The Problem With Supply And Demand — Ramifis Deep Dive

Creating a fungible medium of exchange was one of the greatest inventions humanity has ever achieved.

Bartering is cool and all, but imagine how chaotic the grocery store lines would become if money didn’t exist.

Or if you’re a carpenter in a world without money, and the grocer doesn’t need any woodwork done. Without the fungibility provided by modern forms of money, you’d soon go hungry.

Despite all of its benefits, the shortcomings of modern money are immense.

Check out our history of inflation series for more information on how modern money has consistently fallen short of societies’ needs.

From its humble origins as physical commodities to the multinational horror that is today’s modern monetary system, money is evolving more quickly than ever before.

The issue with precious metals as money

Gold was a viable form of money for millennia and still exists as a reliable store of value today. Gold’s semi-stable nature is for a compelling reason.

It just so happens that the gold mining rate correlates with the overall economic expansion rate. This correlation was an incredibly convenient fact for early civilization — simply pass the shiny metal back and forth to exchange goods and services.

However, there was a slight issue: the rate of gold creation had nothing to do with the demand for gold — the correlation with economic expansion was pure luck.

Cerro de Potosi is a perfect example of what happens when an explosion of supply occurs without a correlating increase in demand.

According to historians, Potosi was perhaps one of the first cities whose rise and fall occurred due to boom-bust capitalism, all thanks to silver’s monetary use value. Upon discovering and exploiting a literal mountain of silver, the following inflation threw the entire global economy into disarray while enriching a select few. Humanity needed something more efficient that correlated with demand.

Unbacked fiat currency was not the solution.

Fiat money presents an entirely new set of issues when it comes to monetary stability. It is supported only through faith and promises, leaving authorities incentivized to experiment with exotic tools and policies to keep the system going for as long as possible.

With fiat currency, we ended up with the opposite monetary problem to precious metals:

Supply now far exceeded demand.

The excess supply resulted in incredible levels of inflation. Fiat systems have questionable actions and consequences — we’ve discussed at length how inflation is intentionally understated and rampant in the consumer economy.

The fiat system’s preferential treatment towards banks and Wall Street contributed in no small part to the development of Bitcoin. Satoshi (the original creator(s) of Bitcoin) was bothered by the concept of unbacked money and decided to do something about it.

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” -Satoshi Nakamoto, Bitcoin Genesis Block (New Yorker)

An Earth-shattering invention in its own right, Bitcoin broke open the Pandora’s Box of synthetic commodities, which exist entirely in digital form. However, there was a bit of a problem with using Bitcoin as money. Just like gold, the supply of Bitcoin has nothing to do with demand.

It’s for that reason that the price of Bitcoin swings wildly. Though still in its early price discovery phase, Bitcoin has a fixed supply, with the rate of creation halving every four years. Because of this, gold is arguably a better form of money than Bitcoin.

Put down the pitchforks and hear us out here! At least the supply of gold somewhat responds to demand — if the price of gold increases dramatically, more mines appear to profit from the upswing in price.

On the other hand, Bitcoin has a supply difficulty adjustment that accounts for this increase in mining. Bitcoin always keeps its honey badger attitude and creates a predictable amount of coins at set intervals, regardless of demand.

The solution to the supply and demand disconnect is to intrinsically tie the two together in the form of a synthetic commodity. When demand rises, the supply of money increases. When demand falls, the supply of money decreases.

While that may sound like an easy solution, it entails many complicated considerations regarding incentives, governance, and the difficult road to real stability.

Ramifi thoughtfully approaches this issue. By offering users the ability to purchase a coin adjusted for inflation relative to a basket of dynamically weighted commodities, we provide a real hedge against inflation.

While the value in dollars per coin may rise, the increase reflects USD purchasing power loss. In all actuality, Ramifi coins aren’t increasing in price — instead, they’re genuinely stable.

Additionally, users can purchase shares within the Ramifi ecosystem. As stakeholders within the protocol, they can redeem shares for coins at auctions, which occur at set rebase periods. This approach offers immense arbitrage opportunities for fast actors that understand USD inflation and technology adoption curves.

We’ll go into much more detail regarding Ramifi’s approach to achieving algorithmic stability and the unique opportunities we’re bringing to the entire crypto ecosystem in a future article.

For now, check us out on social media to stay up to date with the latest developments in the protocol.