Algorithmic Monetary Policy for a Stabilized Token

By: John P. Conley

Geeq Project Monetary Economics1

Introduction

The Geeq Project takes a new approach to distributed ledger technology that builds an ecosystem of federated, interoperable, blockchains. Each instance of a GeeqChain has a validation layer with its own blockchain and ledger, its own independent network of validating nodes, and a separate application layer which may be customized to meet the requirements of a wide variety of use cases. Geeq’s Proof of Honesty (PoH) consensus protocol provides a multilayered ledger security guarantee based on economic mechanism design. PoH implements honest node behavior in coalition-proof equilibrium (Strategically Provable Security or SPS), is 99% Byzantine Fault Tolerance (BFT) and, most importantly, allows users who hold tokens on the ledger to determine for themselves whether the network of validating nodes is behaving honestly and to protect themselves from the consequences of any malicious or dishonest actions they might discover (Edge-Security).2

Blockchain has enormous potential create new markets, make existing markets more efficient, to protect and empower, and for social good.3 Unfortunately, the price volatility displayed by existing cryptocurrencies has had the effect of making the public wary of blockchain technology and platforms in general. Token prices seem to be, and often are, driven by speculation and market manipulation. This may be true even for good projects with dedicated teams building important applications. Bad tokenomics is bad for projects, and bad for the cryptospace at large.

Speculation and volatility are familiar problems in finance and economics. Theory and historical experience have many lessons to teach about what is feasible for a well-designed monetary policy to achieve. Allowing any currency, fiat or crypto, to become detached from its underlying utility to the economy puts speculators squarely in charge of determining its value. The result is volatility and often collapse. On the other hand, attempting to fix the relative value of a currency either through foreign exchange pegs or stable-coin approaches is difficult, expensive, ill-advised, and almost always unsuccessful.

The extremes of uncontrolled volatility and costly or infeasible stable-coin policies are both undesirable. What is needed is a monetary policy that is predictable, ties token value to the utility it provides on the platform, and creates expectations that reduce price volatility without attempting the impossible task of controlling the market. Such a policy would result in a “stabilized-token” that takes a middle path between these two extremes.

The “Geeq” (the Project’s native token) is primarily intended to pay the networks of nodes for their validation and virtual machine services. Geeqs can also be used for micropayments in IoT, content management, smart city, and other applications, or as a general purpose cryptocurrency. This paper describes a transparent, predictable, algorithmic monetary policy designed to support the Geeq as a stabilized-token.

Monetary Policy and Cryptoeconomics

If it were possible to create a “stable-coin” that had a fixed value with respect to fiat currencies, it would probably relieve a great deal of the public’s concern and anxiety about using cryptocurrencies. The idea of maintaining fixed exchange rates between currencies has a long, but not very happy, history in economics and policy. Central banks of many nations have often attempted to peg the value of their own currencies to another, to a basket of other currencies, or to a commodity such as silver or gold. Banks support these pegs by standing ready to buy back any domestic currency offered at the promised exchange rate. Unfortunately, such policies have always ended in failure.

For example, in the early 1990s, England attempted to maintain a 2.7 mark/pound exchange rate as part of its effort to support the European Exchange Rate Mechanism. George Soros and other currency speculators shorted the pound forcing the Bank of England to raise interest rates and commit large parts of its foreign exchange reserves to buying back the pound on the open market. This became increasingly difficult as the Bank of England’s reserves dwindled. Ultimately, England was forced to give up and let the exchange rate float. Currencies backed by commodities such as gold or silver have also proven to be unsustainable. The underlying economics here is that the one and only way to support a fixed exchange rate is to maintain a 100% reserve of the other currency or commodity in question.4

True stable-coins also have an obvious downside from the standpoint of platform builders. Namely, if 100% of token sale revenue is kept in reserve to guarantee the value of the stable-coin, nothing is left over for platform development. Just as obviously, there is no incentive for an investor to buy a stable-coin either.

On the other hand, rapid and dramatic fluctuations in the value of BTC, ETH and other cryptocurrencies are frequently the result of speculation and have little relation to the value of the underlying platforms. These fluctuations nevertheless undermine confidence in the platforms and their technology. Rational users naturally insist on a premium to buy and hold such risky assets, which further suppresses their values. To make matters worse, both positive and negative price swings can be driven by relatively small trading volumes and can take on a life of their own once they start. None of this is good for investors, platforms, application developers, validating nodes, users, or the DLT space in general.

