MyCHIPs Digital Money
A Money Market
We often hear of countries having trade imbalances, but many of us don’t fully comprehend what it means.
It happens when one country, using its own currency, is buying lots of goods and services from another country, who has a different kind of currency. The trades going in one direction outweigh the trades in the reverse direction. So you end up with a surplus of the net-buyer country’s money in the hands of people in the net-seller country.
Since MyCHIPs potentially involves millions of different issuers of credit, it has the same dynamic. But it occurs in much smaller amounts, and across a massive number of trading relationships.
Consider, in our examples above, if lots of Wal-Mart and Home Depot customers were shopping at Home Depot, but not so many were shopping at Wal-Mart. You can imagine, Home Depot CHIPs would be in higher demand, and hence more scarce. Wal-Mart CHIPs, on the other hand would be easier to come by, or more plentiful.
Monetary systems work best when the credit continues to travel around in circles, eventually getting redeemed. But different people are bound to trade in different amounts. And some producers will be more successful than others. So certain issuances of CHIPs are certain to be more popular than others.
So what do we do when things get out of balance?
The solution is called a money market. It is a mechanism whereby people can trade different kinds of money. So if one kind is stacking up somewhere in the system, and another kind is stacking up somewhere else, maybe a trade will straighten things out.
In MyCHIPs, money markets can exist in two ways: The first is called a “credit lift.” It is internal to MyCHIPs itself and is discussed in more detail in the software section. But essentially, the software contains a protocol for scanning the network to find people who want to buy or sell a particular kind of CHIP.
For example, imagine someone who works at Gap, and so has lots of credits there. But she also wants to shop at Wal-Mart. And maybe Gap hasn’t made any deals directly with Wal-Mart or Home Depot, so there is no obvious path for her to use her Gap credits at Wal-Mart.
There are probably others somewhere on the network who have Wal-Mart credits and want to shop at Gap. Or maybe someone has Wal-Mart credits and wants credits for Brand A. And someone else has credits for Brand A, but wants credits at Brand B. And someone else has credits for Brand B, but wants credits at Brand C. And someone else has credits for Brand C, but wants credits at Gap.
You get the idea. The software will scan the network, discover the pathway through these relationships and hopefully, find a way for our friend to effectively trade her Gap credits for the Wal-Mart credits she really wants. And if the demand is there, the trades can all be done for free, because everyone involved will benefit from the transaction.
But what if there is no such demand? This kind of trade imbalance can happen as well. Ultimately, it is the result of a player whose credit is over-rated on the network. And this is where we will need our second type of money market.
Let’s take for example a retailer, we’ll call Blockbuster. Blockbuster has a bunch of employees and they all agree to work for credits. Life is great for a while. Not only can the Blockbuster employees use their credits to rent cool video tapes, whatever those are, but other people want to rent them too. So the Blockbuster CHIPs are in hot demand and the MyCHIPs network efficiently keeps all the employee’s CHIPs accounts traded out, and instead stocked with Wal-Mart and Home Depot credits.
But gradually, people start finding other ways to watch their movies. And Blockbuster does not effectively keep pace with the changes. So over time, their credits start to lose their appeal. And automated trades slowly lose their ability to solve the imbalances.
This is where a managed money market comes in. Every member of the MyCHIPs network is, in essence, his own money market. Your server will advertise on the network the CHIPs you have for sale, and the ones you want to buy. If no automated trades present themselves at par, you can begin to place and accept bids for discounted trades. You can even bid your own price for brokering the deal.
Imagine all those unwanted Blockbuster CHIPs sitting around getting less and less popular by the day. And some brilliant entrepreneur comes along and devises a way to strip out all the tape and use it for ribbons in the gift wrapping department at Gap, where business is booming. He makes a bid for the Blockbuster CHIPs at a discount, say 50% of nominal value. In other words, he will trade 50 Gap chips for every 100 Blockbuster chips.
He then shows up at Blockbuster and starts buying the old video tapes out of the discount bin, for money that is further discounted because of the great deal he just got on his Blockbuster credits. He then repackages the tape as ribbons and sells it to Gap for more fresh Gap credits, which he can use to buy more discounted Blockbuster videotapes.
This is an example of a free market correction. Blockbuster is slowly going out of business. And in the process, their credit is suffering.
Caught early, the devaluation will be much less extreme. For example, savvy traders may be able to make money even on a 10% discount. But as the quality rating goes down, fewer people will accept the credit because it can not be equitably traded in the market. So eventually Blockbuster will lose its credibility for borrowing, just as it should.
Another, more likely scenario is, a strategic trader will buy up all the discounted Blockbuster credit at the right strategic time in the market cycle and then will foreclose on it. If the company still has positive equity, the shareholders and/or subordinate debt will find a way to redeem the CHIP credits before they can be foreclosed on. This will produce a quick and healthy return for the trader.
If they don’t, he will become the proud new owner of Blockbuster. He can then shrink it down to the size of a Coke machine, paint it red, and re-enter the market with a brand new model and strategy.
Finally, a managed money market doesn’t have to be limited just to CHIPs. A MyCHIPs node can, and should advertize its willingness to buy or sell traditional money as well.
There are bound to be plenty of people who want to use CHIPs to buy things from sellers who only accept national currencies like dollars or euros. Other people will be interested in trading central bank money for CHIPs. In this way, the network could conceivably be used to exchange any kind of currency for any other.
And because the job is distributed widely among so many different providers, the pricing and overhead will be the best the laws of economics can provide.