Jump to content
Wandering_Dog

The impossibility of liquidity in xrp

Recommended Posts

19 minutes ago, Wandering_Dog said:

I just gave you one @rootvegetable. Please, if you aren't going to support your arguments, and just post single sentences as if you're impersonating Confucius, just don't bother posting at all, please :drinks:.

I didn't read the whole thread, but I didn't see one in the OP. The idea that the money supply has to increase is a strange product of a handful of 20th century economists. Any supply of money (once it satisfies a few logistical requirements) is exactly equal to any other supply of money. The value of money is infinitely adjustable. 

Share this post


Link to post
Share on other sites
20 minutes ago, Wandering_Dog said:

It doesn't matter if Bob is a customer of which bank, or the price, or anything else. In the simplest sense, is the situation possible? Yes. Is the outcome as stated? Yes. For the sake of the example, it is a gross simplification, to be more accurate we could draft up a structure of debt and simulate it to demonstrate a much more complex system, but we don't need to if this example works for our purposes.  

The limitation of this simplification is that Bob knows that the moment he refuses to supply the value becomes zero because XRP is useless.

Share this post


Link to post
Share on other sites

This is a great thread, thanks for that guys. 

It's above my paygrade to understand but it seems to me that @Ripple-Stiltskin's point about XRP being a truck is how I understood it as well. We are not talking about XRP replacing gold or becoming the world currency, it is an electronic bridge asset that is much faster and malleable than what we currently have. 

As he said in his post, the XRP truck can get bigger and bigger, according to the price. @Wandering_Dog, is the concern here about what happens if your theoretical Bob refuses to use his truck and he's the only one with a truck? Then of course the system would break down. But how is that different from everyone in the world refusing collectively refusing to use EUR anymore? Is the only difference the likelihood of it happening?

Forgive me if this is a stupid question. This is a fascinating thread, as I said.

Cheers. 

Share this post


Link to post
Share on other sites
4 minutes ago, Seoulite said:

As he said in his post, the XRP truck can get bigger and bigger, according to the price. @Wandering_Dog, is the concern here about what happens if your theoretical Bob refuses to use his truck and he's the only one with a truck? 

And there is the problem:

OP must clearify in a few concrete and easy understandable sentences what he thinks the problem is/will be and how/when it will occur, including possible implications.  No 5 page academic lectures about general economic principles.  Otherwise we keep on guessing what he’s hinting at. 

Seems to me he shifts the problem back and forth from inelastic supply to centralised supply. 

Clarification is needed and at least some dialogue in response to given answers by several members in this thread. 

 

 

Share this post


Link to post
Share on other sites
4 hours ago, Wandering_Dog said:

Liquidity in the financial system is achieved by an elastic supply of the global settlement asset, USD, and an elastic supply of various private monies below the settlement layer, typically in the form of bank deposits, bonds, and derivatives, such as swaps, in various currencies (EUR, GBP, JPY, etc). 

This financial system operates in the simplest sense as follows:   

image.png.dc34f652cf96a453e14180ce94b0f658.png

The primary creators of money are account holders at the central bank, namely commercial banks. These allocators of credit determine the purchasing power of economic participants and the direction and magnitude of spending in the economy. The largest problem with this simple system is that the financial assets that banks create are themselves affected by the money that banks create. This feedback mechanism can be explained in the simplest terms as follows:  

image.png.d285bd0d09fd0cbba3df3b52f3b0e6d9.png

This process is known as a credit or financial cycle, and reflects an expanding money supply, and a corresponding expanding supply of settlement money to ensure markets clear. If you replace an elastic settlement layer but retain the elastic private money layers, you will create a problem: there is no way to increase the amount of settlement money, in this case XRP. There will be contracts created today that in the future cannot settle due to an insufficient amount of XRP in the economy.  

The result is known as a deflationary spiral. Without a lender of last resort to create new XRP and lend that XRP, firms must liquidate their balance sheet, flooding the market with assets, which prevents other firms' capital gain, weakening balance sheets, and finally collapses prices. Because there is no balance sheet with the capacity to absorb all losses (the central bank), all balance sheets contract to zero, and the economy either collapses entirely, and unemployment reaches 100%, or the currency system is abandoned, which is historically the case with the gold standard.

In this context, the slogan "use XRP to source liquidity" is a contradiction--adoption of XRP as a standard necessarily implies an illiquid system, which has only one possible outcome: liquidity crisis.  

The argument which remains in favor of XRP adoption is equally absurd: XRP as a hard constraint on lending behaviour of banks. This is the equivalent of the gold standard, which has a long empirical history of failure.

If XRP is viewed from this perspective, it can only be appreciated as a precursor to something else, chiefly a global, elastic settlement system of a similar design but is national economy agnostic. However, currently this plausible implementation of an "XRP_2" does not exist, nor is it even discussed.        

