EQualityCoin- What type of model is this?

[MPrestonSparks]

Hi everyone,

I've been working on developing a crypto-currency called eQualityCoin for a while now and hoped someone here might be able to help me "classify" the system in a formal mathematical sense.

The system's main feature is a simple rule for how it determines a purchaser's exchange rate. More specifically, if the purchaser's native/local currency is the "weakest" in the system then their exchange rate is 1:1. If the purchaser's native currency isn't the weakest, their rate is the inverse of the exchange rate of their currency to the weakest. This formula produces a "pre-normalized" value of eCoins. This value is then normalized by dividing the pre-normalized coin balance by the wallets weight (that is, it's ratio to the pre-normalized wallet universe as a whole). The normalization aspect allows user's who fund their wallets in different base-currencies to have an apples-to-apples view of the wallet's value.

I'm attaching a model I put together (which is basically a thought experiment) to try and study how the system behaves. In the model, the players fund new wallets with different base-currencies which are equally valued (in relative terms of purchasing power). To do this, I used The Economist's "Big Mac Index"; i.e., each player funds a wallet worth 10 Big Macs. Then, two players (using eCoins) agree to the exchange of 1 Big Mac. After the transaction occurs, the players convert their wallets back into units of their base-currency.

What I found is this- although the two players agree to the same price (in eCoins), once their wallets are converted back into their local currency, the price the players actually pay/receive is the same price of the good locally, in units of their local currency.

This leads me to believe that the system would price goods at purchasing power parity (I know this is an econ concept and not a statistical one, but I think it's helpful to get the point across).

If anyone could help point me in the right direction I'd greatly appreciate it. I'll rephrase my question:

In the most general sense, what statistical system best represents a system like this?

Side note: my background is in finance, not physics, so I apologize if my description is unclear in any way. I do understand this system, though, and I'm happy to answer any questions or to clarify anything further.Thanks so much!
-Preston

 

[Fooality]

This sounds really interesting, but I don't understand fully, and can't download your model on phone. Could you provide an example of how it works, and explain the motivation? Is it trying to facilitate fair trade? Is it immune to manipulation through buying foriegn currency and using it to invest?

Please remember people here don't have finance background.

 

[MPrestonSparks]

This sounds really interesting, but I don't understand fully, and can't download your model on phone. Could you provide an example of how it works, and explain the motivation? Is it trying to facilitate fair trade? Is it immune to manipulation through buying foriegn currency and using it to invest?

Please remember people here don't have finance background.

Thanks for the feedback Fooality. I've attached a screenshot of the spreadsheet, hope it works for you.

My motivation was to try and find a way to remove the price volatility from BitCoin. In other words, I want to be able to buy $100 USD worth (or any currency) of the Coin, and be certain my "wallet" will still be worth $100 USD a year from now, regardless of changes in the exchange rate of the USD.

Basically, when a user funds a new wallet, they specify what type of currency the wallet is funded with. The wallet can only be converted back into it's own currency type. I have flowcharts that show the process (I'll upload that as a separate reply).

I would say it is immune to manipulation, because in order to change the Coins exchange rate the manipulator would have to pour money into the weakest currency, which would elevate the system as a whole. Also, I can share some supply/demand curves I made using the model that show it would facilitate fair trade in that it removes what's called a "deadweight loss" in econ. Then again, though, if I could classify the model in a formal mathematical sense, I think others would be able to provide better justifications than mine.

Thanks!
-Preston

 

[MPrestonSparks]

Looked like my image was blurry, try this..

 

[Fooality]

Thanks for that. Fair warning, I'm probably too naive in econ to really offer much, but I want to understand it.

So the basic thumbnail sketch is that day to day currency exchange rates are effected by things that make them deviate from what the rate would be based purchasing power parity, so the result is a different cost of a big mac, in absolute terms (not just nominal), in different places. By using eQualityCoin as an expression of those absolute terms, you can actually bypass that, and have each person in different countries buy a big mac from the other, each at their local cost in absolute terms, instead of the exchange rate distorted by those other factors. Do I have the basic idea?

 

[MPrestonSparks]

You got it! Thanks for the summary, too.

 

[MPrestonSparks]

This may help..

