The SORA Economic System Explained 天
An Algorithmic Decentralized Central Bank
The purpose of this article is to save you time learning about how SORA works. It will attempt to teach you almost everything about SORA, as it is like going down a rabbit hole. Many of the concepts of SORA are new and require hours of research, and most of the works are scattered and must be aggregated. All this research has been recorded by the SORA community and compiled for you in a simplified manner in this non-technical article. If we were to start by telling you that SORA is a decentralized economic system, you would not understand much about it. So we’ll try to break this down to make it easier for you to digest. Furthermore, many have a false understanding of the Financial System. Part of this article is intended to help you better understand the financial system, especially on the topics of money creation and allocation. This article will not explain the basics of blockchain technology, which we assume you are familiar with (otherwise check out the [SORA Academy introduction]https://medium.com/sora-xor/introduction-to-defi-and-the-sora-academy-c0a4d98ccd12). The complexity of the SORA economic system is elevated enough. For this article, we focus in particular on the macroeconomy, tokenomics, macrotokenomics, governance, and decentralized applications. Let’s dive deep into the SORA 天 rabbit hole!
A. Challenges with the current economic system and how current cryptocurrencies do not offer an answer:
- Speculative tokens with inelastic supply make a token’s price unpredictable and not suited for means of payment.
- Lack of a rational monetary policy isolate cryptocurrencies from the real world economy.
- Cryptocurrencies lack a good economic system that has (a) money and (b) a means to allocate and control quantities of said money.
B. Introducing SORA and how it solves the challenges presented in A.
- SORA’s cryptoeconomic system: Solving the problem of irrational token (money) allocation
- The 4 pillars of SORA’s cryptoeconomic system
- Economics: Allocation and control of the money supply
- Blockchain: The SORA Network
- Applications: Polkaswap, synthetic assets and more
- Governance by multi-body sortition
Shifting from Cryptocurrency to Cryptoeconomic Systems
Until now, most blockchain projects focused on temporally finite use case tokenomics, whereby the token design is either inflationary/deflationary or has a fixed supply. In doing so, real economic money attributes are neglected, and many tokens are only used as means of payment without considering the price volatility of the token. This makes the token unpredictable, resulting in a situation where many crypto projects are only used mostly for speculative purposes and not for productive use. “This ignores the macroeconomic reality that markets are limited by quantities.”- Takemiya, M.
The high volatility of cryptocurrencies has made them impractical as a medium of exchange so far. They are mainly interesting as an object of speculation. Money successfully fulfills its main functions when its value is stable and predictable. The inherent volatility of cryptocurrencies makes them a speculative asset. Mainly, due to the inelastic supply of cryptocurrencies, which limits it as a medium of exchange. Supply inelasticity can be more accurately defined as a supply that doesn’t change when demand increases or decreases.
Having no Monetary Policy is a Monetary Policy
Monetary policy is the process of controlling the overall money supply that is available in an economy. So far, the money supply in the real world economy has been managed by private central banks, which have gained control over the economy. It is noticeable that most cryptocurrencies do not have a good monetary policy to manage token supply, and are isolated from the real-world economy. In most cases, tokens are minted for two reasons: Fundraising and Token generation Rewards for services for example liquidity providers and staking/mining The predesigned algorithm over token supply makes it offer limited scope for control over the economy that is built around it. Thereby, it can be argued that this is a bad monetary policy. Having control over the supply of money is the key to the economy. Furthermore, the question of monetary policy authority, which controls the powerful tool for monetary policy, comes up. In every economic system, there is a monetary entity, hence, the question is; “what is an economic system?”
What is an Economic System?
An economic structure is the collection of the various bodies and institutions that make up the economy that help and define the social community. An economic system is defined as: “… a means to allocate money and control quantities of money allocated.” — by Takemiya, M. The allocation of money has always been a key point for the economy, since the controller of credit in an economy is the controller of the economy itself, as the book “Princes of the Yen”(Werner, 2015) makes clear. Thus, the allocation of money should be created by society for society, and not from private individuals, as it currently occurs.
The 3 Attributes of SORA (XOR)
The function of money is taken for granted in our modern era. However, money has become a malleable concept with it undergoing a far-reaching change in blockchain technology, and the possibility of money has changed far and wide. Thus, there are 3 important attributes of money that are related to SORA. Store of value — In an economic system, the store of value should have properties of the asset used for means of payment. The asset should retain its purchasing power and have the possibility to be stored for the future. Unit of account — In an economy almost everything is measured in terms of money. So a token should have the ability to measure the value of a property, good, service, or asset. A unit of account is Divisible, Countable, and Fungible. Medium of exchange — Medium of exchange is an item that is accepted for exchange for goods, services, and assets.
The influence of the economy affects every aspect of our lives, political, social, technological, etc. In particular, the impact of economic factors on political processes, sociological trends, and technological innovations is critical to the strategic planning approach to health care and other aspects of social services provided. Therefore, it is worthwhile to study the empirical properties of money in order to distinguish the important constructs of an economy, so that those aspects can be optimized. Three main factors that are affected by the economy are: Political factor — Political influences and decisions that can affect an organization. Sociological factor — Trends affect the values that characterize social attitudes, demographic changes, and the way people work, live, and new ways of thinking or organizational forms. Technological factor — Technological innovations; approaches to doing new things and tackling old problems with new solutions.
