Disclosures: Unbounded Capital is an investor in Pngme.

The author of this essay series is not a financial advisor and this is not financial advice. Do not invest in speculative assets with money you cannot afford to lose.

Introduction

I recently had the pleasure of sitting down with Brendan Playford, one of the most inspiring human beings and founders that I’m lucky enough to know. We dive into the mission of Pngme, the use of the Pngcoin token, the philosophy behind the Pngcoin token distribution. The technical decisions for building on Ethereum and the vision for the long term governance of Pngcoin are also covered.

If you’d like to watch the video interview, you can find that on our youtube channel

Podcast Interview Transcript

Zach: Hello

Brendan: Great to see you Zach. How are you?

Zach: Hey, I’m great. Welcome to the first video edition of the Tokenomics Podcast.

Brendan: Glad to be here. Thank you very much.

Zach: Yeah. So as opposed to butchering an introduction, how about you tell me a little bit about your background and what you’re working on at Pngme.

Brendan: I’m Brendan Playford, cofounder of Pngme, my other cofounder is my partner Kate. We have been working on Pngme now for just over a year, started building in stealth and we actually have brought the technology out and started testing. And what Png me is is our vision for democratizing the way in which businesses access credit and finance. So we’re building a two sided lending marketplace that allows lenders and borrowers to connect between developed economies where lending rates are very low and emerging markets where the cost of acquiring credit is very high. So bringing these two markets together, using blockchain technology means that people, for example, from the US can get that yield on their cash assets and people in emerging markets can get a low cost of credit, which is otherwise very expensive.

Zach: So could you explain a little bit about how you’re using blockchain and why that’s necessary for the core function of your business?

Brendan: Yeah, so part of our kind of vision is that we’ve seen over the last 10 years, a lot of instances where rate setting in markets is generally done by individual verticalized industries. So in 2012, we had the LIBOR scandal where LIBOR has been fixed for a long period of time.

Zach: And what’s LIBOR for our listeners?

Brendan: So it’s the London Interbank lending rate is the rate at which banks can lend between each other. And that was set by small group of banks for a very long time. Deutsche Bank, Credit Suisse, there’s a whole host of banks are involved in that. And generally what we see in the markets right now is if you’ve got great credit, you can go and acquire capital for very low rates below the Fed or around the Fed interest rates with like the 1.5, 2%. But if you’re somewhat new to the market or a small business, you’re paying really high rates. And actually accessing growth finance for businesses is quite challenging. So there’s a big gap in the middle of rates between five to sort of 20% that currently is by banks, and you end up getting verticalized by your sort of risks. So when you look at somebody in, say Kenya for example, they might go to get bank financing from micro finance institution. We call those MFIs, we’ll go to a smaller local regional bank. And those rates can range from anywhere between 30 to 200%. And that is because right now there’s not much competition in the market and those rates are being set by individuals that really only give one point of access to this kind of facility. And in addition the access to credit is limited because traditional scoring mechanisms through centralized credit rating agencies is pretty limited. You still get credit agencies in many countries, but when you start getting into emerging markets where there is a lot of growth right now financially, smaller companies can’t get this traditional credit. So we do digital credit scoring to allow companies to come into a marketplace of unknown risk.

Zach: So for the companies and individuals that are looking for loans and right now having to pay 30 to 200% to these MFIs, what’s actually the risk on these loans? I’m sure there’s a lot of empirical data about the repayment rates and I happen to know a bit about your business being an investor, but even when I first kind of heard this, my initial thought was, wow, the cost of capital is absurdly high and there’s a complete disconnect between what the real risk is and what’s being priced in.

Brendan: Yeah, that’s a really good point. And I will get back to your original question, which was how does blockchain fit into this? I’ll ask this question and kind of underpin it or we’ll come back to that. So just ask the question again.

Zach: So it seems to me that there’s a humongous spread between what the real risk is and what it is being priced at. So I can see the cost of capital being necessarily higher for small companies in emerging markets without a formalized credit score compared to a small business in the US. But being orders of magnitude higher, it seems like the risk is probably not orders of magnitude higher and there’s a big inefficiency in this market.