 

You never addressed the velocity of money. As more transactions occur the more liquidity there is. XRP dramatically increases the velocity of money far past that of gold. I think you may have forgotten how much more liquid the market becomes when so much capitol isn’t in a holding pattern waiting to settle. Just my two cents

Share this post


Link to post
Share on other sites
5 hours ago, Wandering_Dog said:

 

The argument which remains in favor of XRP adoption is equally absurd: XRP as a hard constraint on lending behaviour of banks. This is the equivalent of the gold standard, which has a long empirical history of failure.   

 

 

Your assumption seems to be based on the unsubstantiated premise that financial institutions will never create debt instruments on top of XRP in the same way that they do fiat currency. In my understanding, IOUs provide this role easily. 

Share this post


Link to post
Share on other sites

Miguel Vias has talked about Ripple potentially using their stockpile of XRP to be a kind of lender of last resort, providing that service to governments of the world (at a cost I’m sure). That sounded like a hypothetical when he talked about it in the past, but it would answer to OP’s weird accusation filled with a lot of assumptions.

Share this post


Link to post
Share on other sites
9 hours ago, Wandering_Dog said:

I'm not following your argument, can you give me a bit more detail when you say "access to someone else's cash" with respect to settling a transaction in XRP? 

I think @jag216, @Professor Hantzen, @Trickeryand @xrpsailor1 have made all the points that I would have done to reply to this, but to reiterate

xrp is not a currency. Governments are not going to budget spending in xrp, amazon will not list prices in xrp (though they may accept it as a payment mechanism), banks will not be required to issue xrp or loan it. xrp exists only to bridge payments in other currencies. Comparisons with a gold standard are not valid.

Your worry that Bob will hold all the xrp and refuse to sell it is a valid concern, but even in the unlikely event that Bob managed to buy up all the xrp and then hold onto it - it becomes worthless as a bridging 'currency'. The beauty of ILP is that it is agnostic to the settlement mechanism, it simply says, I need to pay Alice in currency X and I've only got currency Y, who can give me the best deal on X for Y. It requests liquidity in X 'on demand'. If Bob owns all the xrp and refuses to use it, then someone else will step in and make the trade using some other token, or prefunded nostro/vostro trade and the fee will be reflected in the costs. Bob would be an idiot to do this as there is going to be a huge sum of money made by market makers in making these trades from their spreads, and the world is starting to see this and this is why we see so many exchanges springing up and wanting a slice of the action (and market makers should follow, but we don't see them in the news the same way that we see the exchanges opening). The real money will be made by the market makers - doing the exact opposite of what you are worried about - Bob witholding his xrp makes him no $$$, but trading it millions of times per day to drive the IOV will make him very wealthy.

When millions of Bobs like us are holding xrp and the pool available to market makers becomes scarce, then the price rises naturally - and in principle this could cause problems if the available supply of xrp were to diminish - exponential rises in the price of xrp would result, followed by crashes as we all cash out and then rising again as new waves of investment kick in. The futures market and huge number of investors competing for a slice of the $$$ will hopefully smooth this out and lead to a gradual appreciation of xrp price in line with volume of transactions using it as a bridging currency.

Share this post


Link to post
Share on other sites
11 hours ago, Wandering_Dog said:

The total USD used to backstop the global financial system in 2008 was > 8 trillion. 

That is more than four times the total circulating supply.of USD. If I'd buy your theory that 8 trillion non-existing dollars have been used to rescue the economy, then why could non existing XRP not also be used instead?

Share this post


Link to post
Share on other sites
Just now, lucky said:

That is more than four times the total circulating supply.of USD. If I'd buy your theory that 8 trillion non-existing dollars have been used to rescue the economy, then why could non existing XRP not also be used instead?

Because it's not a currency it can't be controlled that way by a central authority that can add or subtract from circulating supply, it would be like Ripple saying we'll give a market maker X amount of XRP but we won't actually give them to them we'll just promise to. But you can't trade that promise on the XRPL and have settlement without trust, and trust is the thing that blockchain is doing away with, otherwise what's the point?

Share this post


Link to post
Share on other sites
11 hours ago, jag216 said:

while a bank might create money - redeemable tender - that represent claims for hard assets in their vault, there is no way to make the money to pay the interest!

I think you are asking how banks close the monetary circuits they open, which is answered here very succinctly by Zezza: http://www00.unibg.it/dati/corsi/11007/65034-Zezza - Godley and Graziani. Stock-Flow-Consistent Monetary Circuits.pdf 

TLDR: Banks create their own interest profits by spending. 

Share this post


Link to post
Share on other sites

×
×
  • Create New...