The Stablecoin Problem — A Solution
The cryptocurrency space is increasingly becoming dependent on stablecoins for their “stability”, serving as a backbone and store of value. Like many others who are involved in the space, there are clear issues with stablecoins like Tether (USDT) who haven’t really shown any transparency relating to their dollar reserves.
However, there is another key element that the space has yet to address: Inflation. Below I shall explain the detrimental effect that inflation can have and how a project like the Ramifi Protocol, can mitigate its effects on portfolios and the market as a whole.
What is inflation and why does it happen?
Inflation is defined as a rise in general price levels. Things such as housing, transportation, food, and even clothing can be subject to inflation, that is, an increase in price. There are many factors that contribute to inflation but in general, the increased supply of a currency relative to its current purchasing power can slowly start a deterioration process and loss of value. Economists distinguish two types of inflation: Demand-Pull Inflation and Cost-Push Inflation. Both types of inflation cause an increase in the overall price level within an economy.
Demand pull inflation occurs when aggregate demand for goods and services out paces the supply or productive capacity. This in turn causes something like a central bank to rapidly increase the supply of money, inherently increasing demand for goods and services. Overtime the economy's equilibrium moves from point A to point B, resulting in the general price rise known as inflation.
Cost push inflation occurs when the prices of production processes increase. Increasing wages and rising costs of raw materials are known to cause this kind of inflation. Something like rising energy prices can cause the cost of producing and transporting goods to rise. Higher production costs led to a decrease in aggregate supply and an increase in the overall price level because the equilibrium point moved from point Z to point Y.
Both of these contribute to inflation but those changes observed in the real economy occur at a much more complex level. One thing is for sure: inflation reduces the buying power of your dollars and currencies. At a current yearly cumulative rate of 3–4%*!
What is the stablecoin problem and how can we solve it?
Stablecoins are cryptocurrencies designed to minimize the volatility of the price of the stablecoin, relative to some “stable” asset or basket of assets. A stablecoin can be pegged to a cryptocurrency, fiat money, or to exchange-traded commodities (such as precious metals or industrial metals).
As mentioned above, inflation has a detrimental effect on the value of your dollars (including your stablecoins). So why are we pegging our stable coins like USDT, and synthetic commodities like Ampleforth to a currency that loses 3% of its value every year — if not more? This is where the Ramifi Protocol hopes to change the way we see our stablecoin solutions and monetary systems as a whole
Over the past 10 years, the dollar has lost a staggering 20% of its value and probably much more due to rising costs of goods and services. It wouldn’t make sense to peg any sort of store of value to something that is only worth less overtime. Current decentralized finance solutions that are integrated within Ethereum’s smart contracts, have provided us the tools needed to innovate the worlds financial instruments.
When looking at current market capitalizations for different stablecoins, the total dollar value of these markets has a continuously degrading store of value that has not been accounted for, no matter the size.
We like to call this “The Stablecoin Problem”.
What is Ramifi and how does it solve “The Stablecoin Problem”?
Ramifi is a project whose aim is to take on the role of money in the new decentralized economy. There have been many clever attempts, with each growing progressively more sophisticated than the last from USDT to DAI to Ampleforth. USDT gave us an easy off ramp to escape the volatility inherent to the crypto markets. DAI did the same without the need to trust that a 3rd party had the reserves to make good on its debts. AMPL took it a step further without the need for over collateralization of assets for it to be produced or managed.
These projects are all aiming to become decentralized money yet fall short in that they are pegged to the US Dollar whose value is continuously plummeting. The reason for this being that the USD is a global medium of exchange recognized across the globe and is a denomination that most people understand.
The solution then is not to try to create a new medium of exchange, but rather to continue using it while implementing a built in hedge that ignores any further increases in USDs supply, and the resultant weakened purchasing power it has.
The Ramifi Protocol provides a fully fledged solution to all of these drawbacks, and hopes to change the standards for both money and cryptocurrency stablecoins.
References:
Federal Reserve Bank of San Francisco. “What Are Some of the Factors That Contribute to a Rise in Inflation?” Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, 1 Oct. 2002, www.frbsf.org/education/publications/doctor-econ/2002/october/inflation-factors-rise/.