Notice that eQualityCoin (F,T,F) has the opposite characteristics from the modern US Dollar (T,F,T). Not sure what the proper term for this is.

 

[256bits]

Looked like my image was blurry, try this..

After the transaction, there is less GBP currency, and more Indian rupees, if they converted both wallets back to local currency.
That should have some effect upon local purchasing power of the local currencies and the overall exchange rates between currencies in the long run.

 

[MPrestonSparks]

After the transaction, there is less GBP currency, and more Indian rupees, if they converted both wallets back to local currency.
That should have some effect upon local purchasing power of the local currencies and the overall exchange rates between currencies in the long run.

Hey 256bits, not sure I understand what you mean- would you mind PMing me a little more detail? I'd like to keep this thread focused on determining the type of model I'm dealing with.
Thanks!
-Preston

 

[Tom.G]

Ref Post #8

After the transaction, there is less GBP currency, and more Indian rupees, if they converted both wallets back to local currency.

Isn't that called a Trade Deficit?

 

[Fooality]

You got it! Thanks for the summary, too.

Wow, brilliant and disruptive idea. I love it! Its really weird though, I'm blinking and rubbing my eyes looking at it.

 

[MPrestonSparks]

Notice that eQualityCoin (F,T,F) has the opposite characteristics from the modern US Dollar (T,F,T). Not sure what the proper term for this is.

Is this what's meant by "chirality"?

From the wikipedia article "Chirality (physics)":
"A chiral phenomenon is one that is not identical to its mirror image (see the article on mathematical chirality). The spin of a particle may be used to define a handedness, or helicity, for that particle, which, in the case of a massless particle, is the same as chirality. A symmetry transformation between the two is called parity."

 

[Stephen Tashi]

The system's main feature is a simple rule for how it determines a purchaser's exchange rate. More specifically, if the purchaser's native/local currency is the "weakest" in the system then their exchange rate is 1:1.

I'm unfamiliar with currency trading, so let me ask if the exchange rates are usually at a "rational equilibrium" ?

For example, in an imagined non-equilbrium situation the exchanges between currencies A,B,C might be

1A = 2B
1A = 3C
1B = 4C

Which would produce the mathematical contradiction 1A = 3C and 1A = 2B = 8C. I assume currency traders would step-in and make money on the situation until no more could be made, but which currency would they choose to hold after the dust settled? - or would they get out of all 3 currencies ?

 

[MPrestonSparks]

I'm unfamiliar with currency trading, so let me ask if the exchange rates are usually at a "rational equilibrium" ?

Yes and no. The “law of one price” states that they should reach a rational equilibrium, but my understanding is that to date, this hasn’t been confirmed. I think this is caused by the (currency) system being centralized and determined by the Bank for International Settlements. The BIS is the central bank for central banks. It issues shares called “Special Drawing Rights”, which central banks hold on their balance sheets as an asset.

Side note- these shares used to be (at least partially) backed by gold, but on 4/1/03 the BIS replaced the gold franc with their own imaginary “SDRs”.
http://www.bis.org/press/p030311d.htm

from the Wiki page:
“Special drawing rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). The XDR is the unit of account for the IMF, and is not a currency per se. XDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged. The XDR was created in 1969 to supplement a shortfall of preferred foreign exchange reserve assets, namely gold and the U.S. dollar.”
https://en.wikipedia.org/wiki/Special_drawing_rights

This is a long way of saying I believe the “rational equilibrium” you’re referring to which the currency market tends toward is this rate, dictated by the IBS (or it’s shareholders, at least). So maybe in a way it’s an “irrational” equilibrium.

I assume currency traders would step-in and make money on the situation until no more could be made, but which currency would they choose to hold after the dust settled? - or would they get out of all 3 currencies ?

In this situation I think the currency you’re referring to is the trader’s “reserve currency”. The US Dollar is our financial system’s current reserve currency, so most likely the USD.

That being said, I think the USD’s status as global reserve currency is partly responsible for the “de-stabilizing ripple” that spreads across the globe when the USD experiences some turbulent event. It’d be interesting to see if there’s been any empirical confirmation of this.

This system (eQualityCoin), or an idea like it, could potentially act as a better reserve currency. In your example, the trader could move back into eQualityCoin after exploiting any arbitrage.