On the relationship between Fisher exchange equation and decentralized storage bandwidth Market

Time：2020-3-27
Ppio is a decentralized storage and distribution platform for developers to make data cheaper, faster and more private. The official website is https://pp.io.

1. Core summary
Fisher‘s exchange equation is the mathematical relationship between the quantity of money and the economy discovered by the economist Fisher under the academic framework of his theory of quantity of money;
Based on the exchange equation, we find that the decentralized bandwidth market scale is better than the storage market scale;
The utility value of the blockchain network which lacks the use scenario of the token will eventually return to zero.

2. What is Fisher’s exchange equation?
The concept of exchange equation was first proposed by the British philosopher J.S. mill. It was influenced by the Scottish philosopher David Hume. In 1911, it was finally known to the world through Fisher’s integration into an elegant algebraic model:

Among them,

• M (money supply) refers to the total amount of money supply in circulation in an economy;
• V (velocity of money) refers to the velocity of currency circulation and the frequency of unit currency consumption;
• P (price level) is the price level (based on the hypothetical measurement method, such as package goods);
• Q (index of real expenditures) represents the real consumption index.

Fisher’s formula can be simply interpreted as that the number of money multiplied by the number of currency uses equals the economic output multiplied by the average price, that is, the social nominal income GDP. From the perspective of Traditional macroeconomics, this paper explains the relationship between the total social income and the quantity and velocity of money demand. It is instructive for us to understand some typical economic phenomena in the real world, such as inflation or deflation.

In the field of blockchain, economic model design plays an important role, so Fisher formula also has important guiding significance in the design of token model. In a blog titled “on medium of exchange token values” in October 2017, V God summarized the qualitative analysis framework of the operation rules of the Tong Zheng economic system through simple transformation of Fermi formula, which can be understood by interested readers.

3. Economic inflation and deflation seen from Fisher formula
From the Fisher formula MV = PQ, we can easily deduce the real world economic inflation and deflation phenomena. Let’s illustrate them with some specific examples.

With regard to the inflation phenomenon, suppose that in a period of time, due to the relatively fixed factors such as social system and habits, the velocity of money circulation V is basically unchanged, while in the case of relatively stable employment conditions, the quantity Q of goods and services transactions is also basically in balance, so we can deduce the proportional relationship between the quantity m of money and the price P of goods. Therefore, it is easy to understand that the price rise caused by the issuance of additional currency, that is to say, the occurrence of inflation. For example, in China, 1988, 1993 and 1995 were three years of high money supply, which led to an increase of 18.5%, 30% and 15% in CPI. Inflation is essentially a monetary phenomenon. With the economic growth, the money supply does need to increase, but if the increased part exceeds the normal demand of economic development, and if there is no effective price adjustment or monetary recovery policy, the excess money will become the real purchasing power, causing the overall price level to keep rising.

How to explain deflation? If we transform Fisher’s formula into P = MV / Q, we can see that the denominator is the number of goods and services traded, Q, unless it is caused by large-scale war or natural disaster Basically unchanged, so the price P is in direct proportion to the molecule m and V. in some extreme cases, the newly issued currency m is not as fast as V’s decline, and there will be the phenomenon of price P shrinking, that is, the deflation we encounter. For example, the subprime crisis in the United States in 2008 was essentially a credit crisis, which caused difficulties in the final payment of housing, and then formed a chain effect in the market. Everyone covered their wallets, reduced the velocity of currency circulation V, and finally led to the price decline. So if we want to keep P unchanged or rising, the simplest way to fight against deflation is to start the money printing machine and keep a bigger m. The 4 trillion stimulus and 10 trillion credit of China at the end of 2008 is a way to fight against deflation. Of course, this kind of release of money is not unlimited, and the release of water is effective in the short term, but not conducive to development in the long term.

In an ideal situation, the ecological stakeholders of blockchain network want their ecological value to rise, so the design of general economic model will consider the following three aspects:

• Short term: reduce the circulation of money (buy back) and improve expectations;
• Short term: reduce the velocity of circulation (steimit power to steim, released in 13 weeks);
• Long term: improve the overall market capacity, such as DAPP and defi ecology of the public chain.

Through the analysis of inflation and deflation, we can master the Fisher trading equation more effectively. What is the relationship between the Fisher trading equation and the decentralized storage bandwidth market? Before we get to the point, let’s define what the decentralized storage bandwidth market is.
4. What is the decentralized storage bandwidth market?
To understand the decentralized storage bandwidth market, first look at what is the centralized storage bandwidth market. At present, mainstream cloud computing companies, such as Alibaba cloud or AWS, can be called the centralized storage bandwidth market, because the price of storage bandwidth is set by the enterprise according to the market. It has the advantages of high efficiency and commercial service guarantee, but its disadvantages are high cost, low security and insufficient privacy protection.

