Anchor’s MMU: Financial & Technical Aspects | Anchor
Written by Anchor’s CEO, Daniel Popa
At the very core of Anchor’s value proposition lies the Monetary Measurement Unit (MMU), that indexes Anchor’s stablecoin to the real growth of the global economy. But what is it really, and how does it work?
The Starting Point
In order to understand the MMU thoroughly, we have to start at the very beginning — from the problem Anchor is trying to solve. If you look into our Whitepaper, you will see that our core target group is “everyone”. Let me elaborate on that.
Our core target audience, that “everyman” of ours is actually any individual, business, government, or entity that would benefit from the retention and appreciation of value over time, which is basically everyone who independently handles a certain amount of monetary resources. Any adult who would like to spend a certain part of those resources, and put the rest into savings that are guaranteed to maintain their purchasing power.
Considering the fact that this desired outcome is not perfectly available to everyone today, Anchor is trying to offer a solution to that problem. To create a currency that will not lose purchasing power over time.
Let’s Outline the Problems Anchor is Looking to Resolve
- No fiat currency can adequately function as a stable store of value
- Cryptocurrencies and stablecoins have addressed some of fiat issues, such as centralized control, but they failed to provide any semblance of stability.
- The lack of a standard in the stablecoin market is causing chaos, so if the industry were to mature and drive mass adoption, we need a common, compliant standard for indexed stablecoins.
Why No Fiat Currency Can Adequately Function as a Stable Store of Value
When it comes to resource/currency availability, this is successfully resolved by any fiat currency in combination with credit cards and electronic payments. However, the problem ensues when it comes to savings. Savings accounts in banks cannot be the solution to this because inflation is an inevitable fact of life for every fiat, which basically means that resources are doomed to lose purchasing power. The inflation basically “eats” the value of your holdings. Let’s take the value of the US dollar for an example. $100 in 1990 equals $192.84 in 2019. According to the Bureau of Labor Statistics, prices today are 92.84% higher than in 1990. That means that the average inflation rate of the US dollar during this period was 2.29% per year.
Furthermore, fixed-term deposits block the resources, which means that they lose their primary purpose as means of payment for goods and services. Every other option at people’s disposal demands a form of investment, which creates a new, multicomponent issue.
The first part of the issue at stake here is the fact that now, a person who has already spent a lot of time, energy, and money to finish school and become capable to do the job they are doing and earn money through that activity, has to spend additional time, energy, and money to research and analyze existing options, and then choose the form of risk that resonates with them most.
Why do I believe they have to risk anything? Well firstly, this person has to find an intermediary that can be trusted. Secondly, they still don’t have a guarantee that their investment option will save or increase the value of their holdings. Most people aren’t prone to risks of this sort. Furthermore, most people don’t have tendencies geared towards the understanding of complex financial laws. However, the current state of affairs is inescapably pushing them towards these imperfect, risky solutions.
Anchor’s Solution for Preserving and Enhancing Value over Time Is Made Possible by Pegging to the Mmu
Here’s how the MMU works/retains value over time. The question of using/managing money, which is something that fiat currencies have been successful at forever, is answered through the use of a payment token (which is not an asset, as that would slow the token down and limit its versatility). The added bonus to this is the benefit of using blockchain technology. The benefit here lies in the nature of the blockchain and everything that comes with it in terms of trust and transparency. The same has been achieved by other stablecoins but those coins still do not have a solution for the issue of preservation of the purchasing power. For that reason, Anchor needed to peg itself to a unit of value that is immune to inflation, unlike the US dollar to which many of the other fiat-collateralized stablecoins are pegged.
So instead of pegging to a monetary mass of a certain currency, which would inevitably lead to inflation, Anchor needed a peg that will remain stable indefinitely to be able to preserve (keep stable and slightly increase) the value. The index that was created to achieve that goal (and not just that) is named the MMU.
So, what are the assumptions it rests on and what are its main elements?
First of all, a global application demands that the MMU had to be defined on a global level, so it had to represent a global trend. As money can only be used to purchase those goods and services we can access, it is clear that anything created on any of the markets represents something we can use to determine the behavior of the global economy. As one of the basic criteria of MMU is the long-term sustainability of our model, the resulting conclusion is that our business model has to have a coverage in things that are really produced and are, as such, available on the market.
This type of reasoning is contained in the value we call the RMU. Within the framework of this value, we calculate the participation of each individual country and the contribution of their national economies to the global economy, observed during a prolonged time period.
Even though this definition of our concept is very effective at reflecting our starting assumption, it isn’t practical enough for everyday use. The main reason for that is the fact that a lot of countries have unstable economies and currencies (also known as soft currencies). For that reason, we utilize the RMU strictly as a comparative value and a step towards determining the value of MMU. The MMU, the way we have created it, can be recalculated every day so Anchor can follow it and act as a currency that has its own course and the ability to adjust itself properly.
To make that possible, we used two independent components to calculate the value of the MMU.
- FX Indicator, which represents the extent of participation of the most relevant fiat currencies in the global economy, adjusted for the participation of the corresponding countries in the real growth of global GDP, while taking into consideration the daily currency courses for eight currencies being used in ten countries with the most significant economies which enables the nominal expression of the MMU.
- The MMU Premium, which consists of the adjusted real risk-free rates, derived from the sovereign bond yields of select countries and their average inflation rates, adjusted in accordance with their participation in the real growth of the global GDP, which nominally embeds the stable growth of the global economy into the MMU.
That way, the determined value of the MMU is expressed in each and every currency from the abovementioned FX indicator. This value is based on averaged historical values for a 365-day period. For the expression of this value in current market parameters, aka foreign exchange rates, we have primarily calculated the indicator that expresses the average value of the basket of currencies in a neutral unit. To the value we have gotten via these actions, we have applied the participating stakes and current foreign exchange rates in order to get the final value of the MMU for a specific day.
For the calculations I have mentioned above, we are using only publicly available data from reliable sources, so we can satisfy the transparency criteria and build trust. As an addition to our platform, we will have a publicly available simulator, that will enable anyone to track historical values of the MMU, and express it through any of the currencies we’re using for its calculation.
The above explained methodology enables us to define the desired value do the Anchor in any given moment, making the value of the MMU the goal towards which Anchor, as a currency, wants to strive. In an ideal world, this might be enough for Anchor to satisfy every criteria of a universal means of payment that maintains its value and does not lose purchasing power. However, the practice is different. In practice, we rely on our six-pillar safety net, to, in case of a divergence between the desired value of the MMU, and the values on the free market, apply appropriate defense mechanisms that can equalize the desired and the market value of the Anchor.
With the addition of these defense mechanisms, Anchor has the potential to offer a fundamentally stable cryptocurrency to the market that is currently in a dire need of one.