From Idea to Reality; SORA (天)
SORA is a new type of decentralized economic system where consensus is achieved through the creation and allocation of new tokens within the system. The focus is on the creation and allocation of the XOR token, and a democratic voting system that allows system participants to allocate the XOR token. Through the democratic voting process, newly minted XOR tokens can be used for productive purposes in a decentralized form. Generally, this will take the form of either development loans for nations or equity investments in startups where the new purchasing power can be used for production. XOR token creation is the process by which the XOR token supply is increased. The XOR supply acts as an instrument that affects a stable purchasing power. The SORA community can increase the quantity of XOR tokens in order to expand the SORA ecosystem. This is the basic idea of SORA, but there are multiple factors and issues that play a significant role in this process. In this context, the token bonding curve, the SORA governance system, and the overall community are important elements. Token creation is provided by the SORA Parliament and the SORA community can join the Parliament to decide on the creation and allocation of tokens.
“The key thesis of the SORA economic system is that for cryptoeconomic systems to be able to compete with contemporary, centralized economic systems, there needs to be a rational economic model.” — Takemiya, M.
SORA’s cryptoeconomic system: Solving the problem of irrational token (money) allocation
Many people are unaware of how important it is to allocate money in an economy. The problem that SORA is solving, is that most cryptoeconomic systems lack a rational way to allocate new tokens into the ecosystem. If you have studied economist Richard Werner’s work about allocating money in an economy, you will know that money allocation is quite important, and is a key factor in a successful and healthy economic structure- which is why SORA is combining decentralized properties similar to those found within Bitcoin but also having an allocation process where there are rules for what gets made available when based off productive use, similar to some economies in the world. The reality of SORA cryptonomics, though, is much more complex to understand, as it has several components that work together to form a unified whole. We will dive into the 4 parts that make SORA one and whole, to give you the big and complete picture.
The 4 pillars of SORA’s cryptoeconomic system 1. Economics: Allocation and control of the money supply 2. Blockchain: The SORA Network 3. Applications: Polkaswap, synthetic assets and more 4. Governance by multi-body sortition
The SORA Cryptoeconomic System
Cryptoeconomic systems are complex systems driven by autonomous actors. They consist of a decentralized network, which is the blockchain, a governance system, an associated economic system, and rules that govern the interactions between these subdomains. These interactions are symbiotic, which means actions such as XOR token resource allocation, and enforcement of rules coordinate for a single goal; to improve the public productivity of humanity. “The game theory between complex economy, blockchain, governance, and applications opens up far-reaching new solutions with new opportunities for new systems and structures.”
As part of the process, there are 4 subsystems in the SORA system itself. Blockchain, Governance, Application, and the Economy, which in turn are strongly interlinked and modify each other.
The fundamental economic innovation of SORA is how it represents the attributes of money through the modeled system and thus can impact the nominal values of the economy using blockchain technology, with an impact on the purchasing power. As explained before, the attributes of money are; store of value, unit of account, and medium of exchange. Moreover, the SORA economic system has three characteristics that make it an economic system, namely monetary economics, productive finance, and market finance.
Monetary Economics; the XOR token has all the attributes of money in the ecosystem. In the SORA monetary economy, the XOR-token price and quantity change according to the demand in the ecosystem. At the same time, the XOR token keeps its properties as money in the system.
Productive Finance; SORA finances and allocates capital for productive use. (Goods and services) The general principles of SORA are that new XOR tokens should only be created for productive uses, some reserves kept to provide indications of liquidity and price, and that oversight by governance is crucial when allocating new XOR tokens.
Market Finance; the Token Bonding Curve guarantees immediate liquidity. The Token Bonding Curve is a mathematic function that guarantees liquidity. The reserves that are held by the token bonding curve will provide liquidity for XOR. You can read more on this topic further down in the article.
The SORA Network and the Applications
The SORA network is based on Parity’s Substrate blockchain framework utilizing a nominated Proof-of-stake consensus mechanism that will become a parachain for the Kusama and Polkadot networks. By using a EVM bridge, the SORA network has the ability to bridge to all EVM blockchains, such as Avalanche and Solana. One of many applications that are built on the SORA network is the Polkaswap DEX.
Polkaswap.io, Synthetic assets, and NFTs are few of the applications you can find on the SORA network or that will be will be available in the future. The architecture of the on-chain and off-chain infrastructure is an essential part of the network that influences the governance and economy, and vice versa. The changes of the economy are forwarded to the governance and this to the on-chain infrastructure.
Polkaswap is a non-custodial liquidity aggregator cross-chain AMM DEX for the interoperable DeFi future, run by the SORA community. Based on the Polkadot and Kusama ecosystems and built on the SORA substrate network. I will not dive into the intricacies of Polkaswap, but if you’re interested, you can find more details here. XSTUSD is the first algorithmic stable coin on the SORA network that is backed by XOR tokens. You can read more about it here.
