What if crypto token prices are discovered through consensus of utility rather than demand and supply?
“The stock market is filled with individuals who know the price of everything, but the value of nothing.” — Phillip Fisher
Scams involving cryptocurrency are extremely prevalent.
The majority of coins on the cryptocurrency market are worthless meme coins, but they nevertheless manage to dupe individuals into parting by enticing them to grow their money and making them rich in no time.
Crypto scams are currently not limited to big cities now they have even begun targeting underdeveloped villages in nations like India.
The issue is caused by the price being determined by the supply and demand of tokens on exchanges without considering their utility. The prices of tokens depend on how many people you manage to fool, and the scammer’s ability to make a sudden spike through pump and dump.
Crypto scams, also negatively impact useful coins, and all currency prices move in sync, both good coins, and bad coins get dumped in a beer market.
Bad money drives out good, so we need to eliminate the bad money.
The price of tokens derived through demand and supply is suboptimal. It doesn’t include a consensus from everyone or stakeholders), but just the interacting party. So, they are free to produce as much as negative externality they like without any consequences.
Can we discover prices through consensus and using human rationality rather than speculation, increase stability of coins prices and curtail FUD? There may be some way out.
The score schelling game can assist in determining cryptocurrency prices in decentralized exchanges by consensus and human reason.
The algorithm is provided in the following link.
But setting an exchange using score schelling game is not without challenges. One of the problem is arbitrage. If the AMM price is lower than the market price, then people will drain all the liquidity and sell it at a higher price in the market. The solution can be the ability to withdraw after a month or have a KYC so that you can’t withdraw tokens after certain limits.
Similarly, if the demand and utility of the token are more and the price is set lower, it can create a shortage, and more people will not be benefited, so, prices need to be increased through consensus.
Another way is to tax the shit coins and subsidize the good coins based on the price discovery, and this won’t impact the liquidity or create the problem of arbitrage, neither KYC is needed.
Taxing can be done using market makers like Uniswap, and taxes collected are sold at lower discovered prices to buy or collect good coins and hence plummeting the shitcoin price and good coins collected are given as subsidies while exchanging the good coins . Liquidity providers can also be incentivized with tax collected.
Rationality, Disinformation and Nudge
Only a nudge while buying from an exchange can work to many extents.
For example in real world, Adani stocks got plummeted by the Hindenburg report.
A decentralized cryptoexchange with a good governance) can provide a nudge for discovered prices, or provide research review and discussion about the advantages, disadvantages, security and application or use case of the cryptocurrency.
An example nudge: “The price of the coin derived by decentralized experts is this. Do you want to buy the token at this price?”
We also need to have good institutes to stop disinformation by scammers. Social media are usually a good target for online fraud.
We can slowly increase the complexity of exchange with passing year that includes providing liquidity at predicted prices.
An example exchange:
Discovering price in crypto exchange using score Schelling game based on coin utility.
Bitcoin = 0.1
Ethereum = 0.4
Polkadot = 0.3
Near = 0.2
Exchange:
2 Near = 1 Ethereum
To calculate the price you need to take into account:
- Utility of the token (Most priority)
- Total Supply of token
- Inflation or deflation of token
- Demand for token
KYC of user, with limits to how much they can withdraw every day or within a given period of time. One can also make anonymous accounts from kyc account using technology like TEE, such as Phala Network or Integritee network, or one can use ZeroKnowledgeProof to do so.
There are other methods, such as time-locked withdrawals, where one can withdraw funds in a predictable manner based on the DeFi algorithm, without needing any kyc.
There can be incentives for providing liquidity, and the ability sale your token at the discovered price during the initial coin offering.
Price discovery every day or weekly.
Impact of other exchanges
Even if such an rational exchange is developed, what about other exchanges that can go bad and disrupt the pricing system? If these rational exchanges grow big, then other exchanges can only have a little effect, but that’s not how it works when profit and incentives are involved.
Can we make a token available only to whitelisted exchanges by encoding it to blockchain specifications and prevent it from being traded on any other exchanges? If so, what would be the specification or intermediary logic involved in fund transfers?
There are two ways of transferring tokens: one is through the blockchain, where tokens are minted to your wallet for performing specific tasks validated by the blockchain algorithm itself. The other is peer-to-peer (p2p) transfer or wallet-to-wallet transfer. Token exchanges between trading pair occur through wallet-to-wallet transfers.
Though minting tokens based on validation by blockchain is a form of trade, when I refer to trading, I mean swapping or transferring tokens between two pairs. In my personal opinion, we don’t need high-frequency trading. A fair amount of limited monthly trading can fulfill everyone’s needs.
Why the community think? Will such an exchange possible? What are the challenges?