy a car, but is only willing to pay a fair price for it. Suppose there are nine different cars, each with its own fair value, which is $100, $200, $900. Since buyers cannot know all about quality, owners of low-quality cars will always claim that they are selling high-quality products worth $900. Fair prices will reflect the average quality of the market, in this case $500. However, in this case, sellers with a car value of more than $500 found that the price was too low and therefore withdrew from the market. Then the average price must drop to $300, causing more sellers to quit. In the end, no seller other than the worst-quality car worth $100 is willing to sell the car at the price the buyer is willing to pay.
Akerlof's Lemon Market Theory
The Akrolof theory on information asymmetry provides strong support for the need for disclosure. However, how do we explain that financial assets such as Bitcoin or Ethereum have obtained fairer pricing without any formal disclosure mechanism? In fact, in a network like Ethereum, access to information is completely asymmetrical, because the core team of the Ethereum Foundation can not only get more information, but also influence the behavior of the network. How can Ethereum achieve market fairness? The answer is related to the level of decentralization in the Ethereum network. In a fully decentralized ecosystem, price fairness is achieved through the behavior of network participants rather than through information flow. In a decentralized ecosystem, any unfair behavior will be balanced by other network participants without having to rely on a centralized authority. In this sense, disclosure is not as important in a fully decentralized ecosystem as it is in a centralized market.
In contrast, the securities pass is based on a fairly central model development with very small network effects . In this case, disclosure may play a key role in the fairness of the market. From the perspective of different cryptographic assets, the relationship between information disclosure and decentralization is shown in the following figure:
Disclosure and decentralization
If the securities pass changes with the development of the network ecosystem, the importance of disclosure may be balanced by the corresponding network effects. At present, disclosure is still the basic building block of the securities pass, which should be realized through the blockchain protocol. As mentioned earlier, publishing information is only part of the disclosure, and we only need an effective mechanism to digest it.
The programmable disclosure of the securities pass relies on modeling the information sharing workflow as part of the blockchain protocol and can be used during the issuance and transfer of securities passes. Securities disclosures can be used not only by people, but also by agreements to achieve fair market transactions. If we consider the level of centralization of the current securities pass platform, this concept becomes a bit tricky because the model that uses network participants to verify information is simply not available. Although the author has no specific ideas, there are several principles that seem to be common to all models:
• Disclosure predictor : This component represents a trusted entity that publishes important information about the chain that is publicly available for the securities pass. Disclosure predictors should be able to collect information on demand or on time and associate it with the corresponding encrypted securities.
· Disclosed payload : To achieve true programmability, disclosure needs to be encoded in a format that allows for indexing and querying. Unstructured data formats such as PDF do not help to achieve programmable disclosure.
• Disclosure of the query model : In order to be used in the transfer of securities passes, disclosure must be accessible at the protocol level. To do this, we need a mechanism to query and access the information encoded in the disclosed payload.
These three components: the predictor, the payload, and the query model form the basis of the securities pass disclosure agreement. Depending on the composition of the securities pass ecosystem, specific interactions between participants in the disclosure process can be modeled in different ways. Some of the ideas in an agreement like TruSet may apply to securities passes.
For the current securities exchange market, disclosure remains an unresolved issue and one of the main obstacles to ecosystem development. Disclosure should be more than just publishing a document, we should focus on a programmable model that can be integrated into a securities pass. In a semi-centralized ecosystem that supports securities clearance, disclosure should be considered as one of the basic building blocks of the next-generation securities clearing platform.