Geeq Monetary Policy

Geeq’s novel Algorithmic Monetary Policy (AMP) is designed to let platform use and token demand rather than speculation be the primary drivers of token value. We provide a high level description of the AMP in this section.

Overview

A total of 25M Geeqs will be pre-mined at the launch of The Project’s mainnet. No additional Geeqs will be created unless and until the market price of the Geeq rises to $3. If the price stays below this level, 25M Geeqs are all that will ever exist.

For every dollar that the Geeq’s value rises above $3, new Geeqs will be generated at a rate of 5M per dollar. If the Geeq’s price triples relative to their nominal issuance value of $1, it is most likely to be because the use and transactions volume of the platform have grown as well. Part of the revenues generated from the sale of these new tokens will be placed in escrow in a Fiat Stabilization Reserve (FSR) account. As long as token value goes up, both the coinbase and the FSR go up as well.

If token value ever begins to fall, the FSR account automatically starts buying back a predetermined, publicly known, number of tokens and places them in a Token Stabilization Reserve (TSR) account and removes them from the circulating coinbase. Thus, Geeq’s AMP5 creates a predetermined, publicly known, additional supply of tokens in bull markets and additional demand for tokens in bear markets. This does not prevent the Geeq’s value from increasing, nor does it guarantee that its value will never fall. What it does is fund a kind of insurance policy in good times that can be deployed to reduce the impact of bad times. The fact that there is a prefunded commitment to defend the token’s value can dampen or stop low-information expectations driven price changes as well as make it much more difficult for speculators to manipulate the Geeq’s value. Overall, 40% of any new Geeqs issued will be set aside for token value stabilization, 35% for development, sales, and other platform expenses, 15% for founders and advisors and contributors, and the remaining 10% for developer support and community outreach.

To get a sense of what this means in practice, the following table shows the token quantity, token cap, total revenue from the sale of tokens created by the AMP, and the amount that is apportioned to the FSR, the community and developer outreach fund, and the platform itself. For simplicity, this assumes a monotonic increase in the Geeq’s price from $1 to $25. If prices were to follow a more complicated path of upward and downward volatility, the only thing that would change is that the FSR would be somewhat higher (the reason is discussed below). See the mathematical appendix (in the .pdf version of the paper) for more details on how these numbers were calculated.6

Table 1: All numbers are in millions except token price

An Intuitive Outline

Geeq’s monetary policy is described in detail in the first appendix (in the .pdf version of the paper). The basic mechanics of how the AMP works are as follows:

If the Geeq’s price triples, then 5M new tokens are issued for each dollar of price increase. For example, as the price goes from $3 to $4, 50k new tokens are offered for sale at one cent intervals. Thus, 25M tokens are in circulation when the price is $3, 30M when the price is $4, 35M when the price is $5 and so on.

To determine the market price, a standing offer is made by the AMP to sell 50k tokens at a price of $3.01, 50k more at a price of $3.02, etc. Self-interested agents will choose to buy tokens at these prices if and only if they are below the open market value of the Geeq. Thus, Geeq does not need an oracle or outside source of information to determine what the token’s value is. Instead it relies on information revealed by the market.

A total of 40% of revenues raised from the sale of new tokens is placed into the FSR. If price falls, the AMP uses these reserves to buy back Geeqs and remove them from circulation. For example, suppose the price of the Geeq reaches a high water mark price $20, the FSR would hold $391M and a total of 110M Geeqs would be in circulation. To defend the Geeq’s price, the AMP would issue standing offers to buy a certain number of Geeqs at each $0.01 interval below $20.

The tokens in the TSR are sold back to the market if the price begins to rise again. For example, suppose the price drops to $18. The TSR would contain approximately 5.2M Geeqs. If Geeq’s prices start to rise again, the AMP would issue standing offers to sell an equal share of these at every $0.01 price interval. That is, the AMP offers to sell 26k tokens at $18.01, the same at $18.02, until the TSR is empty again if and when the price returns to $20.7

The dollars in the FSR are deployed in three separate price defense zones: the high water zone which is between the highest price the token has ever obtained and 90% of that value, the middle zone which is between 90% of the high water price and the price floor, and the price floor zone, explained below.

One quarter of the FSR is dedicated to defending the Geeq’s price in the high water zone because the greatest volatility typically exists closest to the current equilibrium price. Heading off price drops while they are small instead of letting them build and start generating negative expectational feedback is an efficient way to use fiat reserves.

