How Decentralised Financing Is More Transparent
In my previous post on decentralised organisations, I proposed a model whereby an organisation called Monkey issued a currency, MNY (White Paper/Code), and shares that it sold in return for its own currency, labelled MNYX. I pointed out how new MNY issuances, if configured correctly via an appropriate Proof-of-Value algorithm, would in fact make the price of the MNYX continually rise in value. This, I postulated, would allow the company to raise more capital for less expense of ownership. In turn, the company would gift back a portion of such raises, I said, to its own stakeholders every time it minted new MNYX. These gifts would be in the form of COE (Code), an MNY multi-proxy that players use to accumulate more MNY over 100+ day periods.
In this post, I want to examine some of the more detailed responses to such a proposal. For as an innovation, there are no doubt entirely new repercussions and effects we are not yet fully cognizant of.
The first immediately noticeable thing is the question of supply. I proposed that supply would be divided from the outset at 1:1 ratio per MNY:MNYX and that pursuant to every mining “cycle” (completion of 100 day period for COE or 300 day mining period for MNY, or completion of 100,000 unit issuance for COE or completion of 21,000,000 unit issuance for MNY, whichever comes first) there would be an adjustment of the “cycle rate” of the shares versus the currency. This is the rate at which the shares would be sold in return for the currency relative to its end-of-cycle ratio. Given that there are 21,000,000 MNY in circulation at the end of the first cycle, there must be 21,000,000 MNYX printed at the outset. Monkey, I proposed, would sell its stock MNYX at a 1:1 ratio to start with — at the cycle rate — but would undertake repurchases at a lower “real rate”. The real rate is the rate at which MNY:MNYX is in circulation. Thus, assuming 2,100,000 MNY in total circulation, then, the real rate is 0.1:1. This means at first Monkey is paying a very low cost for its own shares and selling them at quite a mark-up. This mark-up will gradually fall over time if the algorithm upon which issuance is organised is sufficiently disincentivising to re-exchange for underlying value.
For a great example of how this may work, let’s turn to Futereum (White Paper/Code) an innovation I created with a very senior global software engineer back in January of this year.
So, let’s suppose here that MNY is structured like FUTR, with Fibonacci leading the way. Clearly, the very last portion of swaps on a like-for-like basis will not get realised for many cycles to come; simply, the cost of exchange is prohibitively high. Now however, assume such purchasers are in fact making such a purchase in order to buy the currency that affords them the ability to purchase MNYX. Suddenly, it becomes a lot clearer why someone would buy the final quartile of FUTR.
But what if the issuer, Monkey, was to expand the number of MNYX over and above the total supply of corporate currency in issue? This is an excellent question. If that was the case, then you’d have a situation whereby every new currency mint started to depress the MNYX price. This is easier to understand by looking at the ratios. Assume 1:3 MNY: MNYX. In such a case, MNYX are now half the value they were at the start of the first cycle in real rate terms. In cycle rate terms, the value of MNYX is 2:2. Thus, here Monkey is buying its own shares at 3 MNY and reselling them for 2 MNY. This makes no sense and is very obviously a Ponzi scheme. Investors would be wary of such deals and unless there was a very good (short-term) explanation for such financing, would steer away from them. In fact, in financial markets today such financing exists as very commonplace, it’s just investors don’t get to see it. So this decentralised method of financing is, arguably, more transparent than our current negative retained earnings as a balance sheet line item (which investors have tremendous trouble identifying as a drain on the top line of an income statement, but make no mistake about it, is precisely what such legal accounting trickery amounts to).
It’s not always a negative to have a top-heavy X issuance over the currency, however and that brings us to our second observation to the proposal of corporation currency utility. This second question relates to the Fiat value of the corporation currency. Specifically, if such an occurrence as that of top-heavy MNY:MNYX was to take place, would it be acceptable if the Fiat value of MNY was in effect much lower than it had been at the start of the cycle? The answer is, quite possibly, yes. I believe this demonstrates the superiority of corporate currency financing models: specifically, they allow the corporation their own private form of Fiat derivative bet over and above the currency they are utilising as a medium of exchange. Assuming our previous example, if MNY: MNYX was 1:3, but MNY was 8 times lower than where it was at the point of a 1:1 ratio, then clearly, in Fiat terms, Monkey would be financing profitably in the medium of exchange within which its currency was officially reported in GAPP accounting periods. Thus, we can apply the term fiat rate to the definitive ratio at which the company is actually financing its own capital expenses. In the first example of 1:3 with no change in fiat value, the ratio is 0.3. In the second example, however, the ratio is 8:3, or 2.7. Thus, we can infer an 8.9x differential (2.7–0.3/0.3) between the two scenarios in which a fiat value differential interposes itself between supply issuance and value performance. The actual number here is not as material as is the ability investors have at their disposal to calculate real corporate performance.
If Monkey’s currency was bumming out in a crypto-crash then, it’s shares would be doing spectacularly well until there was an increasing amount of cryptocurrency issued to reverse the decline! This also applies in reverse, with the company’s stock price, although ever-increasing in value, regulated naturally by the tendency of the currency to constantly increase in value pari pasu.
The key takeaway here is that this model organically regulates over-valuation of the stock, and in turn, organically regulates an overall lack of utility — and hence falling values — of a currency, which is still a major problem for emerging market countries. In other words, it solves two problems with one solution.
No doubt there are more than a few cost of capital (CAPM) exercises we could do to show how capital expenditure was in this way over time hugely reduced and therefore exponentially more efficient in operating expenses terms on the dollar. Interesting as they are, it is not necessary to grasp their immediate implications to spot the extremely competitive positioning of the strategy more broadly.
What these two examples illustrate most pertinently of all is the power that cryptocurrencies have both to show investors very transparently how a company is financing its operations, and to allow the company to have much more flexibility over financing its operations merely by virtue of carrying out such financing activities in a cryptocurrency as opposed to doing such in Fiat. With financing costs the core consideration of most enterprises today, often above operating cost considerations (which are more streamlined today with globalization averaging out the playing field), this has to be an idea that can’t be ignored for very long without conceding a substantial competitive advantage, surely?
The Evolution of Corporations (Part II) was originally published in Data Driven Investor on Medium, where people are continuing the conversation by highlighting and responding to this story.