Brendan: You’ve hit the nail on the head with the, with the inefficiency. And really, I think where we see blockchain playing a critical role for us is the way in which you match these two sides of the marketplace in a decentralized way. So we just referred to the fact that rates have been set in a centralized manner by few individuals. Our vision is to democratize that down. So the marketplace dictates what those rates should be based on known risks. So we may not be bringing in a lot of borrowers to the market that necessarily have low credit, we may be picking a group of borrowers that are MFIs, B2B to start with that run their own risk management and currently suffer from high borrowing rates on USD. And the reason is because they have to source their capital overseas. They generally can’t source it in country. So that actually makes the cost of capital for MFIs very expensive. With blockchain architecture, allowing the markets to find an equilibrium without a central policy effectively raises the yield for people looking to actually put money to work and lowers that cost of capital for people that do have a low risk. So if you get into where does that risk get mitigated? We can go deeper into it, there are lots of techniques, but you’re absolutely right. Companies right now are penalized for having early credit, a lack of credit, even if they do have assets that they can collateralize loans with, in these markets because there’s not very much competition.

Zach: And it’s the geography. You’re penalized for geography.

Brendan: Geography and competition. You have a couple of new obviously neo lenders, and they have verticalized themselves into this digital credit scoring model where it’s unsecured loans. The default rates for those guys is at about eight to 9%, which is disproportionate to the actual rate of interest they charge across the market. So they still show charging annualized anywhere between 30 to 200%. These figures are pretty public, they are on their website. You can check them out. And that doesn’t account for the actual current default rate. And you can look up there, the highest risk borrowers are people that haven’t had credit. This a new credit model that hasn’t been tested through a downturn. And what they are doing is providing short term loans to individuals that don’t secure it. So the highest risk loans right now have a default rate of between seven and 10%. And that’s covered by extraordinarily high APRs. A little bit above that you have MSMEs, which is what we are targeting. And these businesses that are making profit,have assets, we can secure the loans on the borrower side with their assets. Whether that be equity assets, whether that be fixed assets like plant and machinery. And then on the top end of our marketplace, you can view it almost like a risk stack. We have MFIs and mobile money providers, and those individuals actually hold the risk of default in the marketplace. So they manage their own risk portfolios. They take a larger chunk of capital, let’s say a million dollars, and they will lend that out to a thousand people and they manage the risk, but we’re able to save them money on the cost of capital.

Zach: So long term you’re going to be going direct to MSMEs and direct to consumer, right? But to start to mitigate your risk and go to market more quickly, you’re going to be just lowering the cost of capital for the MFIs. So there’ll be one intermediary to start, but the rate is still going to be set in an algorithmic function to start?

Brendan: Yeah, we have two methods of doing this. So that’s a really good question. Ultimately what we’d like to get to is this notion of a decentralized order book of loans of which all participants in that market basically determine the rate on a certain date.

Zach: Is there anything like that that exists right now?

Brendan: No, there’s nothing. The nearest analogy you can think of this is the way that Bitfinex runs their margin funding facility collateralizing against margin positions. And they have a lending and borrowing market basically. You could think of it analogous to that, adding a risk variable into the way the marketplace works. And you’re absolutely right. So going to market for a company like us it’s extremely critical to manage risks on the borrower side, minimize that, build trust in the platform and get liquidity in the platform. Having actual capital flowing is vitally important. So our first target is the good MFIs that have got solid traction and longstanding mobile money providers. We have an early partnership with a mobile money network in Nigeria. They’ve been going for 14 years. They have around 3 million customers and 9,000 agents. An agent is effectively like a bank branch run by a human. We’re working with these kinds of companies to lower that cost of capital. At the minute the cost of capital for an MFI or a mobile money provider can be anywhere between 15 to 30%. And they want to be looking at 10% price or lower to be really competitive and they want to pass that on to their actual customer. So that is something that we may be catering to.

