Martingale Networks

Pareto Tradings and Market Network

The market is a mechanism in the traditional economy in which participants bargain and exchange based on their respective endowments. In the same game network, thousands of rational people bargain. A Pareto equilibrium is reached when neither party's utility can be improved further without reducing the utility of the other party. We can call this trading mechanism based on bargaining as "Pareto trading". Theoretical equilib- rium is not always easy to achieve or verify. Because complex factors such as transaction costs, information symmetry, and asset liquidity must be considered in the real world, equilibrium is only a theoretical concept un- der ideal conditions. Various intermediaries have emerged as important market participants in this context in order to reduce transaction costs, particularly search and matching costs.

This trading paradigm becomes ineffective when dealing with commodi- ties, assets of uncertain value, or dealing with uncertain returns. For risky assets, for example, we cannot develop a theory based on tangents to utility indifference curves. In this context, we must develop new trading models.

Martingale Trading and Martingale Networks

We can define a new trading paradigm outside of Pareto trading when we consider a large number of uncertain returns in economic activities. This trading paradigm is based on the stochastic process concept: a random process Xt is called a martingale if it satisfies Xt = E(Xt+s|Xt) for any time t and any future time t+s(s >= 0). If a trader pays Xt at time t and receives Xt+s at time t + s based on a martingale, we call this a martingale transaction (here s, which >= 0 is the time difference between transaction cash outflow and inflow.

Outflow and inflow can happen at be the time points infinitely close to each other, or even the same real-time point, as in a smart contract transaction). A martingale network is formed when participants discover various martingales for risk and return and conduct martingale transactions. Although the above definition is straightforward, it reveals an important concept: when dealing with uncertain returns, we must trade using a martingale information flow to achieve a fair result. The essence of the transaction is the same regardless of the value unit, whether it is apples, oranges, US dollars, or BTC. However, the goal of this article is not to develop a theory based on martingale trading, but to attempt to build a decentralized martingale trading network based on blockchain and digital currency, so we position the transaction target as a digital asset on the chain.

A peer-to-peer exchange between two traders is the most general martingale transaction. This type of exchange, which requires matching, is more efficiently carried out by various intermediaries in the traditional market network. We do not intend to introduce any intermediaries, but rather to provide an unlimited supply of sellers to all traders. The ben- efit of this is that traders save money on the cost of original matching. The decentralized network we created in this manner has the following characteristics:

1. Every transaction is a martingale transaction: C = Xt = E(Xt+s|Xt) = F , where C is the cost of the martingale transaction, and F is the re- turn.
2. The target of the transaction is the digital asset on the chain, which in this article refers to the NEST token developed based on ERC20. For example, pay Xt NEST at time t, and get Xt+s NEST at time t + s.
3. All traders trade directly with an infinite supply seller, which is the NEST contract itself. This is what we call the infinite liquidity model - ILM.
4. The digital assets payed by the users to enter the contract will be burned, and the underlining assets for settlement will be issued by the contract.
5. In order to bring the entire network into a state of convergence, we allow the martingales to be the supermartingales: Xt >== E(Xt+s|Xt). Simply put, the current cost of payment is greater than the expected value of future returns.

Overall, the martingale network differs from the market network in the following ways:

1. Unlimited supply: As long as you have NEST, you won't have to worry about a shortage of market liquidity making trading difficult. Any transaction based on martingale information flow that traders require can be fulfilled, so supply is unaffected by the size of the counterparty limit.

2. Risk sharing: All NEST holders will bear the risks and rewards of NEST supply increase and reduction, which are features of blockchain and distributed networks. Risk management in the traditional market network is mostly reliant on market makers to hedge and transfer risks to the market. The expense of such hedging is usually excessive. These distinctions from traditional markets will usher in some novel concepts and phenomena. As a social experiment, we anticipate its value to be as innovative and impactful as BTC/ETH.