Crypto Market Commentary
7 April 2019
Doc's Daily Commentary
Doc’s Next Trade School will be Next Week
The 4/4/2019 Trade School is in the Trade School archive
Our most recent “ReadySetLive” session is listed below;
Watch for a free class preview from Mav for Decentralized Finanace (DeFI) happening sometime soon!
Radix Part 2
Welcome back to part 2/2 of the series on the upcoming Radix project. This half will discuss the economic model of Radix and how it plans to position itself as a true competitor in the race for a complete package digital economy.
What problem does radix solve?
New contenders in the cryptocurrency space sometimes have the advantage where the lessons learned and challenges faced by the giants today are being solved before these new networks go live. The trade-off is the extremely important networks effects and reputation gained by the first movers. As such, any new cryptocurrency project that aims to dethrone a giant needs to create a compelling technology that is either unique in its offering or vastly superior to start attracting developer and user attendion.
As is typical of any new technologies, there are teething problems which must be overcome. The crypto industry is somewhat different to proprietary closed source tech where problems can be solved with a simple software patch. Crypto exists in a hostile and fluid environment where code is verifiable, open source, easily copied and requires consensus and agreement from the network to be successful. In an environment where competitors are in constant supply, first mover advantage can be a handicap and less tangible elements such as reputation, governance, monetary policy and even founder/developer characteristics play a huge role in a project’s longevity.
Upgrading decentralised crypto networks is akin to open heart surgery often with billions of dollars on the line and thus problems like scalability and interoperability which are easily solved in centralised systems, become a far more onerous procedure.
The Radix team understands this and has taken over six years of development time to test, trial and break many DLT systems before settling on one which offered a unique alternative to anything in the space to date. Radix is a product of patience and aims to be an open source and permissionless DLT that solves the following key problems:
- Scalability via near infinitely scalable sharded architecture (Discussed in Part 1)
- Buildability (smart contract and complex transaction capable via simple APIs)
- Price Volatility (via a decentralised economic algorithm)
Figure 2: The three key issues faced by todays DLT systems which Radix is working to solve (Source: Radix Economics Paper – well worth a read of the Executive Summary)
RADIX economic model
The native cryptocurrency in the Radix ecosystem are called Rads with ticker symbol XRD. Rads can be thought of as akin to Dai in the MakerDAO system and act as a stable currency to enable useability and functionality. Where Dai is backed by collateralised token debt created by users, Rads will be backed/pegged by a single token called the Index Token which will eventually represent a basket of assets tokenised on the Radix system (like a stable ETF representing the strength of the Radix economy).
Rads have a number of functions in the Radix ecosystem:
- Useable currency for payments and storing value
- Payment of network fees for transactions and node computation
- Payment to deploy dAPPS
Radix has a long term vision with the economic model planned to grow and develop over a period of around 10 years through three phases.
In order to maintain a low (but non-zero) price volatility of Rads, an autonomous Economic Algorithm (EA) has been developed that utilises a DEX and a reserve of another token called the Index Token (IT) to which Rads are pegged. This algorithm buys Rads when price falls to the price floor of 0.9 x IT and Sells Rads when the price rises to the ceiling price of 1.1 x IT.
Stage 1 – Bootstrapping
Initially an Approved Minter will issue Rads at a rate of 1:1 when a user sends USD to entities approved by the Radix DLT team. This phase is called the bootstrapping phase where no DEX or price floor will be active and thus Rads may be volatile and deviate away from 1:1 on secondary markets. During this time, the Economic Algorithm will accumulate Rads in its reserves which will then be used to create the Index Token for Stage 2. It is worth noting that Rads may be claimed for USD at any time during this phase which should help control the 1:1 peg although users may need to undergo the typical KYC compliance checks depending on their jurisdiction.
Stage 2 – price stabilisation
The second phase of economic model allows for Approved Minters to tokenise new assets aside from just USD backed tokens. The Index Token will gradually become a representative basket of the most liquid and price stable assets as well as introducing diversity and negative correlation for enhanced price stability. It represents an economic model where one unit of currency (XRD) is priced as equal to one unit of “assets” which are deemed useful and valuable to the ecosystem and society. At any time, users can redeem XRD for an equivalent value of all assets held in the Index Token, similar to when money was redeemable for gold.
The XRD currency is intended to remain pegged 1:1 with the Index Token and the Economic Algorithm will gradually bring the price floor up from zero such that XRD will eventually remain within the bounds of 0.9x IT (price floor) and 1.1 x IT (price ceiling). In this system, the EA Reserves start at zero but over time grow in response to XRD demand and gradual lifting of the price floor. The system will eventually reach a point of strength where in theory, the Reserves should only ever run out if all the XRD in circulation have been burned. In other words, every Rad is backed by redeemable assets.
The Economic Algorithm (EA) maintains price stability by the following mechanism:
- If a buyer wants to buy XRD for a price > 1.1 x IT, the EA will step in and sell XRD at the price ceiling and add IT to its reserves
- If a seller wants to sell XRD for a price < 0.9 x IT, the EA will step in and offer IT from its reserves at the price floor and burn the XRD received
Each week, the Economic Algorithm will assess the current price floor and the available reserves. It will then determine whether the reserves are in surplus and either increase the price floor (closing the price volatility window) or redistribute surplus reserves to XRD balance holders. This is a trade-off between reducing volatility faster (increase price floor) and creating economic stimulus to spend Rads (redistribution).
