In his later years, game theorist and mathematician John Nash became consumed with the concept of a global currency. If such a currency could be backed by a precious metal and hold a strong universal appeal, it could achieve a stable value. It could also avoid the cartel-like control and manipulation that are hallmarks of government-issued currencies, including the coordinated printing of money which results in the weakening of purchasing power.
Blockchain’s emergence, and the advent of digital currencies that rely on decentralized “ledgers,” made Nash’s theory one step closer to reality. Of course, modern cryptocurrency price dynamics do not enjoy the stability that Nash would have liked to see, in part because of a gauntlet of market manipulators and price fixers that have come to dominate this new digital marketplace.
Achieving a currency with both global appeal and stable equilibrium price dynamics requires a structure that serves and balances the interests of two distinct groups: the investors who provide the money necessary to build the new currency systems, and second, the users who exchange goods and services using the currency. This second group in particular is benefitted by a currency with unambiguous, hard, intrinsic value.
Today’s purely digital tokens fall well short of this. They lack intrinsic value, for one thing, and in the absence of an unambiguous “anchor” of value, such as a physical asset, there is too much uncertainty around the token’s economic value. This fuels price speculation and volatility, as we’ve seen with cryptocurrencies like Bitcoin.
There have been two major attempts to address these flaws. The first is the dual token system, in which the future value of the currency and its purchasing power are disentangled by offering two tokens. The first is a utility (work-performing) token that does not represent a target for manipulators or speculators because it is designed to bear no market value based on the perception of future value. The second is an investor-geared token presented as a financial instrument that increases in value. While nice-sounding in theory, this hasn’t worked. For one thing, a token that specifically accommodates investors is almost certainly a security, which is heavily regulated. For another, as has been seen time and again, people asymmetrically pile into the investor token and largely ignore the utility tokens.
The second attempt to address cryptocurrency’s limitations is physical asset tokenization: tying the value of a token to a hard asset. This works a little bit better, but has still run into some headwinds.
Consider a token which tracks the value of one gram of gold in a vault. There is no more case for adoption than there is in simply acquiring physical gold. The “convenience” of blockchain gold is not enough of a motivator to build a following for the token, especially when ETF gold products such as GLD enjoy big, liquid markets.
One solution to these problems is a hybrid token structure in which both a physical asset and a digital asset are contained. Such a structure must include a few key features if it is to succeed.
First, supply of new tokens must be transparently offered at regular intervals to ward off extreme price instability and defend the system against hostile takeover by speculators.
Second, the offering sizes must respond algorithmically to demand, statistically sampled between offering periods. This ensures the selling pressure is not asymmetrically weighted towards either the time of issue or sale. This makes the token economy less susceptible to manipulators, as there are no built-in or obvious opportunities for sellers to dump the token, and fuels an orderly evolution of pricing. The result is a more stable marketplace that caters to long-term participants.
Third, the token must encapsulate a hard asset which has a value the public can easily ascertain. Not only is this an extremely effective device for dramatically reducing uncertainty about the token value, but it provides a mechanism for tracking its price. Rather than relying on past pricing as an indicator of future price, one can look at the hard value of the asset to assess value.
Lastly, redemption of the backing physical asset cannot cause the token to be burned or otherwise destroyed. That’s because the concept of burn on redemption forces the token to trade at the spot value of the physical asset (otherwise there would be arbitrage). And forcing the token to solely track the exact price of the physical asset means there’s no incentive to use it—people could just buy the physical asset. Eliminating burn on redemption resolves these problems.
This hybrid token structure, explicitly enabled by blockchain technology, can be the realization of Nash’s dream for a universal global currency with a global appeal that resists manipulation and maintains purchasing power. It could even set the standard for a new economy and a new way of investing in physical assets. The implications for investors, dealers, buyers and financial institutions are vast. If we get it right, blockchain really does have the ability to change the world.
Seth Patinkin did his PhD work in mathematics under John Forbes Nash at Princeton University and is CEO and founder of Ampersand Markets.