Fragments: A Path to Ideal Money - Evan Kuo presentation

Investments Network marcus evans
Investments Network marcus evans Web Content Manager at marcus evans Summits em Investments Network marcus evans
Cryptocurrencies - A Path to
Ideal Money
Evan Kuo, www.fragments.org
Mathematician and economist John Nash, famous for
his Nobel winning work on non-cooperative game
theory, first conceived Ideal Money around the early
1960’s.
At the time he became troubled by the fact that certain
currencies, as part of the International Monetary Fund
(IMF), had agreed to fix exchange rates with one anoth-
er. Nash’s concern was that a fixed exchange ratio be-
tween currencies would encourage hyperinflation
Troubled by fixed exchange ratios ...
Let’s say Alice & Bob agree to a fixed rate:
1 Alice Coin = 1 Bob Coin
and that:
1 Bob Coin = 1 Gold Nugget
• Alice can always exchange for Bob coins, and 	
then redeem them for gold
• So Alice stands to benefit by inflating her coins as 	
fast as possible, trading for Bob coins, and then 	 	
gold, before Bob catches on
Not a Healthy Game ...
• Thinking this was not a healthy game, Nash 	 	
immediately traded his USD for Swiss Francs
• He considered Swiss Francs “better money” 	 	
because they were not subject to fixed exchange 	
ratios, and were more likely to hold their value 	 	
against gold
• Nash went on to imagine what an “ideal money” 	
would be like and spent the last 20 years of his life 	
promoting the concept of Ideal Money
Ideal Money (Abstract)
Definition: A solution to the conflict between near-term domestic interests
and long-term international interests that occur, when using a country’s
currency to stabilize international currencies.
Today Independence is much easier
• We have thousands of new and government 	 	
independent cryptocurrencies like Bitcoin and 		
Ethereum, any of which could adopted as global	
reserve currencies.
We can simplify our definition by dropping the
parts about geopolitical conflict
Ideal Money (Simplified)
Definition: Ideal Money is a solution to the conflict between near and long
term interests when creating a stable cryptocurrency.
But can we state this concretely?
• This definition is simpler, but still abstract
• Many economic theories can now be empirically 	
tested using cryptocurrencies, but we need testable 	
theories.
Let’s think in Functions of Time
• Imagine Store of Value as a simple likelihood 	 	
function over time
• This function takes time as its input (given an 		
initial sum of money) and returns the likelihood of 	
retrieving the purchasing power committed
Fiat looks good zoomed in
Gold looks good zoomed out
Ideal Money must look good both ways
Ideal Money (Concrete)
Definition: Ideal Money is a cryptocurrency that stores
both near and long term value.
But How? The Inflation Paradox
We encountered this problem immediately:
• Frustrated, I reached out to Paul and Joey at 	
Pantera. After some thought, Joey reminded us 	
that when a stock splits, supply increases but your 	
net holdings are unaffected.
• Excited, we went on to design a protocol for crypto 	
currencies that split on inflation.
The mechanism of inflation that keeps fiat currencies
stable near-term is also what devalues them long-term.
Fragments
A low volatility cryptocurrency that splits on inflation.
The currency is designed to store both near and long-
term value converging on the characteristics of Ideal
Money. Our first token is the USD Fragment, price tar-
geted at the US Dollar.
A High Level Example
Floating Price Model
Imagine you purchased 1 BTC at $1, and now have 1 BTC
worth $10000.
Fragments Model
Now imagine an alternate world in which you again pur-
chased 1 BTC at $1, but this time you have 10000 BTC
each worth $1.
In Practice ...
To prevent balances from shrinking:
•	 We first capitalize an ETH reserve
•	 And then split proportionally to token holders
This reserve capitalizes under expansion so that it can
buy back and remove tokens under contraction
Dynamic Reserve Ratio
The Fragments reserve intelligently computes reserve
ratio in each rebase period. It responds to two differen-
tial factors:
•	 Relative change in Supply
•	 Relative change in Purchasing Power
•	 Allocates more to reserve under rapid expansion
•	 Allocates less to reserve under gradual expansion
* More on this in the Appendix
A Buy & Hold Hedge
Major cryptocurrencies today, tend to be highly cor-
related when looking at a 90 moving average. When
dips occur, investors are faced with the frustrating di-
lemma of either.
•	 Accepting losses and reallocating.
•	 Not knowing when they can responsibly withdraw 	
funds.