Governance by Multi-Body Sortition
One of the fundamental parts of blockchain design is its governance mechanism. The SORA system uses multi-body sortition, unlike many other blockchain networks that use token-based voting to govern. Sortition is the practice of random selection to fill gatherings and political positions. In ancient Athens, Sortition was the primary method of selecting courts and councils.
In the SORA governance structure, referendums are used to modify the parameters of the SORA economy. The SORA Parliament is a multi-body democratic body that has three concepts of Athenian democracy: Isonomia: Every citizen has political equality Isegoria: Every citizen has the right to speak and contribute Sortition: Groups of citizens are randomly chosen to make decisions The SORA Parliament is by design multi-body, with a clear separation between propositioning, decision-making, and rule-making bodies. If you are interested, read this blog post about the SORA parliament.
At this point, the picture is clear regarding how the four different areas aforementioned come together. As already explained at the beginning, several aspects play a role in the economy of SORA; such as elastic supply, monetary policy, and price stability. But before we go into these three elements, let’s turn to the aspects that influence the viability of a cryptocurrency in general, or rather, what does a cryptocurrency have to do in order to sustain itself?
What makes a Cryptocurrency Viable?
Just like forex trading and comparing currencies IRL, Exchange rate & value stability (Storage of Value property of money) are important factors to determine a cryptocurrency’s value. Volatility in the price of many cryptocurrencies is often a major obstacle to their widespread adoption. The purchasing price of most cryptocurrencies is determined by secondary markets. While this is a desirable feature for a non-sovereign currency to have, crypto markets are prone to excessive fear and greed (FUD, FOMO, etc), making most of them too volatile to be accepted by stores. The few stores that accept a volatile cryptocurrency have to deal with a possible exchange rate risk, which leads to uncertainties regarding the price of the currency, due in large part to the fact that it is impossible to predict how the currency will move. For this reason, stores that accept cryptocurrencies find it difficult to accept a currency for a long period of time. Furthermore, compliance also creates additional costs and uncertainties related to accepting cryptocurrencies. All this can be shown on the following graphic regarding the increases and decreases of the acceptability of Bitcoin.
— >Based on all of the above, it follows that there is a need for an economic incentive mechanism design for price stability and perceived certainty for a cryptocurrency.
What is the XOR Token Bonding Curve and why is it needed?
Reduction of purchasing power, supply shock, and inflation are terms that are frequently being used by economists to describe the current global monetary conditions. These terms being used are derived from the backbone of the existing monetary system, where central banks issue fiat money into the economy based on predicted credit creation. As we can currently see, there are two major issues in this practice. First of all, the present fiat currencies are not backed by any commodity and derive their value solely from the trust that the people place on it and the regulatory government. This brings us to the second issue, centralization. Having central monetary authorities regulating the issuing of purchasing power increases the risk of human error, greed, and increases the miscalculated risk of a supply shock, thus leading to an incalculable monetary economy. The XOR Token Bonding Curve solves these issues. The XOR token has all the attributes of money. It is embedded with the value of other assets; including but not limited to DAI (USD), ETH, VAL and PSWAP tokens, making XOR a true store of value. This significantly increases the trust in the monetary value as the token’s value is influenced via the backed assets.
The token bonding curve (TBC) manages the supply of tokens in a rational way, without the involvement of humans or a central government, to create a system that avoids the boom-bust problems of traditional economies and the deflationary economics of many cryptocurrencies. A token bonding curve is a smart contract that takes the input of some token and outputs a new token. The TBC uses a simple model where there are two linear functions: a Buy-Price Function and a Sell-Price Function.
In simple words, the TBC is essentially an infinitely liquid, decentralized central bank. At any time, you can buy newly minted XOR from the token bonding curve using some specific reserve assets, or sell your XOR tokens (which are instantly burned) for one of those assets.
Applying Technology for Efficiency
To design a successful blockchain ecosystem for the real-world economy, the allocation of purchasing power is key to laying a strong foundation for the economy. Optimal purchasing power allocation will lead to the best resource allocation in the economy, so in the context of blockchains, token allocation impacts the network effects. Blockchains that are designed for efficiency and production, and not speculation, will be the most successful ones.
After a deep dive into a rabbit hole that included the definition of money, democracy, economics, and parachains, it is clear that the SORA Economic System has taken tried and tested factors that positively affect global economies and laid them in a decentralized fashion that allows anyone anywhere to join a movement that is powerful in creating change. If you have read this far, you will be well aware that SORA is not a token to speculate on while waiting for a moon. SORA is a decentralized economic system that seeks to improve society through responsible money creation and allocation, however, unlike existing centralized and privatized systems currently in existence, SORA does so with the community first and foremost.
References Werner, R. (2015). Princes of the Yen (0 ed.). Routledge. https://doi.org/10.4324/9781315701554 Takemiya, M. (2019). Sora: A Decentralized Autonomous Economy. 2019 IEEE International Conference on Blockchain and Cryptocurrency (ICBC), 95–98. https://doi.org/10.1109/BLOC.2019.8751489