In the previous four chapters, I have covered openness and navigability as qualities that would make blockchain work better for financing and investment. In the next three chapters, I will cover efficiency. A primal point of efficiency that has so far been acutely missing is a simple, market-driven price discovery mechanism.
While market forces are imperfect, they are in general efficient in reaching equilibria. Given that liquidity brings many benefits to assets meant for investment, and that for the purpose of investment the ultimate goal is to sell the assets on (which is to say that price needs to be supported by the market after all), correct valuation from the start by market forces is highly attractive to investors. Granted, many would prefer to buy undervalued assets and profit from arbitrage; this “ideal” situation does not truly contradict market-driven price discovery: Unless the investment opportunity is highly exclusive (which means that many investors who would value the asset higher simply are excluded), for an asset to be undervalued investors in the market must on average undervalue it. Thus, the “ideal” situation is but a case of diverging valuations among investors — the ultimate force that makes a market work to begin with.
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This is the exert of an article published by us on our Medium channel: https://medium.com/@IdeaFeX/make-blockchain-work-ch-5-price-discovery-447377f3368a