By design, Fragments offer downside protection but
will also gain in a manner uncorrelated with major coins.
When floating price currencies dip, traders retreat into
stable currencies. In the case of Fragments, demand
pressure triggers currency splits.
A Platform for Stable Utility Tokens
Today’s Utility tokens are simultaneously priced based
on two very different qualities.
•	 Network Market Cap ( based on expected annual 	
rates of return over a 5-10 year time horizon)
•	 Utility Value (what customers are willingn to pay for 	
a utility or service like 1 hour of compute time).
Projects using the Fragments protocol will be able to
stabilize unit prices while maintaining network effects
for early adopters. Eventually our currency can be
pegged to a basket of commonly used utilities or com-
modities.
Working with Pantera
As Investors and Advisors.
•	 Paul Veradittakit
•	 Joey Krug
Other Investors Include:
•	 True Ventures
•	 Founder Collective
•	 FBG Capital
•	 Brian Armstrong
www.fragments.org
evan@fragments.org
Appendix A - stabilization layers
We take a layered approach to stabilization.
It’s a common misconception that expansion and contrac-
tion occur in equal measure. At any given moment, there
can be infinite potential buy pressure, but only finite sell
pressure. For this reason markets tend to be heavy tailed.
•	 At the inner layer, a network of market makers 			
benefit from simple arbitrage, and are the first line of 	 	
defense against volatility.
•	 At the outer layer, sits our reserve and supply policy.
Appendix B1 - sensitivity parameter
At some threshold of change T_high, the reserve will out-
put a reserve requirement of 1.0. As a result the reserve
can be adjusted to be more or less sensitive to change.
•	 At low (conservative) thresholds the system behaves 	 	
like a parity reserve, overcollateralizing
•	 At high (liberal) thresholds, the system behaves more 	
like a fractional reserve.
Low thresholds optimize for fault tolerance. High thresh-
olds optimize for splitting to coinholders. Our objective is
to:
•	 Maximize distribution to coinholders
•	 Minimize reliance on lenders of last resort
Appendix B2 - sensitivity parameter
Appendix B3 - sensitivity parameter
Appendix C - automated market making
The more robust our market making network, the more
safely we can increase our sensitivity threshold, and thus
maximize distribution of supply to token holders.
Fortunately, one of the key advantages of knowing a price
target is that corrections can occur very quickly, and some
of this trading can even be automated.
The Fragments foundation will participate as a market
maker alongside others.
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Fragments: A Path to Ideal Money - Evan Kuo presentation

  • 1. Cryptocurrencies - A Path to Ideal Money Evan Kuo, www.fragments.org Mathematician and economist John Nash, famous for his Nobel winning work on non-cooperative game theory, first conceived Ideal Money around the early 1960’s. At the time he became troubled by the fact that certain currencies, as part of the International Monetary Fund (IMF), had agreed to fix exchange rates with one anoth- er. Nash’s concern was that a fixed exchange ratio be- tween currencies would encourage hyperinflation
  • 2. Troubled by fixed exchange ratios ... Let’s say Alice & Bob agree to a fixed rate: 1 Alice Coin = 1 Bob Coin and that: 1 Bob Coin = 1 Gold Nugget • Alice can always exchange for Bob coins, and then redeem them for gold • So Alice stands to benefit by inflating her coins as fast as possible, trading for Bob coins, and then gold, before Bob catches on
  • 3. Not a Healthy Game ... • Thinking this was not a healthy game, Nash immediately traded his USD for Swiss Francs • He considered Swiss Francs “better money” because they were not subject to fixed exchange ratios, and were more likely to hold their value against gold • Nash went on to imagine what an “ideal money” would be like and spent the last 20 years of his life promoting the concept of Ideal Money
  • 4. Ideal Money (Abstract) Definition: A solution to the conflict between near-term domestic interests and long-term international interests that occur, when using a country’s currency to stabilize international currencies.
  • 5. Today Independence is much easier • We have thousands of new and government independent cryptocurrencies like Bitcoin and Ethereum, any of which could adopted as global reserve currencies. We can simplify our definition by dropping the parts about geopolitical conflict
  • 6. Ideal Money (Simplified) Definition: Ideal Money is a solution to the conflict between near and long term interests when creating a stable cryptocurrency.
  • 7. But can we state this concretely? • This definition is simpler, but still abstract • Many economic theories can now be empirically tested using cryptocurrencies, but we need testable theories.
