Real Value: Asynchronous Price Discovery

 

In a Synchronous system, all operations (buying & selling) are coordinated by one, or more, centralized parties and must executed in the same time. In contrast, Asynchronous systems are not happening at the same time and do not depend on any parties.

This fits with the Decentralization concept which brings famous to the blockchain technology.

 

According to Bancor Protocol, Asynchronous Price Discovery is the ability of a smart token to discover the price of itself or its reserve tokens without having to match a buyer & seller in real time.

In general stock market, price discovery is a process to determine the price of a commodity based on supply & demand factors. For example, if the demand for a particular commodity is higher than its supply, the price will typically increase.

This is also a common practice in Cryptocurrency Exchanges, where the supply & demand of a cryptocurrency determine it’s spot market in any exchanges.

Since Price Discovery process is involving buyers and sellers activity at a transaction price for a specific item at a given time, it becomes sensitive to many factors like:

  • Number of buyers
  • Number of sellers
  • Number of recent sales or purchase price
  • Current bid price
  • Current offer price
  • Availability of funding
  • Cost of execution (market fees and tax)
  • Cost, Availability and Transparency of pricing information in current and other execution venues.

Due to Factors of Sensitivity, Price Discovery could lead to an unstable market or even a crisis in case of panic selling. One of the worst side-effect is Pump & Dump activity.

The theory behind “Pump and dump” scheme: a group of individuals try to boost the price of a cryptocurrency with false or misleading statements about the currency itself then they will buy the tokens in a huge number of amount. Once the price has been pumped up, it will attract potential investors to purchase the tokens. They now dump/sell to make a huge profit. At the same time investors lose money with the fall of the price.

As long as the cryptocurrency price depends on buying & selling activity and not based on the real valuation of the currency itself then there will always “pump & dump” activities around.

Valuation is different from the commonly-used Price Discovery. Valuation is the process to determine the current value of the company. A few factors like team member, technology, products, Intellectual Property Rights, assets & revenues can be used to help determine the value of the company and prospect it’s future value.

 

Valuation matters to investors because it determines the share of the company’s tokens in exchange for money. At the early stage the value of the token & the company itself is close to zero, but the valuation has to be a lot higher than that.

Bancor develops an empirical measure of price discovery which is suited to asynchronous, high-frequency financial data and already test the model predictions.

Without Buyers or Sellers (no one buying or selling at the same time), Smart Tokens can reprice the token any time it is purchased or liquidated through its smart contract. This is done by holding the pre-set CRR constant and adjusting the price to reflect current smart token supply and reserve balance.

The price increases when the token is purchased, and decreases when it’s liquidated. Over time, the price will stabilize at the point of balance between the purchase and liquidation volumes. The more people use the currency in their daily life, the higher the price.

This in turn makes the market work much more effectively, stable and invulnerable to any kind of threats like Pump & Dump activity or other factors that might affect the price.

In other words, no one can cheat the system!

Both company & investors should benefited from this technology since Company can now focus on developing a working products and Investors feel secure since they are investing on the company itself not only for the sake of the tokens.

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Author: Albert D Stone

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