TWO PRIME AND THE OPEN SOURCE FINANCE FOUNDATION
We introduce a new digital asset class, the FF1 MacroToken, and apply it to the blockchain industry. We first provide the axiomatic principles of modern monetary theory and modern banking practice and show, in a logical and compact form, how the modern monetary pyramid functions from central bank FIAT M 0 monetary ab-initio creation to commercial bank led and asset-backed M4 monetary emission. We show how modern crypto-currencies have challenged these established axioms, as BTC and ETH function as de-facto M0 stores of value with no asset backing. We propose a mechanism for M4 in the crypto realm with fractional asset-backing replicating fractional reserve monetary emission. We describe the mathematics of an alternative, superior approach, forming Two Prime’s financial thesis. We show how this methodology can be applied as an Open Source application, in the vein of BTC and ETH, with all the creative and value generative potential that comes along with it. We leverage store of value functions of cryptocurrencies to arrive at value creation and accretion in the real economy by the intermediary of crypto exchanges on which we propose to provide protective measures. We detail treasury and reserve formation for the Open Source Finance Foundation, describe its relation to Two Prime and detail the emission of a new crypto-asset called the FF1 Token. We seek liquidity for the FF1 treasury within the secondary exchanges for the purpose of applying M4 in the real world, both in the private and public sector. We first apply this to the vertical of cCryptoc-Currencies while outlining the genericity and stability of the model which we indeed to apply to esoteric financial needs (e.g. Smart City financing). In so doing, we extend the scope and control of applications that a system of digital units of value stored on decentralized, public ledgers can aim to advance. We call this approach Open Source Finance and the resulting coin class a MacroToken.
MODERN MONETARY THEORY FRAMEWORK
Modern Monetary Theory states two interdependent phenomenological axioms and the banking system operates on a resulting syllogism:
- Axiom 1: in discounted cash flow analysis (axiom 1a), 0 = 1 and (axiom 1b) 1 = 1..N.
- Axiom 2: Government possesses, de facto, exclusive, and perpetual right of use of Axiom 1a for Ab-Initio Money(M0) monetary creation (FIAT M0).
- Syllogism 3: The creation of AssetBackedM oney(M4) is a consequence of these two axioms. The banking system creates BACKED M4 with debt-backed cash flows of type 1b: 1 = N with N ⇡ 1. Add equity to these cash flows (e.g. project finance) and you create a return of type 1 = N with N 1 or axiom1b. FIAT currencies are therefore designed to be accretive with possibility of fluctuation.
In the past 10 years, the formation and emergence of BTC and ETH has verifiably falsified Axiom 2 [1]. The phenomenon of crypto-currencies has created ab-initio global stores of value of type 1a. Cryptoc Currencies have displaced trust by means of government violence and associated, implied violence, with instead, open source distribution, cloud computing, objective mathematics, and the algorithmic integrity of blockchain ledgers. The first “killer app” of these open source ledgers areis stores of value, e.g. Bitcoin, or “open source money” as it was first characterized by its semi-anonymous creators. Leading crypto-currencies have proven themselves as viable global stores of value. They are regulated as Gold is in the United States. However, as type 1a units of value, they have tended towards high volatility inevitably leading to speculative market behavior and near 0 “real” asset-” backing or floor price [2], albeit with an aggregate value of $350bn ab-initio creation.
We therefore advance Axiom 2 to Axiom 2’
- Axiom 2’: (spoken “Two Prime” and the reason for the company name): ab-initio value creation (type 1a) and Macro Token (type 1b) can reside outside of national powers and central banking, e.g. in Open Source Finance.
At N < 1 we have dilutive debasement of fungible units of value, aka inflation. At 1, the new monies are therefore stable coins. At N > 1, these tokens are designed to grow with demand. Axiom Two Prime (or 2’) displaces government endorsed violence as our macro-socio organizing principle, with algorithmic objectivity and verifiable transparency. This occurs within the landscape we call Open Source Finance.
THE TWO PRIME MODEL
Two Prime refers to the financial management company managing the OSFF. FF1 refers to the Macro Token of the OSFF. The first stage is reserve and treasury formation, the second stage describes the mechanics of the public markets and the protective measures of the reserves and third stage is treasury liquidity via the Continuous Token Offering both in public and private markets. We will now describe these in more detail.
MACRO INVESTMENT THESIS AND RATIONALE FOR FF1
The FF1 MacroToken is a synthetic token based on the proven killer applications of Cryptoc-Currencies. After 110 years since the inception of the blockchain technology, the killer apps of crypto are already here and they are primarily all financial, not technical. The historical killers apps are:
- Transnational Store of Value: Crypto-Currencies display a robust and transnational store-of-value function. Many crypto professionals today use the blockchain as their international bank. They maintain balances and pay with internet-based open source ledgers (a.k.a crypto). They find local FIAT liquidity on local exchanges. They speculate in crypto on global exchanges. The paradox of Axiom 1a is that in the absence of any backing the value of these stores of value is determined solely via exchanges, pure supply and demand mixed with sentiment. Their volatility is a side-effect of their lack of anchoring.