One half of the FSR is dedicated to defending the Geeq’s price in the middle zone by providing certainty that demand for the Geeq exists at all price levels and thereby serve as a speed bump to slow or stop price drops. Often such price drops are built on very thin trading volumes rather than a wholesale loss of confidence in a currency.

The final quarter of the FSR is used to provide a price floor for the Geeq. The TSR grows and the circulating coinbase shrinks as the AMP deploys the FSR in high water and middle zones. If price continues to fall despite these efforts, the remaining quarter of the FSR eventually becomes large enough to repurchase all of the Geeqs still in circulation. Thus, the AMP uses the last quarter of the FSR to remove tokens from circulation until the price floor is a sustainable equilibrium price for the Geeq (or it buys all of the Geeqs in circulation).

No new tokens are created unless and until the TSR is empty and the price rises above the previous high water mark.

A key element of the AMP is that it produces a fiat surplus. This is because an equal share of the dollars in the FSR are spent buying Geeqs on the way down, but an equal number of Geeqs are sold on the way back up. Thus, many more Geeqs are purchased at lower prices than at higher prices on the way down, while an equal number of Geeqs are sold at all prices on the way up.

All surpluses made from stabilization efforts are added to the FSR. This has the interesting effect of strengthening the stabilization process. The larger the FSR, the larger the number of Geeqs purchased and put into the TSR as price drops. Even more interesting is that this has the effect of raising the price floor. In other words, the more volatility token value experiences, the more effective Geeq’s monetary policy becomes in the future. It is even possible that the feasible price floor could rise above $1. Although this would not make the Geeq a stable-coin, it would give it a price floor above its notional issuance value.

Geeq’s monetary policy is pre-funded, transparent, and is designed to smooth the volatility and reduce uncertainty. The policy does not, in and of itself, determine the Geeq’s market price. Instead, the AMP stands ready with a set of known bids and asks that all platform users can take into account when planning and conducting their business.

Conclusion

Geeq’s tokenomics is centered on the idea of creating a middle path between the impracticability of a fixed exchange rate stable-coin, and the uncertainty and volatility of an unsupported, free-floating token. The main purpose of the Geeq is to pay the network of nodes that support multiple, interoperable, instances of GeeqChains for their validation and virtual machine services. The intention of Geeq’s monetary policy is to tie token value more closely to its use on the platform and the value of the services built by developers within the Geeqosystem. Limiting the impact of speculators and dampening the impact of fear, uncertainty, and doubt, creates a more predictable and stable environment to support and sustain adoption and usage for all of Geeq’s platform participants.

Notes

1This paper contains a description Geeq’s stabilized-token and the monetary policy that supports it. Geeq, Geeq, GeeqChain, Geeqosystem, Proof of Honesty, PoH, Strategically Provable Security, SPS, Catastrophic Dissent Mechanism, CDM, Stabilized-coin, and Stabilized-token are all registered trademarks of The Geeq Corporation.

2See The Geeq Project’s Technical paper for proofs and more details here: https://geeq.io/2019/05/26/the-geeq-project-technical-paper/

3See for example, a portion of a report written for the World Bank posted here:https://medium.com/geeq-official/world-bank-using-blockchain-to-further-its-mission-9a4f12fde51a

4You may wish to have a look at the following Medium article for additional discussion about the problems and challenges associated with stable-coins.

5The Project’s objective is to implement Geeq’s monetary policy through a smart contract. However, the policy requires interactions between real world banks, token exchanges, and Geeq users. While Geeq can and will make implementation of this policy transparent, regulatory and technical issues may place limits on fully automating the policy through a smart contract. Geeq’s founding principle is that code is law, and so to the extent that it is practical and compliant, an automatic, transparent process will be used. Banking and exchange fees, transactions costs, and similar expenses will be deducted from the FSR as they are realized.

6This is the revenue that would be generated if all tokens were sold at the moment they were created. In fact, 85% will be sold immediately. Founders and advisors’ tokens are subject to lockups and may be held instead of forced onto the market directly as they are created.

7See the example on page 8 in the mathematical appendix (in the .pdf version of the paper) for details on how these numbers were calculated.

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Disclaimer

The details of the planned private sale, liquidity event and monetary policy, may change depending upon current regulatory and legal environment, agreements with liquidity providers, and coding and other technical considerations.

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