At a given time, there is an optimal money supply needed for the economy. To achieve zero inflation and zero deflation (no oversupply and no undersupply), the exact money supply should always ensure the Target Exchange Rate (TER) is satisfied as illustrated at the section of DUCAT VS. THE US DOLLAR of the Home page. At crypto exchange markets, Ducat is constantly priced by USD. If the Ducat’s price is within a tolerable 2% variation of the TER, the Ducat money supply will be close to the optimal level. Both inflation and deflation can seriously hurt the economy.
“The length and depth of the deflation during the late 1920s and early 1930s strongly suggest a monetary origin, and the close correspondence (across both space and time) between deflation and nations' adherence to the gold standard shows the power of that system to transmit contractionary monetary shocks. There is also a high correlation in the data between deflation (falling prices) and depression (falling output), as the previous authors have noted and as we will demonstrate again below.”
Ben Bernanke and Harold James, 1991, page 33, “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison” in Financial Markets and Financial Crises, ed. R. Glenn Hubbard, University of Chicago Press
“Inflation tends not only to be higher but also increasingly volatile and to be accompanied by widening government intervention into the setting of prices. The growing volatility of inflation and the growing departure of relative prices from the values that market forces alone would set combine to render the economic system less efficient, to introduce frictions in all markets, and, very likely, to raise the recorded rate of unemployment.”
Milton Friedman, 1976, page 283 – 284, Inflation and Unemployment, Nobel Memorial Lecture, Economic Sciences
CryptoFed has three policy tools:
i) Fiscal Policy defined as rewards paid to consumers at range of 5.5% -12% and paid to merchants at range of 1% - 4%
ii) Monetary Policy defined as interest paid to all Ducat holders at range of 3% - 5%.
CryptoFed will increase interest rate as high as necessary independent of the range to cure inflation or deter inflation. Interest rate increase has been proved to be an effective tool to control inflation. “Twenty-five years ago, on October 6, 1979, the Federal Reserve adopted new policy procedures that led to skyrocketing interest rates and two back-to-back recessions but that also broke the back of inflation and ushered in the environment of low inflation and general economic stability the United States has enjoyed for nearly two decades.” — FRBSF ECONOMIC LETTER, Number 2004-35, December 3, 2004.
“Unbeknownst to many, last fall was the silver anniversary of a watershed moment in Fed history and the economic history of the country. On Oct. 6, 1979, Fed Chairman Paul Volcker took dramatic steps to rein in the runaway inflation that had been sapping the strength of our economy since the mid-1960s. Without his bold change in monetary policy and his determination to stick with it through several painful years, the U.S. economy would have continued its downward spiral. By reversing the misguided policies of his predecessors, Volcker set the table for the long economic expansions of the 1980s and 1990s.” —President's Message: Volcker's Handling of the Great Inflation Taught Us Much. By William Poole, January 1, 2005.
iii) Open Market Operations defined as buying and selling Ducat at crypto exchange markets to maintain the Target Exchange Rate (TER) and keep the variation within a 2% lower and upper bound about the TER. On monthly or quarterly basis, CryptoFed will adjust the fiscal policy within the reward rate range and monetary policy within interest rate range, while Open Market Operations are conducted daily. The three policy tools will be guided and coordinated via Machine Learning and Linear Control methods. For example, Open Market Operations will be governed by the CryptoFed’s Linear Quadratic Gaussian (LQG) controller to achieve zero inflation and zero deflation (no oversupply and no undersupply).
Locke impacts Ducat in two ways while in turn, Ducat provides fundamental value to Locke:
i) Making CryptoFed’s network rules under which Ducat operates
ii) Buying and selling against Ducat in Open Market Operations, both of which will have impact on Ducat money supply. With the growing adoption of Ducat among merchants and consumers, Ducat’s money supply will increase year after year. For every 10 Ducat generated by the increase in money supply comparing to 12 months prior, 1 additional Ducat will be created and dedicated to Locke buyback to maintain and raise Locke’s value for the purpose of effective Open Market Operations. The CryptoFed will use the Ducat to exchange for USD from CryptoFed’s USD reserve based on Target Exchange Rate, burn the Ducat, and use USD to buy back Locke (equivalent to central bank’s sterilization intervention). This is the best way for CryptoFed to gradually use up the USD reserve whose value will continue declining against Ducat due to inflation overtime. A virtuous cycle mechanism between Locke and Ducat has been built in for automatic perpetual growth which will benefit all Locke and Ducat holders
There are four major channels through which CryptoFed puts new Ducat into circulation:
i) Ducat issued to users who purchase Ducat with USD. The USD proceeds can always be used for Ducat redemption.
ii) Ducat paid to Ducat holders as interest. The interest payments contribute to retain Ducat in the Ducat economy. Also, it is certain that inflation in Ducat economy can be cured or deterred by interest rate increase.
iii) Ducat allocated to buy back Locke. A higher value of Locke will make it possible for Locke to buy back Ducat in Open Market Operations as needed.
iv) Ducat rewards and compensation paid to consumers, merchants, wallet issuers, States and Cities are associated with and based on purchasing goods and services at merchants. The increase of Ducat money supply through this channel results from the growing adoption among merchants and consumers. Given that Ducat’s purchase power can be preserved (no inflation & no deflation) by CryptoFed via its three policy tools, Ducat holders have no economic reasons to convert Ducat to USD. Instead, more and more USD will be converted to Ducat to enjoy the benefits provided by Ducat economy.
