Hedging Against Inflation
Last updated
Last updated
Inflation is defined as the growth in the money supply less the growth in the total value of goods and services in an economy. This can be represented as:
Although it could seem easy to avoid an inflationary spiral, targeting inflation is in fact an imprecise and indirect process subject to uncertainty.
In traditional economies, Central Banks are responsible for increasing or decreasing the money supply — one could think of it as “printing” or “burning” money; though, it is actually the Treasury which physically does this. The objective of Central Banks is to ensure financial stability. For the vast majority, this is accomplished through their mandate to stabilize inflation through explicit target rates or ranges. There are 2 primary ways that Central Banks target inflation: 1) buying or selling assets, and 2) adjusting the interest rates they charge to banks — together known as monetary policy.
Unfortunately, these tools have a limited pass-through to prices and interest rates within the economy. The ability of Central Bank policy to affect inflation is known as the transmission mechanism — characterized by long, variable and uncertain time lags. Thus, it is difficult to predict the precise effect of monetary policy actions on the economy and price level.
It is important to note that a growth in the money supply does not necessarily lead to inflation if there is an equal growth in the value of the goods and services in an economy. In fact, it could be argued that a productive and growing economy requires a growing money supply to support it. Though such a system can be more productive over time, it is prone to financial instability due to the debt cycle (business cycle fluctuations) and the difficulty in targeting inflation.
Despite this difficulty, the vast majority of economies choose to target some amount of inflation. This has a couple benefits for Central Banks and Governments — as it decreases the cost of debt over time and allows for monetary policy flexibility. Perhaps even more important: a growing money supply encourages investment in productivity growth in the short run.
Just as a growing money supply supports the productivity and growth of a traditional economy — a productive and growing token-based economy requires a growing token supply to support it. A growing supply of the token will create incentives for more consumption and investment within the network and lead to greater productivity and value in that economy in the long run.
As well, a growing token supply, when used to pay for the work and security of the network, supports the growth of the token-based economy. It enables the network to achieve its highest value.
Let’s take an example of a network that rewards Validators of transactions. To achieve an optimum level of transaction load (to achieve the highest value of the economy), both fees and growing token supply should be used as expenditures of the network. Meaning, Validators are paid fees by users for validating transactions — and they are also rewarded with the growing token supply. If only fees were used to pay for transactions, the system would reach a lower equilibrium value and incur a deadweight loss for this security payment. When this security payment comes from both fees and a reward from a growing token supply — a more favorable equilibrium is reached.
A limited supply
One of the main principle to hedge against inflation is the limited supply of FRK described here. This a maximum of 1.5 billion tokens attributed to the community and an increase of the value captured by the ecosystem, the inflation will be always contained.
Slowing the minting
As described in the Creator Earning Model section, the calculation of the increases the difficulty to mint new FRK. Thus, the number of FRK minted reach an asymptote.
A entropic value creation in the ecosystem
The main sources of revenue of the ecosystem come from partnerships, advertisers and exclusive content purchases. These exogenous incomes will keep growing and will exceed the endogenous revenues within the first 24 months.
Maintain the growth of the number of FRK minted below the value created in the ecosystem
What makes a difference with most of xxx-to-earn mechanism is our permanent recalculation of the fractions price and the $FRK earnings model in order to avoid an acceleration of the inflation. The $FRK earnings is permanently linked to value captured by the ecosystem.
Burning mechanisms
Like in the traditional economy, burning mechanisms can be necessary in critical cases. Frak Foundation can use its reserves to burn tokens.
