How to fight against inflation and support Emerging Markets
Many fiat currencies lose their value as quickly as cryptocurrencies, dropping potentially in value 20-99% per year. Unfortunately, this is exactly what happens to the fiat currencies of many emerging markets. While many of us live out our days safely insulated from the consequences of this reality, many others suffer from hyperinflation. Imagine holding a currency that loses 50% of its value every year, and having little to no alternative.
International Monetary Fund. Map of the Inflation rate, average consumer prices. Oct. 2020.url:https://www.imf.org/external/datamapper/PCPIPCH@WEO/OEMDC/(visited on 10/31/2020).
Stable cryptocurrencies are an inevitable piece on the monetary game board. And it’s much easier to stop the movement of physical cash and bank-operated digital money than it is to stop the movement of peer-to-peer electronic cash. With no clear strict regulation, governments will soon no longer be able to artificially prevent competition over which currency their citizens hold.
The Nature of the Opportunity In summary are:
- Stability currency
- Faster and cheaper way to transfer currency
- Everyone can get access to this currency easily
- Programmability, may enable new solutions to age-old problems that have hampered the net benefit of capitalism.
- Censorship-resistance
The Challenge for Stable Cryptocurrencies is achieving stability without compromising other important properties. It's an ambitious objective.
The Reserve Rights Token presents the major design decisions that a stable cryptocurrency issuer must face, and our reasoning for which option is better at each decision point.
- Pegged vs. Floating Exchange Rate Some floating currencies (for example the US dollar), are relatively stable in value. They are actually again for few years the source of all currency stability.
The project ambition in the future is to create an independently stable cryptocurrency that isn’t pegged to any fiat currency.
There are numerous problems that stand in the way of this lofty goal. Stable cryptocurrencies should be at the first stage at least pegged to an existing stable currency, commodity, or basket of assets.
Let’s see what is Reserve Rights Token
The objective of the Reserve Rights token is to balance the financial inflation, and eventually, in the future the local fiat currency can be replaced by a stable cryptocurrency.
Basic Attributes
- The Reserve Protocol can be implemented on top of any smart contract platform. It could be operated on its own chain, but it benefits from locating itself where collateral tokens are most liquid.
- The initial production version of the Reserve Protocol will be substantially centralized, and over time each protocol component will be migrated on-chain and released from control by the founding team.
- The Reserve token will initially have a target value of US $1.00, but is designed to go off of the peg to the US dollar in the long term.
The Reserve Protocol is designed so that once the portfolio of tokenized assets held in smart contracts is stable enough, the Reserve token can transition to representing a fractional ownership of the collateral tokens.
This option is in place so that if the US dollar starts to depreciate, the Reserve can maintain a more stable value.
The Reserve Protocol interacts with three kinds of tokens:
- The Reserve token (RSV)—a stable cryptocurrency that can be held and spent the way we use US dollars and other stable fiat money.
- The Reserve Rights token (RSR)—a cryptocurrency used to facilitate the stability of the Reserve token.
- Collateral tokens—other assets that are held in smart contracts in order to back the value of the Reserve token, similar to when the US government used to back the US dollar with gold. Many of the collateral tokens will be tokenized real-world assets such as tokenized commodities, currencies, and securities.
How the Reserve Protocol is Capitalized?
The Reserve Protocol holds the collateral tokens that back the Reserve token. When new Reserves are sold on the market, the assets used by market participants to purchase the new Reserves are held as collateral. This process keeps the Reserve collateralized at a 1:1 ratio even as supply increases.
At times, the Reserve Protocol may target a collateralization ratio greater than 1:1. When this is the case, scaling the supply of Reserve tokens requires additional capital in order to maintain the target collateralization ratio. To accomplish this the Reserve Protocol mints and sells Reserve Rights tokens in exchange for additional collateral tokens.
How the Reserve Token is Stabilized?
Reserve token, prices are expected to fall on secondary markets, what happens then?
Suppose the redemption price of Reserve is $1.00. If the price of Reserve on the open market is $0.98, arbitrageurs will be incentivized to buy it up and redeem it with the Reserve smart contract for $1.00 worth of collateral tokens. They'll continue buying on open markets until there is no more money to be made, which is when the market price matches the redemption price of $1.00.
The same mechanism works in reverse when demand goes up.
Example in the graph below:
© https://reserve.org/protocolPromising future for a decentralized and accessible stable cryptocurrency
This token holds the potential to develop a stable currency in the future, which will allow people worldwide, independent of borders and restrictions, to use money protected from hyperinflation. This promising outcome depends on The Reserve team achieving its goal of setting up a completely independent stable coin inside their own blockchain, outside the fiat money.
This article has been created with the material present on the website (https://reserve.org/protocol) and other lecture below
If you want more understanding of the dynamic of the token you can read the whitepaper on the reserve.org
Resources :
- Irving Fisher. Stabilizing the Dollar. The Macmillan Company, 1920.
