Prof. Dr. Nicola Dimitri - The Economics of Two-Token Blockchains

Transcript

so again thank you very much um um let me just introduce briefly myself I'm an economics professor at the University of of Sienna Italy and I've been doing work on uh the economics of uh cryptocurrencies and blockchains for few years now what I'm going to present today briefly I'm not going to present everything I've done is um is work which I have been doing for two blockchains uh one is Neo and the other one is vchain and both of them are two token blockchains so I was actually interested in in these projects

because uh the two tokens blockchains I haven't seen discussed in the literature uh especially from an economic point of view and so um it was very interesting for me to to enter the uh story it doesn't go um I'm trying with this oh comp oh yeah y okay so

um what I'm going to uh discuss with you what I'm going to share with you is some of the work that I have done um let me say that uh the presentation will actually be split into two parts the first part is more related to the work that I've done for Neo uh and the second part will be uh more related to the work that I've done for vchain the both of them are very similar but I've done different work for for them so um the first part is uh let me scroll where is the scroller here here we are I'll just press okay so I think the starting point uh at least for me of

Interest was the following um when ethereum introduced gas um to uh which is a fictitious unit of measure of course measurement to uh to to measure computational and storage costs Etc to my understanding the main goal for that was to sterilize was to isolate uh the cost which are measured in this uh uh in this uh fictitious unit uh from Market volatility okay so the main goal for introducing gas uh uh was to uh

separate uh the U measurement of computational storage cost from the um Market volatility which on the other hand affects the main domestic uh uh token okay um so uh transaction fees on ethereum are paid uh on the basis of a unit price which is a uh two components price uh made by a base Fe a tip after the reform and multiply it by the number of needed gas units Etc so that's the starting point okay the second gas is like a fictitious second token in in

ethereum uh which again was introduced for this very main reason namely to try to stabilize uh um the computational cost to isolate computational cost from uh Market fluctuations now the interest list for me on these two uh um um blockchains is that both of them have two tokens and both tokens are actually uh listed on the exchangeable on the market okay so if the two tokens for this blockchains and other blockchains were inspired by the ethereum

example okay isolation from the market of transaction fees uh payments um for this kind of blockchains and perhaps other blockchains this doesn't work anymore because both blockchains uh both tokens in both blockchains are actually traded on the market and so they're both exposed to Market volatility now the question is uh you know very basic question and the economics I'm going to discuss to some extent is basic economics um so the question is what are the economic characteristics of these two blockchain uh

um two token blockchains uh where both tokens are are actually traded in the market so the question is are they do they actually exhibit specific features or they are very much aen uh to one token platforms let's see now the first part if I can go [Music] on uh okay so the first part is work which I've done for for Neo they actually asked me to sort of try to um uh find a way to have some sense of what

is the economic value of the platform if you have two tokens which are quoted on the market so this paper has been already published I'm going to draw a few uh stuff uh from it to uh to um to share how I actually reasoned on that and the idea I had in mind was something like uh uh you know having a dashboard where by looking at uh the indicators that are that I'm discussing to have a sense of what the economic value of such a blockchain is you have a dashboard in for in front and you kind of you know react to how

the indicators move around um you know changing perhaps the token Supply or similar kind of measures so that's the kind of philosophy I had in mind and uh so to to my mind uh you know they came out very basic uh questions so the the first question is what is the absolute desirability of these Tut let me also say that the two tokens actually Implement different functions so the main native token is the one that is actually used for governance uh and for um uh transactions the other one is introduced to pay for transaction phase

okay so in the same way as gas was introduced uh by ethereum as a matter of fact the second token for Neo is called indeed gas okay doesn't doesn't uh you know have a different name whereas in in the other blockchain it has a different name so in my um when I started to think about it I thought about two things first is some kind of absolute desirability of the two tokens uh you know how how attractive is one you know one token uh in a kind of absolute U

manner um and then relative desirability which I'm going to discuss more extensively later on as for absolute designability what we normally take is you know market price but of course quantities as well exchange quantities can can actually play a role um uh but what is the I think the very new uh component of this story is the relative desirability how is one uh uh token uh desirable as compared to the other by uh by the market or whatever so what it came to mind is to con you know construct indicators which I call where

is the point you have the anyway which I call five just to uh point oh it's not working so so the first Formula is just a general formula for an indicator which depends on the two prices so PNC and PGC are the two tokens which in Neo are called n nng NE n stands for Neo the main domestic token and G stands for gas which is the second token they're both traded in the market so they have a market

price prevalent you know market price in terms of a currency whatever the currency is could be Fiat could be uh crypto whatever um so uh the idea was to construct indicators and here I have two desirable properties if you want the first is that to measure desirability if um relative desirability if the two prices are the same then you would want this uh um uh indicator to be equal to one so equally desirable in some sense uh and we'll see y uh uh equal to one and in a in a in a couple of slides

and currency Independence of the indicator means that whichever is the currency that I refer to uh the C currency uh the indicator should should take the same the same value okay so basically U if we refor if we take property two we can actually reformulate proper property two in the following Way by multiplying both uh arguments of the of the function f uh uh by P one over PGC you get you get that thing okay now how is demanding this property of being

independent of the currency uh uh reference currency well I think it's very realistic I mean Arbitrage uh activities are actually uh inducing that kind of Independence across across different currencies to which the two tokens can be uh traded on so basically uh if this currency Independence holds uh the indicator whatever that is is going to be expressed only uh as a function of the price ratio okay so in front of this dashboard dashboard you would react uh as the um uh if you see your indicator