Zach: And you feel that you could offer a rate like this and still have a large margin of safety in terms of the risks of your taking on lending to the MFIs?

Brendan: Yeah, absolutely. And what I want to be clear on is we’re providing this platform. Going back to your question about rate setting with algorithms, it may well be that in our first iteration is done using some sort of auction process. So we have a small number of high volume MFIs. So you can have multiple participants coming into a particular offer and you can ask to obtain the best rate of interest. And that we think is a really good way initially, of limited participants, for optimizing the best rate of interest.

Zach: So I think that’s a really nice summary of what you’re working on, how you’re going to market, but this is the Tokenomics Podcast, so why do you have your own token and why is that part of your go to market strategy?

Brendan: Yeah, so the token functions is in three ways. First and foremost, this vision of having a decentralized network that allows this rate setting functionality to happen with all incentives aligned for all participants. So in order to launch a network like that we need to have validators and nodes on the network that provide truthful outcomes and record that. So the token serves as an incentive mechanism. In the way that proof of stake works we’ll be onboarding validators onto the network as we build it out. And those validators will, in the way that a proof of stake network gets rewarded for providing the validation and enforcement of that, and also governance as well. So there’ll be an election process within those validators to bring more in. And over the course of three or four years we’ll gradually increase the number of nodes on the network, starting off around 10 to start with and trying to get more and more progressively decentralized, a little bit the way that EOS block producers started off, but not counting that 21 going beyond that. So there’s a way you can vote more people in to make it more inclusive. Secondarily, we use it for incentives. So ultimately we want to have a marketplace where we have retail borrowers and retail lenders as well as institutional. That’s the ultimate goal. And we offer a point system where people who sign up to the mobile application platform get rewarded for certain behaviors. So we use it as a very clear incentive mechanism that drives adoption on the network. And that adoption comes from Jeremy, the B2C customer. We have been running tests on this and we have people that are able to come download the app, and then tokens for staking those and using the actual app.

Zach: So when I first invested in this business and first started seeing things it was much more of a B2C play to start and like a lot of early stage companies it becomes B2B and B2C, and then to B2B for obvious reasons. How does the token still play as much of an integral role at the outset now that you’re going kind of direct to the MFIs?

Brendan: Yeah, so I really think it does. For our actual value proposition the network is building on the core of this landing engine. However, we spent a lot of time building our own mobile wallet, which has a lot of the functionality of a theory I’m abstracting. So gas fees are abstracted and you pay your fees in the token you’re transferring in the wallet. We’ve used some of the Bread implementation, open source Bread wallet to provide us architecture and our own side chains to Ethereum which then updates its’ state. You can think of it a little bit similar to the way that IDEX provides decentralized exchange in a mobile app, it’s peer to peer payments.

Zach: So how does this come into play for the direct learning gamifies?

Brendan: So we see the having a core base of organic B2C for the actual app itself, being able to have people transacting using the payments and other functionalities as really important because when you look at an MFI, they have about 62% of their costs built in the disbursement and the administration of the actual loan.

Zach: So when you’re working with the MFIs, they’re using the Pngme wallets, or using your architecture?

Brendan: That is our goal. So our goal is then with these MFIs over the next year or so is that we partner and we have one initial partner in Seattle doing this where they will take a white label version of our application and then we’ll actually deploy that into market. So for them being able to have their users use our app and have the same incentive mechanism actually benefits their business and it helps them reduce that cost.

Zach: So then if other lenders want to use that data to set their own rates, they have the benefit of that as well. So you have a lender that’s based out of Seattle, they’re now running all things on their own white label, but that information can be shared to set rates broadly speaking for your B2C customers and your other B2B clients.

Brendan: Yeah. And we do see this value in this peer to peer payment app where people can transact at very low fees without the complexity of Ethereum. And that’s something that we built. We started B2C, we built that. We’re now pivoting more to our go to market for B2B, but we still see there’s inherent value in that. So yeah, building a community around that, a strong community for us, long term is a three to five year thing and we can start that now. And that can be our grassroots community that’s built around the token.

