Decentralized Effervescent-Token Model and Capital Pricing Tool: Scoping study

applications/decentralized-capital-pricing-tool-scope.md

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+# Decentralized Effervescent-Token Model and Capital Pricing Tool: Scoping study
+
+- **Team Name:** Mark Van de Vyver [PhD](https://www.student.uwa.edu.au/course/award-verification-service?family=van+de+vyver&family_partial=on&given=mark&search=Search)
+- **Payment Address:** 15WoVugRLfBAogS1FBmhzxVv8WZqZK1z4KKHALijTZfdVcCm (USDT)
+- **[Level](https://github.com/w3f/Grants-Program/tree/master#level_slider-levels):** 3
+
+## Project Overview :page_facing_up
+
+This application is in draft status - seeking feedback on whether this topic is in the scope of a W3F grant.
+If this topic is in the scope of W3F grants, additional milestone detail will be provided where indicated, and re-submitted.
+
+### Overview
+
+A scoping study for: A Blockchain capital pricing workbook template and documentation.
+Prior related W3F Grant: [Token economics survey 2022](https://github.com/taqtiqa-mark/tokenomics-survey-2022/)
+
+Together the workbook and user guide are intended to demonstrate how to:
+
+1. design a (hypothetical) blockchain token with known (theoretical) equilibrium relations,
+2. build a model the equilibrium token dynamics, and
+3. construct a capital pricing model for the token.
+
+The target audience is blockchain developers, analysts and users. The tool implementation will refer to Substrate components relay chain, parachain, solo-chain, on-demand chain. Otherwise it is blockchain agnostic.
+
+#### Description
+
+Design a hypothetical token with a known pricing relation to observable variables that influence the token value dynamics.
+The token use case and design will strive to be consistent with the constraints and requirements described by [Cong, Lin William, Ye Li, and Neng Wang. “Tokenomics: Dynamic Adoption and Valuation.” The Review of Financial Studies 34, no. 3 (August 2020): 1105–1155.](https://doi.org/10.1093/rfs/hhaa089).
+Implement a capital pricing workbook for the so designed token/coin.
+
+The capital pricing framework will be the Black Zero-Beta capital asset pricing model (CAPM).
+
+#### Motivation
+
+Particular tokenomics can introduce different token users with conflicting interests. And [it is known](https://doi.org/10.1111/jofi.13192), under [different conditions](https://doi.org/10.1287/mnsc.2023.4756), such conflicts can lead to the token/platform breaking down.
+However, currently there is zero help or guidance for developers create a token economy that does not have these vulnerabilities. Yet all the tools are provided to do create such vulnerable/fragile tokens.
+
+This is a recipe for disasters.
+
+This project establishes the scope of work required to develop a workbook and user guide to assist developers in creating a token economy that is not known to be vulnerable to breakdown.
+
+There is a need for blockchain developers and users to have access to tools and documentation that allows them to explore the dynamics of a token, and to later verify those expectations using data from the blockchain.
+
+There are two use cases: Pre-launch and post-launch
+
+- Pre-launch - development tool:
+  - Can you identify the productivity benefit that is driving your token value?
+  - Are there proxy or real data that measure those things? Directly? Indirectly?
+  - Is their use case compatible with the token requirements/assumptions?
+  - Does the Substrate chain support the configuration required by the token design?
+  - Do the developers understand the range of token price volatility to expect?
+  - Do you and your users understand the 'best-estimate' timeframes required for your expected network effects to materialize?
+
+- Post-launch - validation tool:
+  - Are the proxy or real data consistent the intended use case?
+  - Are users adopting the token as was expected pre-go-live?
+  - Is the token price dynamics within the range expected pre-go-live?
+  - Are the network effects and user adoption materializing as you expected?
+
+Furthermore, it is common for capital costs to be calculated using a variant of the Capital Asset Pricing Model (CAPM). Specifically, a survey of CFOs by [Graham and Harvey (2001)](https://doi.org/10.1016/S0304-405X(01)00044-7) indicates that 73.5% of responding financial executives use the CAPM for capital budgeting. [Truong, Partington and Peat (2008)](https://doi.org/10.1177/031289620803300106) find that in Australia, 72% of responding financial executives use the CAPM for capital budgeting.
+
+The workbook and user guide will assist developers and users in calculating a cost-of-capital estimate for their token design.