Lending through commercial banks is the Federal Reserve’s mechanism to put new money supply into circulation. When the absolute level of debt accumulation is too large to be paid back, the Federal Reserve’s mechanism of money supply will stop functioning. The burden of existing loan repayments will ultimately reach a level that even at a low interest rate close to zero, the borrowers cannot meet the lender’s criteria to pay back additional loans. Consequentially, no additional money can be supplied to maintain and increase effective demand for economic growth.
Furthermore, the Fed cannot increase the interest rates to control inflation, because an interest rate increase will bankrupt a lot of existing borrowers due to the additional burden of interest payments, leading to an economic and financial crisis. The fact that the Federal Funds Rate has stayed at or close to zero for about a decade after 40 years of one-way downward path since 1980, demonstrates that the Fed no longer has an effective tool to adjust money supply for inflation and deflation control. Money supply mechanism through lending has failed to establish a virtuous cycle between lending and loan repayments to perpetuate the Federal Reserve System.
In contrast to the Fed’s lending mechanism, CryptoFed’s money supply mechanism is giveaway. Ducat rewards paid to consumers and interest paid to Ducat holders are the mechanism by which the CryptoFed can put new money supply into circulation. Effective demand in the economy can be maintained and increased for economic growth, which in turn will generate more demand for additional money supply. In case there is Ducat oversupply, Ducat reward rate and interest rate can be adjusted and optimized mathematically via Machine Learning. Money supply mechanism through giveaway can establish a virtuous cycle between giveaway and economic growth to perpetuate the CryptoFed monetary system.
By replacing the Fed’s lending money supply mechanism with the CryptoFed’s giveaway money supply mechanism, the Ducat economy presents a viable alternative to avoid the Fed’s fractional reserve banking and the necessity of FDIC. The fractional reserve banking legitimately institutionalizes the inherent and inevitable macroeconomic risks in the economy via the banking industry, periodically causing boom and bust business cycles (economic expansion and contraction) and subsequent large-scale bailout by the FDIC and tax-payer money through government intervention. This brutally impacts the American middle class through unintentional periodic and systematic financial and economic crisis.
Right after the housing bubble collapse in 2008 — symbolized by the fall of Lehman Brothers — the IMF published a report entitled "The Chicago Plan Revisited'' which validates the 100% reserve banking model for decoupling money supply function from bank’s lending function. The citation is slightly long, but it is important because it fully supports the CryptoFed’s model of decoupling money supply function from bank’s lending function. The only difference is that the CryptoFed is pursuing a denationalization of money supply mechanism, while The Chicago Plan pursues the nationalization of money supply mechanism but not banks.
“The decade following the onset of the Great Depression was a time of great intellectual ferment in economics, as the leading thinkers of the time tried to understand the apparent failures of the existing economic system. This intellectual struggle extended to many domains, but arguably the most important was the field of monetary economics, given the key roles of private bank behavior and of central bank policies in triggering and prolonging the crisis.
During this time a large number of leading U.S. macroeconomists supported a fundamental proposal for monetary reform that later became known as the Chicago Plan, after its strongest proponent, professor Henry Simons of the University of Chicago. It was also supported, and brilliantly summarized, by Irving Fisher of Yale University, in Fisher (1936). The key feature of this plan was that it called for the separation of the monetary and credit functions of the banking system, first by requiring 100% backing of deposits by government-issued money, and second by ensuring that the financing of new bank credit can only take place through earnings that have been retained in the form of government-issued money, or through the borrowing of existing government-issued money from non-banks, but not through the creation of new deposits, ex nihilo, by banks.
Fisher (1936) claimed four major advantages for this plan. First, preventing banks from creating their own funds during credit booms, and then destroying these funds during subsequent contractions, would allow for a much better control of credit cycles, which were perceived to be the major source of business cycle fluctuations. Second, 100% reserve backing would completely eliminate bank runs. Third, allowing the government to issue money directly at zero interest, rather than borrowing that same money from banks at interest, would lead to a reduction in the interest burden on government finances and to a dramatic reduction of (net) government debt, given that irredeemable government-issued money represents equity in the commonwealth rather than debt. Fourth, given that money creation would no longer require the simultaneous creation of mostly private debts on bank balance sheets, the economy could see a dramatic reduction not only of government debt but also of private debt levels,” — Jaromir Benes and Michael Kumhof, 2012, page 4, The Chicago Plan Revisited, IMF Working Paper
“To build an enterprise-grade financial product using blockchain with high scalability, low latency and zero transaction fee, EOS was our choice.” The article “Why we built our blockchain business on EOS instead of Ethereum” provides a great testimony. Furthermore, EOS is an open-source protocol which enables CryptoFed to build its own CryptoFed Blockchain (sister-chain).