Zach: So you kind of answered this in the answer to the last question, but why is it necessary to do this via token secured by a distributed network versus a loyalty point or something because just to start. there’s going to be some degree of trust for Pngme as a company. So can you just kind of really hammer on why a blockchain token is necessary and not just kind of some other marker for this more decentralized rate setting?

Brendan: So when you look at having multiple parties in an ecosystem, which we have, we have stakeholders ranging from validators to B2C users, to various apps that are also going to be using our architecture, when there is more of a distributed interest from multiple parties, and we feel that there is not a good outcome when one organization has sort of monopoly over that infrastructure, the logical sort of philosophical route for us is to make sure that we’re using a decentralized architecture, not a centralized one from the go. The way that we look at the technology now is that, generally speaking, on a base layer, when you’re looking at side chains or instances of our Ethereum kind of space layer that we use, the cost of deploying that is around the same cost as a centralized database. It’s just the tooling around it that becomes a little bit more bespoke and a bit more specialized. So for us, we have multiple parties on a network and we have a rate that’s being set for the benefit of the participants. We don’t view that that should be coming directly from us. We think that should be more of an ownerless structure.

Zach: I understand that. But more specifically, why couldn’t the borrowers, not the MFI ends, but the end borrowers, use some type of still white label Pngme wallet, but instead of receiving a token that’s secured on an Ethereum side chain?

Brendan: So a lot of this is the way in which you can kind of look at compliance. So we’ve been really careful to, in the mobile app, maintain custody of the assets in the user’s device. So when you create an account and a wallet through Pngme, you as the user have custody of your private keys. If we were to do a vertical stack where it was a normal kind of custodial solution to a bank, we wouldn’t have the flexibility of being of service in many markets and be able to go truly peer to peer. So it gives the user full ownership of their assets that is not possible on a centralized system. And then in each of the markets we go into those different regulations. So for us with this vision of being more global and peer to peer, that really is only possible by having a non-custodial blockchain solution.

Zach: So what made you decide to build as an ERC 20 on an Ethereum side chain versus kind of all your other options?

Brendan: So having looked at building things like DAGs in the past, the way that IOTA has gone and just the general proliferation of lots of new networks. There’s still a first mover advantage of Ethereum in terms of how there’s obviously a lot of conjecture and noise about ETH 2.0 and whether or not that’s really going to happen. When you look at the kind of services that are deployed on Ethereum right now, for example USDC, that’s a USD-backed stable coin issued by circle which we have been supporting, that has about half a billion in actual liquidity and its treasury. There are no other stable coins on any other network that come close to that. So there’s a lot of product forward decisions in terms of we’re going to an end user and an actual business use case. We want to be using infrastructures. So far, to this point, it’s been built to serve and integrate. Circle has great on and off ramps within the US, we have a banking partner that can provide custody of those assets. An institution could come on and go through compliance and KYC, on board circle and then easily across circle.

Zach: Yeah. Those on-ramps with that level of ease, it’s just not possible off Ethereum, right? So does ETH 2.0 worry you? For the long term future of your token?

Brendan: That’s a good question. I think for us, the way in which this thinking being graduated is that you still have grandfathering into the ETH one point we’re going through sort of the beacon into the Charlotte kind of ecosystem. The way it stands at the moment, it’s so far off that the infrastructure we’re building, we’ll get a lot of value out of it first contributing that backend. What I hope is that as the ecosystem evolves, we can either contribute back or we’ll find another alternative that’s established itself to be honest.

Zach: Well, I definitely agree. It’s far off. As I’ve made clear to you in conversations off the air, I’m personally very skeptical of basically all kinds of proof of stake networks, especially those that are trying to be incredibly decentralized, including ETH 2.0. So definitely one of frankly my concerns around the Pngme token is the governance, and how so much of governance for Pngme and in distributed networks in general is really untested and the kind of proof of stake like methods. There’s, I think inarguably a security trade-off compared to proof of work, and wanting to know what your thinking is on proof of stake and what made you decide to go that direction?

