, July 26, 2021

0 results found in this keyword

Fath: A monetary system to mitigate currency devaluation and deflation


  •   6 min reads
Fath: A monetary system to mitigate currency devaluation and deflation

The British pound sterling (GBP) is the world's oldest fiat currency. It was established in 1694. Back then, 1 GBP was equal to 12 ounces of silver. Today, 12 ounces of silver cost around 220 GBP. It’s obvious that the GBP, and other fiat currencies have lost 99% of its worth. There is no precedent in history for a fiat currency that has maintained its value.

What are the causes for currencies losing their value? According to a survey of 775 fiat currencies, a currency's average lifespan is only 27 years. 20% failed due to hyperinflation, 21% were destroyed by war, 12% percent were destroyed due to independence, 24% were monetarily reformed, and just 23% are still in circulation. A fiat currency's average life expectancy is 27 years, with the shortest life span so far being one month.

Enter Fath

Fath is a monetary algorithm with a proportional distribution of money issued, created by the Paradigm research team. Fath takes its name from the term Fathom, which means a deep understanding of why something is happening after much thought and summarizes properly how the process was to get here.

Fath monetary system establishes two principles:

  1. Proportional Distribution: Any emission should be proportionally and directly delivered to each currency holder without distinction of role
  2. Rebalancing: Monetary base should be rebalanced according to the amount of value created in the system.

To better understand these principles, let’s take a deeper look at each of them and why they exist.

Proportional Distribution

The idea behind Fath is to create a monetary system where emission is distributed proportionally, in contrast to how the fiat credit cycle and capital-based public blockchain operate.

Since the global conversion to fiat and decimalization that hit most countries in the ’70s, world leaders have transformed the emission of money in the financial system to a debt-loan cycle.


In other words, money is created in the form of loans  towards large financial entities by the emitting entities. The large financial entities in turn resell it as debt to retail banks and small/middle enterprises. Small enterprises and retail banks resell their debt to other people or enterprises. Enterprises and people are the bottom line in this scheme and are the ones paying for the emission.

If ordinary people or enterprises fail likewise, in most cases they are thrown onto the street by law enforcement, go bankrupt, or go to jail. Consider the fact that every time the emitting entity prints money it increases the money supply and devalues the currency, meaning that agents at the bottom of the emission pyramid not only get devalued with each coin printed, they also pay for it to happen.

At the same time, capital-based public blockchains have their own issues when it comes to emission. In Proof-of-Work blockchains, such as Bitcoin, the protocol acts as the emitting entity. With emission set in every block - until the network mints their max supply of 21 million - only miners directly receive it while ordinary users get nothing. Being this way, miners either can decide to hold onto the emitted money or sell it on the market. So, even when this system does not sell the debt to the bottom line participant, as the emission is received only by miners, the devaluation of non-miners agents' assets, even if it is small, still happens.

At the same time, supply is not balanced with value creation. This means that the limited supply is not lining up to the growth of the value in the system making it deflationary, which on a nation-sized scale makes economies unhealthy and potentially leads to a crisis.

On the other hand, Proof-of-Stake blockchains have some kind of governing entity that decides upon the emission and operates as the issuer. Usually, there is a Decentralized Autonomous Organization (DAO) that sets the emission or, in the worst scenario, an offchain agreement. Here validators receive issuance directly from the protocol and in Delegated PoS, they also redistribute it across their delegators. So, regular token holders get nothing from the emission and DAO can set emission at any level.

Sometimes, in PoS blockchains the devaluation is extreme because validators accumulate minted tokens and sell them on the market to cover expenses and make profit, but their networks are not as big as Bitcoin to counterweight the devaluation effect.

Rebalancing

Humanode monetary system lies on the Fath hypothesis, which states that it is possible to mitigate long-term devaluation by the proportional distribution of emission, taking into consideration the growth of value of the network’s economy. Rebalancing the monetary supply according to the economic growth will save the system from the devaluation effects while direct proportional distribution makes the issues advance more fair.

The amount of issuance is determined by the Fath protocol algorithm calculating the amount of additional value created in the monetary system, aka economic output of goods and services sold across the network, that we would call Gross Monetary System Product (GMSP). This means that the protocol calculates the real value creation (rVC) in two different periods, being one year each.

The HMND token will be the first currency to be based on the Fath hypothesis. Fath will be implemented at the genesis of the HMND token, and the rVC will be calculated based on the transaction fees spent by participants of the network.  

If the amount of commission received by human nodes in the second period is different from the first, then the algorithm applies the same difference in percentage to supply and rebalances every single wallet that exists. In other words, when the rVC, or output of the economic system around Fath currency rises by 1%, new currency that amounts to 1% of the monetary base is issued  and is distributed proportionally, based on currency saving, to every wallet in the system.

Rebalances occur in two ways: inFath and outFath.

(i) inFath

If the amount of commissions paid out in the second period exceeds the commission paid out in the first period, inFath occurs and emission is distributed across every wallet proportionally.

(ii) outFath

If the amount of commission paid out in the second period is smaller than the first then outFath occurs and burns excessive supply throughout every wallet.


Gross Monetary System Product (GMSP)

Fath protocol will work with Smart contracts design to allow the increase and decrease of supply automatically on every period called rebase. As we mentioned before, the monetary algorithm establishes a period in a time of a year. Meaning that an annual rebase will be taking place in the Humanode network.

It is safe to say that the first rebalance on the Humanode network will occur after two years since the launch of the mainnet. Since then, the annual rebase operation will be applied proportionally across every wallet’s balance, using inFath and outFath distributions powered by the data captured by the Smart contracts applying similar formulas to the ones used for countries but our network. When this happens, we will shift from Transactional Fath to Growth Humanode product Fath.

Thus, the right calculation of GMSP and the implementation of InFath and outFath distribution cycles requires that the algorithm uses verifiable and auditable data that any user anywhere in the world would have the opportunity to track. In this matter, it becomes key to the consensus between the DAO members.


Further Consideration

Humanode project pursues the implementation of Fath as a long-term solution to mitigate long-term devaluation by the proportional distribution of the emission.

We strongly believe that a financial system that does not become a hyperinflation spiral nor create devaluation is possible with a proportional distribution between members of a network with the correlative value. Our vision is to create a stable and just financial system that relies on the existence of human life itself, one human = one node. And Fath will work as the monetary algorithm for it to happen.

References:

You've successfully subscribed to Humanode
Great! Next, complete checkout for full access to Humanode
Welcome back! You've successfully signed in
Success! Your account is fully activated, you now have access to all content.
Success! Your billing info is updated.
Billing info update failed.
Your link has expired.