All individuals and business entities are required to open an account at a CryptoFed participating bank or compliant crypto exchange or organization complying with Know Your Customer (KYC), Anti-Money Laundering (AML) and money transmitter regulations. These banks, exchanges and organizations will serve as trustful block producers, certify and publish CryptoFed’s Group Treasury funds under their management for transparency purposes, issue CryptoFed co-branded wallets bearing the name of the issuers to the individuals and entities for holding and transacting Ducat and Locke.
The co-branded wallet issuers will be paid 0.50 Ducat by the CryptoFed for every purchase transaction in Ducat made by their customers through the co-branded wallet. Furthermore, an amount equal to 10% of the total interest paid by the CryptoFed to Ducat holders will be paid by the CryptoFed to co-branded wallet issuers. These Ducat compensations are equivalent to mining revenue.
In the long run, to further decentralize the CryptoFed Blockchain, all private entities which currently process personal information during their ordinary course of business, have expertise in KYC /AML and money transmitter regulations, and are already required to protect personal information, can serve as block producers. These entities include, but are not limited to, banks, credit unions, universities, insurance companies, airlines, pharmacies, utility companies, retail merchants issuing private card programs, etc.
Ducat money supply through rewards and compensation paid to consumers, merchants, wallet issuers, States and Cities is associated with and based on purchasing goods and services at merchants. This money supply mechanism ensures that Ducat can directly purchase goods and services at merchants without conversion to USD. The stability of Ducat comes from this purchasing power. None of the other two-token models have an equivalent mechanism design for money supply.
Both Fedcoin and Diem belong to the USD family and carry the same inflation rate as USD. The Fed has lost the capacity to adjust interest to control the inflation. Ducat will appreciate against USD over the years following the Target Exchange Rate (TER) which accounts for US Dollar inflation. In addition, both Fedcoin and Diem are unable to provide the attractive incentives (rewards and interest) to consumers and merchants. The CryptoFed on the other hand supports:
i) Ducat rewards paid to consumers at range of 5.5% -12% and paid to merchants at range of 1% - 4%.
ii) Ducat interest paid to all Ducat holders at range of 3% - 5%.
Because CryptoFed can establish a virtuous cycle between a "giveaway money supply mechanism" and economic growth, the competitive advantage can last in perpetuity. The virtuous cycle will be further enhanced, because the CryptoFed is open to the general public of Ducat users through the Locke tokens which can be acquired at open crypto exchange markets and can initiate and vote on all governance matters. “While the Board of Governors is an independent government agency, the Federal Reserve Banks are set up like private corporations. Member banks hold stock in the Federal Reserve Banks and earn dividends... Member banks also appoint six of the nine members of each Bank's board of directors,” according to the St. Louis Fed.
From an economic perspective, the money supply mechanism of both the Bitcoin family and Ethereum family is an exogenous factor. By design, the Bitcoin family and Ethereum family generate their token money supply independent of the needs of the real-world economy and do not have any mechanism to stabilize their token value against average price of goods and services in the real economy. In contrast, Ducat money supply mechanism is designed for and based on the exact needs of the real economy. As a result, by design, Ducat is a currency to run the real-world economy, while Bitcoin family and Ethereum family are not.
Furthermore, Locke not only has the attribute of a finite number for circulation as Bitcoin does, but also has the underlying Ducat real-world economy to support its value growth. In other words, the Bitcoin family does not have a real-world fundamental economy to support and grow its value as Locke does. In addition, CryptoFed’s EOS Blockchain empowers participants to create their own currency as Ethereum does and will massively expand Ducat-denominated currency family in real economy. It is reasonable to conclude that CryptoFed not only has what the Bitcoin family and Ethereum family have, but also has what they do not have, e.g., the real-world economy.
Through the mining process, the Bitcoin family and Ethereum family put new money into circulation which consumes massive amounts of energy. In contrast, the CryptoFed defines mining broadly as rewards payment for purchase in Ducat, interest payments for holding Ducat, compensation to wallet issuers. From energy consumption perspective, EOS has an overwhelming competitive advantage. “73.1 TWh / 0.0011 TWh = 66,454 times that EOS is more Energy efficient in comparison to Bitcoin & 17,236 times more Energy efficient than Ethereum.”, per the analysis article
“EOS Energy Consumption vs Bitcoin and Ethereum”
Ducat money supply mechanism
Ducat money supply policy tools
Relationship between Locke and Ducat?
Ducat economy stability?
CryptoFed vs. Federal Reserve
Why does CryptoFed use EOS protocol?
Banks and Exchanges as block producers?
Locke/Ducat vs. other two-token models, such as MakerDao/DAI?
CryptoFed vs. Fedcoin and Diem?
Locke/Ducat model vs. Bitcoin and Ethereum family?