uh is is actually changing value you would react depending on the price ratio and of course there could be an infinite virtually infinite number of indicators that will satisfy both properties which are in some sense natural and these are just two examples but in some sense the very natural uh indicator to in my view to take uh would be uh the price index itself so to take the uh identity function and sorry the price index the the price ratio and I call the price ratio uh I use the symbol e for exchange rate because it's

not the price ratio is not a proper price in some sense because in exchange notes there are no markets where you can trade directly one token for the other at least until I wrote uh the paper um so there is no direct market for one token versus the other token in exchange nodes so you got to triangulate uh and so that's basically uh an exchange rate okay is not a direct price on a on a market that would be the most natural perhaps index or relative desirability if it goes up and down you can take uh uh um policy measures uh

to okay um I'm trying to to go to be quick uh just spend few words on the fact that uh this is actually going to take more more space in the paper that prices don't say everything I think quantities also are very important um in particular quantity traded in um in the uh token currency Market NC or GC markets uh as compared to the number of uh C culating tokens so NCT stands for the number of circulating tokens n of Type n at time T and GCT stands for the

uh number circulated gas token at time at time T these are also very important because how many uh tokens are traded as compared to uh the total number of tokens circulating I think it's a very important measure of how desirable could could be a very important indicator how desirable was one token with respect to the other and as a matter of fact what I've done in the paper I'm not going to show that I'm going I I actually took this uh um indicators which I call Pi uh which are constructed as ratios of these relative uh quantities uh uh traded in the market to combine with price

indicators uh and construct uh you know Global indicators taking prices and quantities to have an idea what is the value of of the blockchain at that very moment and let me tell you that uh uh if you use this kind of compound indicators quantities component can actually compensate for Price components in terms of attractiveness okay uh and now let me jump onto the second part this was done is just a small piece of a of a report of a paper which is now under revision uh which I've done for vchain and now here um I focused on a different uh topic they

were asking me uh in an explicit way whether there is anything specific of two tokens okay now what I found is something not very uh fancy but certainly intrinsic to two tokens economy what I call the multiplier fat and perhaps speculative flows related to the existence of the two traded two tokens now multiplier is not a new term in economics uh we have multipliers for many things and here uh quite nicely actually appears again so uh the two tokens here are called V that's the main token and E is the correspondent of gas

which which is used for um to pay transaction fees uh so let me tell you what is multiplier effect which is there I mean it it's not uh it's not contestable in some sense I it's effect uh is is um consist of so suppose you have a certain amount of V tokens hv0 at block zero okay so H stands for holding of V tokens at block zero now this uh blockchain but also Neo are structured in such a way that if you hold a certain amount of the a certain

amount of uh the native token you're going to get for free these second token e tokens uh in a percentage which is using the notation the small V so hv0 times small V is the number of tokens that you get for free for free that's the key key point for free uh by holding you know HV um zero token V tokens now if you can exchange uh the two tokens and so if you can exchange uh e um against anything on The Exchange Market you can actually if you

want buy back V V tokens so and if the Q is is actually the the exchange rate at which V tokens exchange with e tokens on the market what you're going to have just to cut a long story short is that if you buy back V tokens you're going to have hv0 plus hv0 * V / q v tokens uh in your wallet so you started with hv0 and because e tokens are free and because tokens are exchangeable you're going to get more now um and so if you uh do it twice you get that and if you do it B

times where B is any generic numbers you get that after uh B blocks you're going to have that sum of V tokens okay so basically you started off with with the sum at Time Zero or block zero and you get uh at Block B many more tokens uh depending upon how big is the here's the multiplier effect you can multiply your V tokens uh by exchanging the uh the ones uh the the second token which you get for free back and forth uh and you get uh potentially many more tokens how many more depends

on the ratio V over Q of course uh and here's the end I think I was right on time uh and uh uh yeah I stop it here there is a lot of more work to be done here I've done some which I didn't show but there is much more and uh so thank you very much for for your attention thank you Professor Demitri hello we are thank you very much Professor Demitri thank you very much uh we have a very little window for Q&A very limited nice and quick perfect already good run run run going there I like this he's stress now go on run there we go

run run run run run there we go lovely thank you very much for this uh interesting analysis um I was thinking about something else a bit um only about one token but also here with vchain one token that has two different functionalities so it's for example a governance token but it's also traded so people may hold it for different motives either for participating in the governance protocol in votings or maybe for capital gains that they hope so what is your or what are your thoughts about this did you also do some research on

the implication of this tokens that have several functionalities on the economic value have you thought about this or did you do any I haven't seen anything certainly the story that I told namely exchanging the other token to get can be can be seen as similar to a situation where you only have one token and if you keep it in your wallet for some time you get additional tokens for free so in that sense you you also increase in a but I think the interesting part of the true token story is that that if you don't quote in the market your second token then it's fine but if you do you're going to get for free uh

uh you know additional wealth which was not I think the uh original goal of uh of of ethereum when they uh in my understanding when they started to think about introducing a different measure uh for computing uh okay so the one token no I haven't seen uh there couldn't be many very many differences um but I will have to I will have to investigate to be more precise on that thank you right lovely thank you very much and thank you again for Dr Dimitri