On Floating Grain Prices

The CredSperiment
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Since the launch of the CredSperiment, we’ve had a fixed redemption rate of 1 Grain = $0.01. This was a really simple way to get the system going, and assign some real value to Grain. However, this system has some serious flaws.

Problems with a fixed Grain price

It ties Grain issuance to external funding

Grain represents “accumulated value” that’s been contributed to the project. Therefore, its issuance rate should be primarily driven by internal considerations, i.e. how much value has been added to the project lately? (Also: internal governance constraints, as a safeguard against inflating Grain.)

However, fixing the Grain redemption price means that the Grain issuance needs to tightly couple with the availability of external funding. It means we may have situations where (due to changes in external relationships) the project loses the ability to internally reward contributors.

It is hard to predict actual redemptions

As of early Nov 2019, we have distributed $22k worth of Grain (at $0.01/Grain). However, we’ve only had ~$1000 worth of redemptions. It seems like most people would rather hold onto their Grain than redeem it at 1 cent per Grain. Given that we do actually want to send more money to the SourceCred community, it’s hard to find the right Grain issuance rates.

It admits the possibility of “Grain bankruptcy”

Riffing off the above, suppose that PL provides a budget of $10k to purchase Grain, and historically our redemption rate has been about 2%. Then I might issue $500k (at fixed exchange rate) to try to get $10k worth of redemptions. If something causes the redemption rate to spike, we may run out of money, which will greatly damage trust in the project.

Choosing a specific Grain price is very awkward

Prices convey valuable information about the world, and allow other actors to orient around that information. In the case of Grain, the price might reveal how strongly the community and stakeholders believe in the future of the project, and provide a useful and hard-to-game signal about how the project is doing.

Fixing prices, on the other hand, has a very bad track record. :slight_smile: The system will be healthier if the price represents real information about contributors’ belief in the project.

Switching to Floating Grain Prices

In the future, I expect the price of Grain to be set in an open market, where contributors can freely sell Grain, and supporters of the project can express that support by buying it. Healthy markets characteristically have many sellers and many buyers. However, for a variety of reasons, it makes sense to start with Protocol Labs (@protocol) as the sole Grain buyer.

So the question is: how can we build a mechanism that allows contributors to sell Grain to Protocol Labs, in a way that:

  • allows the price to be set by contributors’ supply (of Grain) and demand (for dollars), rather than by Protocol Labs
  • allows Protocol Labs to budget their cash outlays predictably
  • avoids massive swings in the Grain price (e.g. if one week folks are on vacation, and almost no-one sells, the spot price of Grain should not increase 100x)

In A Mechanism for the Weekly Grain Sale, I propose a mechanism for conducting such Grain sales.

Thanks to @ianjdarrow for reviewing this post.

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I think this topic shouldn’t be talked about in isolation as I believe it will function as part of an ecosystem, not a standalone supply-demand equilibrium.

Particularly, I’m talking about the perceived value of Cred. The functionality of Grain (for example boosting, or staking for champion status). The grain minting system. Tax law implications of creating a market, e.g. making this a digital asset.

Additionally I’m disagreeing with numerous assumptions in these two posts.

This is only for markets. A fixed price on Grain under the current system tells you exactly nothing about value, other than that somewhere a design choice was made. Rather I think what people would use as an indicator today is what contributions results in what payouts. Which is more tied to the Cred distribution and Grain minting.

If the added value to the project expressed in Grain exceeds the budget available to buy back that Grain in USD, in a market the value of Grain would need to plummet. Making people’s Grain near worthless like a hyper-inflated currency would solve “Grain bankruptcy” on paper but fails to realistically compensate people all the same. The coupling between ability to compensate in currency and the available funding isn’t going anywhere.

Imho, if I should interpret “internally reward” as, we can still issue Grain and use it as such when funding dries up, is a bit of a cop out as previously Grain afforded real buying power and in an inflated state is just a forced doubling down on waiting for it’s market value to go back to non-defunct values in the future.

Trading fractional reserve banking’s risk of collapsing, for a market crash / hyper-inflation possibility. Same as above point. A different way of encompassing the same problem of funding drying up.

A healthy market having many sellers and buyers is exactly why it can’t be a fully free and open market. Currently we’re accepting a monopsony position of PL because we trust them to be a benevolent sponsor. Opening yourself up to an unlimited acquisition fest would allow any untrusted party with sufficient funds to put themselves in a position of great influence to the point where other buyers can be bullied into a position where their investment simply isn’t justifiable. Just one example why a real world market usually requires much more regulation than just opening it up and aiming for diversity.

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To provide an alternative to and argument against markets, here are some thoughts.

Anticipating to solve a problem we don’t yet have.

Markets seem to me a solution for a problem at a later trust level. Reducing friction for sponsors / investors.

It’s certainly a lot easier to buy a couple of tokens on an open market to play the speculation game, than it is to make a hard commitment to a community and requiring a mutual trust level. But I think that’s exactly why we’re staying with Protocol Labs in this stage. And in my opinion it would be healthy to keep such friction in place for any additional potential sponsors in the foreseeable future.

So, not yet deciding to go to a fully open market but expecting we will, and therefore choosing something in-between that looks like a market. I think is preemptive, so I think there could be completely different options for the current stage.

Problems to solve right now.

Design goals (I think):

  • Reducing friction for contributors to claim benefits (governance, financial, etc.).
  • Have Cred distribution reflect community values in terms of incentives and value of contributions.
  • Using Grain as an incentive system through boosting / staking.
  • Using Grain as a redeemable / sell-able token for currency.

Immediate problems:

  • Fixed rate Grain issuing and redeeming, decouples it from progress made in the project.
  • How to deal with the risk of the Grain redeeming budget going insolvent, vs the inefficiency of reserves not being used for anything.

Alternative

Considering that the people most impacted by Grain going insolvent are the people who have Cred. Seconded by the parties that bought Grain. And having a high trust relationship with sponsors makes sense for the current stage.

Why not a (cred weighted? :smile:) stakeholder meeting to set the financial policy as the community, including PL. This would be to address and monitor both problems.

For example, the meeting could decide on:

  • Keeping a fixed redeem rate for Grain, but peg issuance to an absolute Cred target. For instance 200 Grain per Cred (probably way off mark).
  • Have a threshold of no less than 15% reserves, before which a meeting should be called.

Examples of what the meeting could decide to remedy a low reserve:

  • Issue Grain slower or not at all.
  • Lower redeem value.
  • See if the sponsor will increase budget.
  • Ignore and change to 8% of reserves as the observation is still 1%.

And so on.

The key thing here is that by having the meeting, the community can decide on their own risks and possible consequences they’re comfortable with. I think PL should have a say as, while they’re not at risk of overspending, are at risk of not seeing enough progress for their funding if mismanaged. As a side-effect it’s a great opportunity for useful debate, and to increase inclusion of the community into governance.

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