Stage 3 – Mature growth
The final stage of the economic model starts once the price floor reaches 0.9 x IT. This indicates that the economic algorithm and reserves have grown in sufficient strength that price stability can be maintained and that sufficient liquidity is available within the economy. It represents a time where a significant inflow of money and development capital into the Radix ecosystem has occurred.
As the diversity and value contained within the Index Token basket grows, the intrinsic value of XRD will also grow. Thus if the Radix network proves to be a valuable public asset and many assets are tokenised and business cases developed, the IT value should rise above the starting point of 1USD. Effectively, the XRD currency grows in value as the Radix economy grows in strength. Under this model, there is a positive feedback loop where increased economic activity on Radix improves the value of the XRD currency whilst still maintaining a stable price.
It is an interesting and unique value proposition where a currency is redeemable for useful commodities and assets which grows and shrinks in strength with the overall economy.
All DLT systems are reliant on their nodes. Compensation via inflation, mining or fees (or some combination) are the typical approaches in order to pay for the electricity and maintenance requirements of node operators. With Proof of Work systems where fees go to miners, there is a general trend towards centralised hash power as the economies of scale take over and specialised hardware is developed.
Radix aims to employ a relatively familiar system for node incentives however aims to make the opportunity for node rewards to be fair and proportional to value added to the network:
- Anybody can run a Radix Node with the contribution proportional to the available computing resources of the node.
- Temporal proofs for an Atom created by nodes are a signed declaration of a node’s interaction with the Atom which doubles as a public record of the nodes contribution to the network
- Transaction fees are proportional to the complexity of the code within the Atom (like gas fee).
- Base transaction fees of 0.01 XRD are initially set by Radix DLT but will eventually be determined via consensus
- Fees are paid to all Nodes involved in the Temporal Proof. If a proof length of 10 confirmations is requested, each node will receive 10% of the fee
In order to ensure that temporal proofs are spread across the network and to ensure that all nodes are utilised, Radix employs a logarithmic spiral function which seeks out nodes to participate who have the most favourable transaction volume compared to the monitored shards. This results in an overlapping mosaic where nodes are guaranteed to be utilised and communication, data redundancy and thus security is ensured across the network.
The governance paper for Radix is currently under development and I will report back when this paper has been completed.
In the meantime, it is worth noting the following regarding the genesis of Radix DLT and the founding company Radix DLT Ltd:
- Radix DLT is a registered company incorporated in the UK
- $2.8m in equity funding has occurred to date with an additional $2m provided by the founder Dan Hughes from his own capital
- Radix DLT Ltd will create a genesis allocation of Rads of total value of 9.8m Rads at Technical Go-Live to cover the $4.8m in development costs to date and an additional $5m of expected future funding
- Of this, only 27.6% will go to Radix DLT Ltd, 62.6% will go to early community supporters and 9.8% to the community fund for stimulating development activity
- An annually reducing share of the redistribution (reserve surplus) will go to Radix DLT Ltd starting at 10% and reducing by 1% each year.
Radix is a completely unique take on the decentralised economy. It has approached the DLT problem from an academic and robust perspective having first trailed and identified the pitfalls of existing technology stacks. The concepts present in Radix shows learnings from the cryptocurrency space such as a focus on sound economic models, scalability from day one and the benefits of programmability and tokenisation.
I am excited to see a project which is open about the need for long term sustainable growth where the economy builds itself up and early adopters must accept the volatility risk in return for long term stability and asset appreciation. The incentives for nodes, users and developers are aligned with the strength of the economy a direct response to positive actions by all actors. The utilisation of an autonomous economic algorithm, a DEX and a native asset backed index token is an interesting approach to price stability.
The key challenges and risks I foresee are the following:
- Attaining network effects – I do not see Radix as a competitor to Bitcoin as Radix is a full decentralised economy package and is not attempting to compete on the decentralised sound money front. I do however see Radix as a competitor to the Ethereum + MakerDAO combination as well as other smart contract platforms. Ethereum in particular has the strongest network effects and reputation in this space so will be the one to watch as the incumbent protocol.
- Radix DLT Ltd is a central body in the system and will have a role in the early years supporting the network. Furthermore the role in selecting and on-boarding Approved Minters should be clarified in the governance paper. As such, it may be that in the early years, Radix will not be as decentralised as existing networks. This is not an uncommon situation as very few cryptocurrencies have the origin of Bitcoin where there is no head of the hydra. That said, I believe that the funding model and fund allocations are very reasonable considering the complexity of the development and I believe the intentions of the Radix team are positive.
- Radix will not be doing and ICO as we know it from 2017 and it can be considered closer to a USDC or GUSD model where USD can be exchanged both ways for Rads. However as we all know, the regulatory uncertainties persist and given the existence of a central body upon which success of the network relies, it may still fall under the grey area of USA regulations. It is my understanding that Radix DLT Ltd will be compliant with UK regulations.
An Update Regarding Our Portfolio
We are diligently working on providing you with our new RSC Managed Portfolio (V3.01) in the coming weeks. We will be posting iterative updates in the discord.
We intend on this portfolio being balanced between the Three Pillars of the Token Economy & Interchain:
Crypto, STOs, and DeFi projects.
We will also make a concerted effort to draw from community involvement and make this portfolio community driven, like our Portfolio call on yesterday’s Discord chat.
Thank you for your patience.
Here’s a sneak peek at the new portfolio:
Here’s our past portfolios for reference:
RSC Managed Portfolio (V2)
RSC Unmanaged Altcoin Portfolio (V2)
RSC Managed Portfolio (V1)