Brendan: Yeah. So as a long term miner, I love proof of work. I think it has a lot of family, both the culturing and fostering community that gets around and asset and even a network. To hear my kind of favorite networks outside of this, if you look at something like Decred, which is a Bitcoin fork, they were really experimenting with new governance, it’s community based and that becomes very interesting. That is a proof of stake / proof of work hybrid, which is interesting in the way the participants can become a little bit more democratic, including voting on issues. So that is still highly experimental. I think that we’re in a phase of, with governance, it is all experimental and we haven’t yet figured out what truly works. So at the moment you’ve got a couple of choices; you choose security and distribution, the proof of work at the sacrifice of maybe speed, or you take speed and efficiency and being a little bit more towards an enterprise environment. You can sell more customers but you end up being a little bit more centralized, there’s generally a trade off range. So what we’re trying to do is take a pragmatic view where at the minute we are not being too ambitious in our goal and letting some other people, if you look at to credit Radix as well, Radix is noting a new kind of DLT specifically full payments, really interesting consensus algorithm, crazy speeds, really interesting throughput, going to have a whole host of different languages you can build on. I’m really excited for seeing my Radix comes. It’s been seven years in development already and I’m still not production grade and they’re doing amazing work, but we need to be cognizant that some of this technology takes a while. So we want to capture some of this market now and for us doing a proof of stake and getting stakeholders that we feel can add value to the network initially is really important. And that is a little bit more easy for us to do with an initial proof of stake.

Zach: And you’re making a clear trade off, for a proof of work level of security and immutability, which is to my understanding rival to none, for something that is still, but meaningfully better than the way the types of decisions are made for existing products out there. Yeah. If, let’s say there was a highly scalable proof of work, blockchain that continues to grow in terms of maximum possible, practical block size, how would that potentially change your thinking on governance, and on the token long term?

Brendan: So I think ultimately, we would like the underlying network to be owned by the network and for that decision to come from the community. So ultimately we want to get this thing launched, and as a company build on this framework. We’re building a company, we have a revenue model, we have a business model that’s going to drive profits for Pngme the company. But underneath this, there is this network layer, which we view as providing an infrastructure for this new financial technology to build on, of which Pngme is the first thing on it. And I would like to think that we can work with the community to move towards a good option. If there is a better option, we should seriously consider that as it comes up in the future, 100%. I don’t have any kind of aversion to that. I would say that we are focused on building the most functioning base layer right now because it can get extremely costly building these new networks. Which is sort of somewhat intimidating. I think there’s a lot of people that are quite ambitious and the resources and that development talent you need to deploy on these networks is quite high.

Zach: And that’s what’s so difficult as an investor looking at, you know, both crypto assets, networks and companies, which is a lot of times you have the normal, incredibly high startup risk of starting a company, building a new product, getting new users and then you know, multiplying that by building a completely new governance, distributed ledger system… The ambitions start to get very high, not necessarily something attractive to get funded.

Brendan: And it’s also, you know, your engineering resources are quite challenging. When you start looking at really technical distributed networks and novel consensus algorithms, there is a small set of individuals that can cover that. And when you go out and try to source people as extremely competitive environment. Not only have you got the likes of Google, Uber, Salesforce, getting these people at deep learning, distributed computing systems, which all of these companies had on their back end, there is also big applications of this kind of technology in a centralized setting. That’s an extremely competitive marketplace. Without trying to attract those people into the blockchain market is a real challenge.

Zach: And as a result, you get the ideologically motivated. Because they of course can’t compete with the cash of these large companies. So talk to me a little bit about your vision for governance for the Ping token and what that looks like to start and how that will grow and especially with a focus on how you might be doing things differently than other networks that have come before.

Brendan: That’s a really good question. I am a big believer in the kind of mining incremental distribution tokens. We’ve seen in the past in 2013, everything was mined from the ground zero with them and to a 2014/2015, pre-mine scenario where tokens are pre-mined by developers a lot.

Zach: How many altcoins were there in 2014/2015?