On the contrary, decentralized storage bandwidth market means to make full use of idle storage bandwidth resources, and the demander will find a matching supplier in the open and transparent market. Decentralized market pricing mechanism can remove the monopoly pricing power of the company (middleman), and fully protect the core interests of both sides. The supplier can give the demander a lower price, plus the open-source end The end-to-end encryption of distributed storage technology can ensure high data security, but also effectively protect the privacy of users.

Of course, in the early stage of the development of the decentralized storage bandwidth market, due to the insufficient supply of resources, the utilization efficiency is not high, and it is difficult to provide business level service guarantee. But in the long run, with the increase of idle resources, the development of blockchain technology, and the effective economic model to stimulate supply and demand matching, the decentralized storage bandwidth market will eventually move from the edge to the mainstream.

The demand of decentralized storage bandwidth market can stimulate the supply of efficient, low-cost and secure storage bandwidth, while a large number of effective storage bandwidth supply with good quality and low price can also stimulate the demand for it, the two complement each other. But if we discuss the storage market and bandwidth market together, we will lose a deep understanding of their unique attributes. Based on the Fisher formula, we will analyze the supply and demand economic models of bandwidth and storage market respectively, so as to have a deeper and comprehensive understanding of the decentralized storage bandwidth market.

5. Fisher’s exchange equation and the Enlightenment of decentralized bandwidth storage market economy model design
If the vehicle is used to represent the user’s data, the highway is used to represent the bandwidth market, and the parking lot is used to represent the storage market, the circulation frequency of money brought by the constant flow of vehicles on the highway is far higher than the currency circulation speed brought by the vehicle in the parking place; in other words, from a qualitative point of view, the currency circulation speed of the bandwidth market is far faster than that of the storage market The velocity of money flow. From Fisher’s formula, it can be concluded that if the market with the same amount of money m, the larger V is, the PQ value is also known as the social nominal income, i.e. the larger GDP is, the stronger the overall economic growth of the society is. If we first cut into the bandwidth market, it will be conducive to the rapid start-up and development of the total economy, thus driving the development of the storage market; if the order is the opposite, the results may not be so healthy and orderly.

No matter in bandwidth market or storage market, price P needs to be relatively stable, at least with little fluctuation, so that commercial users can safely use services or goods in the market. However, the greater the fluctuation of V value, the more timely regulation and control of M is needed to stabilize the price P. This requires the design of the general certification model to be more robust and detailed, so as to avoid the volatility of P caused by the volatility of other elements.
In conclusion, according to Fisher’s formula, we analyze the decentralized bandwidth and the V and P of the storage market independently, and conclude that the bandwidth market is superior to the development of the storage market, and put forward the challenge of maintaining the stability of the price P. Finally, based on the current cognition, we will discuss the design of decentralized storage bandwidth market economy model.

6. Discussion on the economic model design of decentralized storage bandwidth
For the design of decentralized storage bandwidth market economy model, we first set out several principles and objectives:

• Demand first, supply second, demand drives supply, supply promotes demand;
• The supply side can provide relatively stable service capacity and price to the demand side;
• The pass design can fully encourage the community ecological parties to maximize the ecological construction;
• The use value of the pass is better than its investment value, because without the use value, the investment value will eventually return to zero.

The use value is to be paid by the demander, so we define demand first and supply second. First of all, we hope that supply will be driven by demand, so as to promote growth. But only from this perspective, we may introduce the problem of insufficient power of redundant supply side, so we need to think at the same time, how to motivate the supply side to provide more stable and abundant goods and services, so as to ultimately promote more demand to enter the ecology.

If the cost of using the storage bandwidth to the center is directly linked to the fluctuating price of a single pass, the price of using the storage or bandwidth will fluctuate, which will inevitably conflict with the demand side commercial users’ pursuit of stable operating costs. Through the stability design of utility token, the use cost of storage bandwidth service is effectively realized, that is, the price of application token and underlying token is separated, so that the cost of enterprise application is controllable and predictable.

If the relationship between underlying pass and application pass is strong, for example, refer to vechain The design of the application pass is to cast the application pass through the bottom pass, which must be to achieve the continuous stability of the application pass through the centralized governance and control means, which deviates from the decentralized mode; if it is weak correlation, it is not only to repurchase, destroy or share the bottom pass through the collection of platform fees in the circulation process of the application pass, but also to be centralized in nature And from the design, we need to consider the requirements of financial securities regulation. How to balance the strong and weak relationship between the two is the difficulty of designing the whole dual currency economic model. I hope that I can make further sharing and discussion with you on this topic after thinking mature.

7. summary
Fisher’s exchange equation can not only help us understand the inflation or deflation phenomenon in the macro-economy, but also has great reference significance for the design of blockchain economic model, especially for the decentralized storage distribution market scenario.