- Capital Formation: Cryptoc-Currencies have proved very adept at capital formation both on flow and stock. The days of the ICO, where hundreds of millions of (crypto) dollars were raised seemingly overnight, need to be reborn as the Phænix from its ashes. However, the ICO faltered at capital allocation, wasting proceeds on tech no one needed and lavish parties, resulting in non accretion (N = 0.07)
- Fractional Asset- Backing and Stablec Coins: Stable coins are tokens that are backed by existing assets. The first and best known example of a stable coins is Tether, which has a 60% backing ratio. We credit the crypto rally of 2017 to the conjunction of ICOs and stable coins. These instruments also have something to say to banking infrastructure. Witness the political backlash to Facebook’s Libra or the efforts of the Bank of China launching it’s own Central Bank Digital Currency. It should be noted that FIAT in the west is born as a fractionally asset- backed instrument (N = 0.07 or Basel III ratios) and matures, over time to (N > 1), as a super-backed instrument.
The FF1 MacroToken is a pot-pourri of these features, a synthetic token that mixes the best of breed practices of crypto mixing Store-of-Value, Capital Formation and Fractional Asset-Backing.
MACRO INVESTMENT THESIS AND RATIONALE FOR FF1
Treasury Generation: Ab-Initio Store of Value On the supply side, The OSFFTwo Prime has created is creating 100, 000, 000 FF1 Macro Tokens, which it keeps in treasury. They are pure stores of value for they have no assets backing them at birth. They are ab-initio instruments. The FF1 Macro Tokens are listed on public crypto exchanges. Two Prime manages operates market- making for these stores of value.
Treasury Management: Supply- Side Tokenomics All FF1 are held in the Open Source Finance Foundation treasury. Crypto aAssets that enter into treasury are, at first, not traded. The FF1 supply will be offered upon sufficient demand. which Two Prime generates publicly and privately. The total supply will be finite in total units (100, 000, 000), but variable in its aggregate value for supply and demand will make the price move. The proceeds are the property of the OSFF (not Two Prime) and Two Prime places invests the liquid treasury (post FF1 liquidation) in crypto assets to protect against depreciation and create a macro-hedge reserve andor floor for the price. It should be noted that the price and the NAV of assets are, by design, not equal. In other words, the additional OSFF treasury is locked and can enter circulation if, and only if, there is a corresponding demand which is then placed invested in crypto assets with a target value N 1. This results in fractional asset- backing at first.
EXCHANGES, CONTINUOUS TOKEN OFFERING, AND DEMAND- SIDE TOKENOMICS
Public Exchanges Two Prime will maintain listings for the FF1 Tokens on behalf of the OSFF. Two Prime maintains market- making operations in public crypto exchanges on behalf of the OSFF.
Continuous Token Offering Two Prime works on creating new liquidity for the FF1 Macro Tokens to comply with the supply side constraints detailed above, namely that a token enters circulation when matched by demand. Two Prime does demand generation in public as above as well as private. This CTO results in something akin to a reverse-ICO, letting the reserves be set by public trading and then marketing to private purchasers investors (accredited US for example) after the public liquidity event. Demand generation is done via marketing to relevant audiences, e.g. as a macro way to HODL with exclusive private equity investments for crypto holders, and as a diversified and de-risked way to gain crypto exposure for FIAT holders (Sharpe ratio: 1.55, Beta to BTC: 0.75).
PARTNER NETWORK, USE OF PROCEEDS, ACCRETION AND FLOOR PROTECTION
Though this mathematical approach allows for a broad and differentiated set of financial applications and outcomes, Two Prime founding Members will first apply this work to the realm of project finance within the Blockchain space via algorithmic balancing of an equity and debt based treasury consisting of real crypto assets and future cash flows.
Proof of Value Mining in Partner Network Funds and projects can apply to the foundation for financing. This is the partner network and is akin to the way a network of miners secure the chain. Here a network of partners protects the value. The Foundation invests the proceeds in liquid crypto assets, interest bearing crypto assets and equity crypto assets via partner funds, creating a bridge to the real economy (crypto companies) in the last step. The foundation holds these (real economic) assets.
M4 Asset Mix The funds raised are invested in public and private sector projects. We consider the following mix
- Up To 30% cash and cash equivalents including crypto products (HODL)
- Up To 30% debt and bonds. Including crypto products (Staking HODL)
- Up To 30% deep tech including Fund of Funds
- Up To 30% discretionary allocation including back to reserves.
This completes the M4 step and the flow of funds for the FF1 Token. It shows a feedback loop, for the Foundation can buy back it’s token, leading to an idiosyncratic tokenomics: the FF1 Token has a fixed (and potentially diminishing) SUPPLY alongside (potentially increasing) endogenous and exogenous DEMAND.
Two Prime : The Future of Decentralized Finance
Traditional Banking While what is described here focuses on the future of financing, it is actually informed by traditional and proven banking practices. Our operative investment thesis is that modern innovation of exchanges allows us to replicate the proven mechanisms of (traditional) fractional reserve banking. Today, the so-called M2 monetary supply, which includes bank deposits, is fungible, a dollar claim from a bank deposit is equivalent to a dollar claim from another bank, we don’t see the difference nor are we aware of it. Historically, the Federal Reserve System (FED) was in-part invented to has existed to guarantee par-redemption across liabilities of it’s chartered member banks.
The Role of Exchanges The operative thesis used by Two Prime is that exchanges provide the same fungible operation which is intrinsic and necessary to the proper functioning of the modern banking system. This is why we maintain public pair listings. We just apply it to the crypto realm. What provides the liquidity of a crypto treasury are the exchanges dealing in stores of value, along with their valuing methodology (usually supply and demand), in lieu of a centralized clearing system. The exchanges are the new banks, in many more ways than one. Here we have a clearing system based on exchanges which allows us to do away with the centralized infrastructure. It is this purely decentralized exchange-based capacity that comprises one of the most promising and revolutionary applications of Open Source Finance while referring back to 1000 year old practices re-visited with modern blockchain technology.
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