Brendan: Oh there was a lot. Continuous launches, you know, anything from Myriad coin, which is in the top 500 somewhere, to Via coin, there’s a lot. There’s a big graveyard and then big list on coin market cap that has these ones. So that was a generally a fork of some description with a different, either x11 or you know, various, different novel algorithm on top of one of these tokens being launched every day. Through Bitcointalk you can look through the archives and see how many announcements that there were. Our model is such that we’ve tried to lay out a very limited initial distribution where as people join the app or the network, we mint tokens into existence. So we have a very small distribution for the treasury of the issuer. And then some core advisors and people that have come in to help get everything set up, but we’re not telling a public sale, we are doing an initial distribution coming up very soon. And ultimately we have from the get-go a set allocation of where tokens are going. That is going to be in, it’s proof of stake distribution, and we’re not going to have it with just one group of individuals can stake and then tokens, that’s not just the validators. Anybody that stakes tokens on the network right away, from someone that has 10 tokens right away, right through to 100,000 for example, will get the same rate of reward as anyone on the network. So in terms of the governance initially, we’ve set what we think is a transparent token model with fixed inflation that reduces over a period of time. Our goal ultimately is to introduce the right amount of liquidity sequentially with the growth of the network and the growth of users on the platform. As we evolve the network, if there’s any changes to be made to that model we should invoke the voice of the community and those kinds of decisions. And that is very similar to what to Decred does. Decred has a voting and ticketing mechanism where they have issues come up and you have to stake or submit a certain number of votes. And that is something that we’d like to, to find more than what we have right now. But we’re starting off with initial fixed supply distribution schedule that everybody can understand, and is planful, and is driven by growth. It’s not driven by a sale for example.

Zach: Yeah. Well things are really clear on the distribution side of things, but really more on the governance of how future decisions will be made on the network. It’s going to look like to start, in the realm of delegated proof of stake, and similar to EOS in that regard. Can you talk a little bit about just specifically what it will look like and how it differs from EOS and the other kinds of DPoS networks out there?

Brendan: So that’s a good point. Maybe say in mining, if you have like a software upgrade, you have to do a hard fork, if there is a disagreement in the network you’ll end up with a hard fork, like to give rise to Bitcoin, BCH, BSV for example. So that is a difference in sort of the community wanting a different for the network to go and they choose by hash power and you get a fork. So that’s where the proof of work works on that look when really exists like that. We’ll have initially a group of validators much more like unfortunately the EOS model. I say unfortunately because that is one where there are different views around whether or not that’s a good thing for the EOS network. We want to go a little bit further than that and allow validators to be voted in and acquire a position in the network. To govern that from the staking position. We see that as an incremental increased proof of stake. And there’s a couple of things that you have to be careful of here. One is the number of tokens that are required to stake on the network. So we’re running an auction process behind determining what the adequate amount of tokens to become a validator. So again, the network isn’t going to set the required number of tokens to become a validator. The number of participants, sort of bidding for validated spots will determine the required state beyond a certain point.

Zach: In the reverse Dutch fashion?

Brendan: We’ve modeled this on Vickery Clark Groves mechanism.

Zach: Could you maybe explain for the group?

Brendan: Yeah. So you’ll have a group who has its problems, and you have a group of people like me that sets like an elegant way of creating a strategy for selling an asset or setting a price on asset. And basically what you do is you take a summation over all of the bids for an item or two items. So if you’re selling two of something and you have three bidders, one bidder might bid an amount to buy both of those items. Let’s say they paid $5,000 for each item, the grand total of $10,000. And then two other parties enter, one bids $8,000, the other bids $4,000. That aggregate total is $12,000 and it actually gets split. So each party pays six and six and that’s optimizing the amount of capital yielded for selling those assets and the price paid for each one between the two parties.

Zach: What if the person that bid $4,000 can’t or doesn’t want to pay $6,000?

Brendan: That’s a matter of checking to see whether they actually have the capital to pay that in an auction. That could be a barrier. But generally speaking in these, in these auctions, in order for the second party to follow through with the actual sale, they have to agree on that price.