+
+### Project Details
+
+#### Draft scope
+
+The workbook and user guide will assist developers building a blockchain token economy, by providing:
+
+- an example (hypothetical) token design and use case;
+- an adoption checklist of criteria to be met for the token model to be applicable;
+- an example construction of a token state variable given the token design and use case;
+- a simulated sample distribution of future token values;
+- an example adoption curve for the token;
+- an estimate of the discount rate for token expenditures;
+- an estimate of the expected rate of return for the tokens under Black's Zero-Beta CAPM.
+
+In addition, it is desireable this tool:
+
+- be decentralized i.e. run on a user desktop, not a (centralized) web site;
+p- be accessible to any developer, business analyst, regulator or like minded user tasked with developing or assessing a Substrate based blockchain token;
+- be extendable by any user with minimal script/macro skills;
+
+- Mockups/designs of any UI components:
+  - Worksheets:
+    - Charts: adoption curve (simulated), expected token value distributions (simulated), etc.
+    - Riskless return data
+    - State variable (model and construction)
+    - Token dynamics
+    - Benchmark portfolio construction
+    - Zero-beta portfolio weight calculations
+    - Token beta and expected return calculations
+    - Token simulations: 1Yr, 3Yr, 5Yr
+- Core functionality
+  - Token expected return p.a. (a.k.a treasury/project discount rate)
+  - Adoption curve (1, 3, and 5 years)
+  - Token value distributions (1, 3, and 5 years)
+
+- Technology stack
+  - Public data providers
+  - curl/wget, jq
+  - Linux shell scripts, shellspec
+  - Parquet/DuckDb/SQLite
+  - LibreOffice
+
+- Documentation:
+  - Scripts
+  - User Guide
+
+### Ecosystem Fit
+
+- Where and how does your project fit into the ecosystem?
+  - The tool and guide should be useful to any developer or analyst seeking to understand the design of a blockchain token.
+  - The tool will provide outputs (e.g. discount rate) that serve as inputs to a blockchain treasury capital/project budgeting tool.
+- Who is your target audience?
+  - Developers, business analysts, regulators, users.
+- What need(s) does your project meet?
+  - Provides an example of how to construct a token/coin such that there is a known pricing relation that articulates the observable variables that influence the token value dynamics.
+- Are there any other projects similar to yours in the Substrate / Polkadot / Kusama ecosystem?
+  - No.
+- Are there similar projects in related ecosystems
+  - Not that I am aware of.
+
+## Team :busts_in_silhouette
+
+### Team members
+
+- Mark Van de Vyver, [PhD](https://www.student.uwa.edu.au/course/award-verification-service?family=van+de+vyver&family_partial=on&given=mark&search=Search)
+
+### Contact
+
+- **Contact Name:** Mark Van de Vyver, [PhD](https://www.student.uwa.edu.au/course/award-verification-service?family=van+de+vyver&family_partial=on&given=mark&search=Search)
+- **Contact Email:** <[email protected]>
+
+### Legal Structure
+
+- **Registered Address:** 9681 41st St NE, Saint Michael, MN 55376
+- **Registered Legal Entity:** Begley Brothers Inc.
+
+### Team's experience
+
+- Mark Van de Vyver, [PhD](https://www.student.uwa.edu.au/course/award-verification-service?family=van+de+vyver&family_partial=on&given=mark&search=Search)
+  Expertise is in financial economics, mathematical statistics and implementation in both domains.
+
+  - Commercial:
+    - CourseAccess - with John Chionglo (CA), circa 1997. University class scheduling, course grade and materials management web site. When `htc` and `idx` files were a thing. Used by Dr. David Walsh to manage Financial Management course. That is, 300+ students served from a (dual!) Pentium-Pro.
+    - Taqtiqa - Solo, circa 2009-11. Rode the AWS and devops wave. Negotiated commercial and academic use license with NYSE.
+    - [Participant](https://doi.org/10.1111/j.1835-2561.2002.tb00191.x) in the Investment and Financial Services Association (IFSA) debate on expensing employee stock options.
+
+  - Technical:
+    - Thesis topics: Generalized AutoRegressive Conditional Heteroskedasticity (GARCH) option pricing and derivation of the asymptotic distribution of the deviance statistic, and related functions (estimators).  Awarded Distinction. Examiners [Brockwell](https://web.archive.org/web/20230731032804/https://dl.acm.org/profile/81100472556), [Chiarella](https://doi.org/10.1016/j.jedc.2018.06.001), [Duan](https://web.archive.org/web/20230131093512/https://d.nuscri.org/profiles/duanjc/). Supervisor [Prof Ross Maller](https://web.archive.org/web/20230605043356/https://researchers.anu.edu.au/researchers/maller-ra).
