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Market Dynamics
The default state of the network is the intrinsic value. After a period of inactivity, prices will always return to this level. It is conceivable that the contraction would be triggered by a short-term liquidity crisis only. Since XPH holders are guaranteed that the price will eventually return to above intrinsic value, the only sellers below should be those who need a short-term exit and are willing to take additional losses.
It can be triggered by adding stake or bond.
Before adding a stake, users usually buy XPH from the market. This raises the price, which allows the agreement to be sold at a higher price and increases the revenue for the equity holders. This should help bring in more stakeholders and continue the cycle.
At the same time, the increasing price adds the bond discount and creates room for new bonds. Before these there was new liquidity, which improved the ability of the Protocol to make sales and increased the liquidity of Xenophon.
Such positive cyclical feedback on price liquidity helps create a sustainable expansionary cycle. However, they work in both directions. Lower demand reduces staking rewards and bond capacity, leading to a further decline in demand. This is an inevitable fact of the system as such; even the best (i.e. Bitcoin) are no strangers to large declines following expansion periods.
But we can work to mitigate the depression. That's when the Protocol reserve pool will carry on to take the downward pressure. It does so through forward guidance and through purchases that are permanently below intrinsic value. The Treasury ensures that while bear markets and contractions can and will occur, the Protocol will never die.
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