Zach: Is this something that’s checked upon the time of bidding? So it’s known that the funds are in the wallet or does it assume this and that if it doesn’t work it re optimizes?

Brendan: So for us we will need to implement a way in which to have that almost guarantee, but this is used in things like auctions for Olympic cities for example. In real sitautions, when you’re buying a house, you have a certain amount that you have kind of escrowed and you can bid within that range. So they’re the same thing. You have like a certain maximum bid and you bid within a range under the thumb.

Zach: So yeah. My thought was just that, given you’re going to be bidding, presumably using crypto assets, you have the ability to then like connect something to a wallet so that you can see the total capital that that person has. There perhaps could be some types of terms to the auction anything you put in the wallet can be the rest of what you bid, what you’re comfortable doing. And then there could be optimizations from that.

Brendan: Yeah. There’s going to be an escrow element where in order to participate you have to escrow assets and then you’d bid within the balance of that escrow.

Zach: If you’re able to check the wall too, do you need to be able to escrow?

Brendan: Yes. In this environment, yeah. You would escrow in a multi-sig wallet where each party at the end of the auction, they can choose to finalize the sale, because obviously the third bidder who loses gets the assets back and they will have to sort of agree that the sale is completed in some way.

Zach: Okay. So my, my last question here is, could you briefly summarize the differences between this and a reverse Dutch auction?

Brendan: Yeah. So a reverse clutch auction, in this case is where you have a number of parties bidding at varying rates. So, uh, for example, if we had a certain quantity of something, a known quantity of a good, let’s use of a loan as an example, let’s say there was a bid out for $100,000 loan and you had three parties wanting to buy that loan at a ceratin interest rate. So the hundred thousand dollars, the person looking to take that loan isn’t setting the interest rate. You have buyers coming in that are going to fill that loan. Let’s say there’s three participants and the first two participants put in bids of 6% interest in the first one, second one puts in a 7% interest and both of those bids are for $40,000 each. That means that we filled up $80,000 about demand. We then have a third one come in and they want to buy another like $40,000 but there’s only $20,000 left and they’re bidding at like 8%. So we actually take the second highest rate in the auction. So not the 8%, the 7% rate to determine the rate of this loan. And each participant at the bottom contributes 40 and 40. And then the person on the top contributes 20 of that hundred thousand allocations. So it optimizes for the second highest sort of bid. And in this case it’s interest, until the full thing is set up.

Zach: And if those bids were made in a reverse Dutch auction, how would that differ?

Brendan: So that as a reverse Dutch auction.

Zach: Oh yeah. So sorry if that, if that was made in a Vickery Clark Groves?

Brendan: It’d be slightly different because you would, there’s various mechanisms for doing different sales. This, we’re talking about setting an interest rate for a singal item. In the previous example we gave using Vickery Clark Groves, we might have one or more items, in which case you’re trying to sell all of those items for the best price for all items. And we use that in my setting, let’s say for example, multiple validator nodes.

Zach: So Vickery Clark really only makes sense when you’re selling multiple of the same.

Brendan: Yes, exactly. Yeah.

Zach: And a Reverse Dutch is on a single basis?

Brendan: That’s right. Yeah. If you look at the ETH auction for example, there was X number of Ethereum tokens sold, and instead of the rate of the rate of interest in that example, it was a price that people were getting. So the price filled up from the bottom and then once all tokens were sold, it took the price below the highest you have to set the overall rate. So that’s where there’s a single auction, but multiple items all priced the same, and you can do that again with validator nodes as well. If you have 20 different nodes you’re trying to auction, each person put a bid in. Pretty similar that.

Zach: Okay, cool. Yeah. I know you’ve mentioned the different Clark auction before, but thanks for explaining it. Well, Brendan, I know you got a lot of stuff on your plate. I don’t want to take too much of your time today, but thanks so much for coming on the Tokenomics Podcast.

Brendan: Yeah, thanks. Really appreciate it.

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