+    - Market microstructure; [Corporate Finance](https://doi.org/10.1111/j.1835-2561.2002.tb00191.x); Investment Management; [Econometrics](http://dx.doi.org/10.1111/1368-423X.t01-1-00090).
+    - Wrote a distributed computing screen saver for thesis calculations. Deployed across 400+ student laboratory computers; Served from dual Pentium-Pro (Win/NT 3/4).
+    - Rust; Ruby; Julia; Python; MPI/MPICH;
+
+  - W3F:
+    - Grant: [Token-economics survey (2022)](https://github.com/w3f/Grants-Program/blob/master/applications/tokenomics-survey-2022.md)
+    - RFP: [Designing UpChain: a framework for securing Substrate runtime upgrades and Substrate network upgrades](https://github.com/w3f/Grants-Program/pull/1309)
+
+### Team Code Repos
+
+Personal
+
+- <https://github.com/taqtiqa-mark>
+- <https://github.com/bbros-dev>
+- <https://github.com/taqtiqa>
+- <https://github.com/BegleyBrothers>
+
+### Team LinkedIn Profiles (if available)
+
+- <https://www.linkedin.com/in/tatiqa/>
+
+## Development Status :open_book
+
+- [Token economics survey 2022](https://github.com/w3f/Grants-Program/blob/master/applications/tokenomics-survey-2022.md).
+  - Selection of the token design described in [Cong, Lin William, Ye Li, and Neng Wang. “Tokenomics: Dynamic Adoption and Valuation.” The Review of Financial Studies 34, no. 3 (August 2020): 1105–1155.](https://doi.org/10.1093/rfs/hhaa089).
+
+## Development Roadmap :nut_and_bolt
+
+### Development Overview
+
+- **Total Estimated Duration:**  3 months
+- **Full-Time Equivalent (FTE):**  0.6 FTE
+- **Total Costs:** 30,000 USD
+
+If this topic is in the scope of W3F grants, additional detail will be provided.
+
+### Milestone 1 — Token use case, design and model
+
+- **Estimated duration:** 1 month
+- **FTE:**  0.6 FTE
+- **Costs:** 10,000 USD
+
+If this topic is in the scope of W3F grants, required milestone detail will be provided.
+
+- Document token design and (hypothetical) use case.
+  - Identify required properties of the state variable specification.
+  - Identify optional properties of the state variable specification.
+- Prepare W3F grant application for implementation.
+- Documentation.
+
+### Milestone 2 — Token use case, design and model
+
+- **Estimated duration:** 1 month
+- **FTE:**  0.6 FTE
+- **Costs:** 10,000 USD
+
+If this topic is in the scope of W3F grants, required milestone detail will be provided.
+
+- Identify required model development for an empirically measurable state variable.
+- Identify required data for measurable state variable model and possible data sources.
+- Identify required workbook structure and components.
+- Identify required user guide structure and components.
+- Prepare W3F grant application for implementation.
+
+### Milestone 3 — Token use case, design and model
+
+- **Estimated duration:** 1 month
+- **FTE:**  0.6 FTE
+- **Costs:** 10,000 USD
+
+If this topic is in the scope of W3F grants, required milestone detail will be provided.
+
+- Finalize required model development for an empirically measurable state variable.
+- Finalize required data for measurable state variable model and possible data sources.
+- Finalize required workbook structure and components.
+- Finalize required user guide structure and components.
+- Finalize W3F grant application for implementation.
+
+## Future Plans
+
+- W3F grant application for implementation
+- W3F grant application for a DAO treasury capital budgeting tool.  This will assist teams and communities systematically and objectively evaluate treasury resources among competing applications.
+- If user interest is sufficient, port relevant parts of the documentation and spreadsheet content to an applied tokenomics tutorial using the Open Web3 Stack.
+
+## Additional Information :heavy_plus_sign
+
+- [Truong, G., Partington, G., & Peat, M. (2008). Cost-of-Capital Estimation and Capital-Budgeting Practice in Australia. Australian Journal of Management, 33(1), 95–121.](https://doi.org/10.1177/031289620803300106)
+- [Graham, J. & Harvey, C. 2001, ‘The theory and practice of corporate finance: Evidence from the field’, Journal of Financial Economics, vol. 60, pp. 187–243.]()
+
+**How did you hear about the Grants Program?** Web3 Foundation Website
+
+Here you can also add any additional information that you think is relevant to this application but isn't part of it already, such as:
+
+- Pior grants:
+  - [Token economics survey 2022](https://github.com/w3f/Grants-Program/blob/master/applications/tokenomics-survey-2022.md)