  • 8. Let’s think in Functions of Time • Imagine Store of Value as a simple likelihood function over time • This function takes time as its input (given an initial sum of money) and returns the likelihood of retrieving the purchasing power committed Fiat looks good zoomed in Gold looks good zoomed out Ideal Money must look good both ways
  • 9. Ideal Money (Concrete) Definition: Ideal Money is a cryptocurrency that stores both near and long term value.
  • 10. But How? The Inflation Paradox We encountered this problem immediately: • Frustrated, I reached out to Paul and Joey at Pantera. After some thought, Joey reminded us that when a stock splits, supply increases but your net holdings are unaffected. • Excited, we went on to design a protocol for crypto currencies that split on inflation. The mechanism of inflation that keeps fiat currencies stable near-term is also what devalues them long-term.
  • 11. Fragments A low volatility cryptocurrency that splits on inflation. The currency is designed to store both near and long- term value converging on the characteristics of Ideal Money. Our first token is the USD Fragment, price tar- geted at the US Dollar.
  • 12. A High Level Example Floating Price Model Imagine you purchased 1 BTC at $1, and now have 1 BTC worth $10000. Fragments Model Now imagine an alternate world in which you again pur- chased 1 BTC at $1, but this time you have 10000 BTC each worth $1.
  • 13. In Practice ... To prevent balances from shrinking: • We first capitalize an ETH reserve • And then split proportionally to token holders This reserve capitalizes under expansion so that it can buy back and remove tokens under contraction
  • 14. Dynamic Reserve Ratio The Fragments reserve intelligently computes reserve ratio in each rebase period. It responds to two differen- tial factors: • Relative change in Supply • Relative change in Purchasing Power • Allocates more to reserve under rapid expansion • Allocates less to reserve under gradual expansion * More on this in the Appendix
  • 15. A Buy & Hold Hedge Major cryptocurrencies today, tend to be highly cor- related when looking at a 90 moving average. When dips occur, investors are faced with the frustrating di- lemma of either. • Accepting losses and reallocating. • Not knowing when they can responsibly withdraw funds. By design, Fragments offer downside protection but will also gain in a manner uncorrelated with major coins. When floating price currencies dip, traders retreat into stable currencies. In the case of Fragments, demand pressure triggers currency splits.
  • 16. A Platform for Stable Utility Tokens Today’s Utility tokens are simultaneously priced based on two very different qualities. • Network Market Cap ( based on expected annual rates of return over a 5-10 year time horizon) • Utility Value (what customers are willingn to pay for a utility or service like 1 hour of compute time). Projects using the Fragments protocol will be able to stabilize unit prices while maintaining network effects for early adopters. Eventually our currency can be pegged to a basket of commonly used utilities or com- modities.
  • 17. Working with Pantera As Investors and Advisors. • Paul Veradittakit • Joey Krug Other Investors Include: • True Ventures • Founder Collective • FBG Capital • Brian Armstrong www.fragments.org evan@fragments.org
  • 18. Appendix A - stabilization layers We take a layered approach to stabilization. It’s a common misconception that expansion and contrac- tion occur in equal measure. At any given moment, there can be infinite potential buy pressure, but only finite sell pressure. For this reason markets tend to be heavy tailed. • At the inner layer, a network of market makers benefit from simple arbitrage, and are the first line of defense against volatility. • At the outer layer, sits our reserve and supply policy.
  • 19. Appendix B1 - sensitivity parameter At some threshold of change T_high, the reserve will out- put a reserve requirement of 1.0. As a result the reserve can be adjusted to be more or less sensitive to change. • At low (conservative) thresholds the system behaves like a parity reserve, overcollateralizing • At high (liberal) thresholds, the system behaves more like a fractional reserve. Low thresholds optimize for fault tolerance. High thresh- olds optimize for splitting to coinholders. Our objective is to: • Maximize distribution to coinholders • Minimize reliance on lenders of last resort
  • 20. Appendix B2 - sensitivity parameter
  • 21. Appendix B3 - sensitivity parameter
  • 22. Appendix C - automated market making The more robust our market making network, the more safely we can increase our sensitivity threshold, and thus maximize distribution of supply to token holders. Fortunately, one of the key advantages of knowing a price target is that corrections can occur very quickly, and some of this trading can even be automated. The Fragments foundation will participate as a market maker alongside others.