Central Bank Digital Currencies and Inflation: Element Zero is the Solution
Element Zero believes that the stablecoins that protect against inflation will become a viable alternative to both fiat and potential government-issued cryptocurrencies. There are a number of countries working on a crypto version of their fiat currency, this is known as a Central Bank Digital Currency or CBDC.
Probably the most well-known of these is Venezuela who has declared its state-backed cryptocurrency Petro as the country’s official national currency. Recently, a former chair at the Federal Deposit and Insurance Corporation (FDIC) in the United States, has argued in favor of the US Federal Reserve creating its own CBDC. The Reserve Bank of New Zealand and Sweden’s Riksbank are also looking at using distributed ledgers to help expand their fiscal policies. Meanwhile, the President of the European Central Bank (ECB) has gone on the record and stated that the Eurozone has no intention of creating a digital Euro.
When it comes to CBDCs, it is very important to understand the function of a Central Bank and how one might manipulate its nation’s currency. Central banks are the caretakers of a nation’s financial system. One of the key responsibilities of a Central Bank is setting interest rate targets. When they lower interest rates, they stimulate inflation, and when the interest rates are raised this contracts growth and puts breaks on the economy. Central banks do not aim for zero inflation as that would lead to stagnation of the economy. This type of power can be easily abused and may not always be wielded with the general population’s best interests in mind, as evidenced by the ongoing economic struggles of countries such as Venezuela.
Losing Purchasing Power
Traditional fiat currencies, stablecoins that are pegged against a fiat currency, and even future digital currencies created by a government, will all suffer from a loss in purchasing power due to inflation. For example, let’s say you put $100 in the bank, or converted it into a stablecoin pegged against a fiat currency. In the USA after ten years at an inflation rate of 3% per year, that same $100 will only have less than $75 of purchasing power. This loss of value due to inflation impacts everyone and especially their retirement savings, leaving them wondering how to mitigate these effects.
What Will $100 USD be Worth in N Years?
3% (L-T aver)
Inflation Rates in Underdeveloped Countries
But what about countries outside the US? The impact of inflation in some of the less developed countries is even greater. For example, the Venezuelan Bolivar had been experiencing hyper-inflation so they announced a new currency in February of 2014, when their official inflation rate was said to be 53.7%. Unfortunately, this change had no effect and in fact the currency inflation has only gotten worse. Between the inflation rate and an administration known for poor economic choices, the population has been trying to keep their wealth in assets other than the Venezuelan Bolivar, a task the government strives to make exceedingly difficult. Residents are looking for any possible way to escape their crumbling economy.
The Turkish Lira is also facing its own crisis. Due largely in part to increased trade tariffs imposed by the United States, the Lira has been dropping in value quite rapidly. To try and counteract the effects of a declining currency value, the central bank has been raising interest rates while at the same time attempting to help companies repay foreign-currency debts. This is creating large amounts of volatility, at times even more than Bitcoin and other cryptocurrencies, and the governmental solution seems to be tighter regulation and taxation increases.
If we take a look at Greece, a country that has been on the brink of economic collapse for quite some time, we see that its residents are already storing their wealth in things such as jewelry and gold rather than their national currency. With worry of a “Grexit” looming on the horizon (Greece dropping the Euro), Greek nationals have been quick to adopt Bitcoin as a store of value.
We believe cryptocurrencies that solve the problem of how to stabilize their purchasing power and protect against inflation will have a higher potential for mass adoption. Element Zero’s stability protocol is designed to not only eliminate the possibility for any volatility in the first place, it also protects the token holder from inflationary effects.
How Will Element Zero Overcome Inflation?
Element Zero’s protocol has been designed to increase the value of its stablecoins in a way that will balance purchasing power by overcoming inflation. This has been done by automatically following the Personal Consumption Expenditures (PCE) and by creating a floor with a minimum of a 3% inflation rate per year, which is the average inflation per year over the last 100 years (based on CPI) and designed to combat the extreme scenarios of temporary hyperinflation crises.
To guarantee that the Element Zero stablecoin’s price reflects inflation, every time the system generates new stablecoins, they will be based on a new current coin price which includes an inflationary adjustment. And every time the system processes a redemption the users will receive the current coin sale price. For example, if the stablecoin is worth $100 today and one year later the system creates new stablecoins at current coin price of $103, users that want to redeem their stablecoins from the system will receive a return with the new coin at a price of $103.
Element Zero’s approach to stability and inflation management is the first of it’s kind and is set to become a viable alternative to government-controlled currencies. The stability promised by the Element Zero platform means that it will not only be desirable as a long-term store of value, but can be used for daily purchases without the concern of price variation. This opens up endless possibilities for both merchants and investors; granting safe, stable access to a global market not controlled by any single governmental body. With Element Zero, one can attain financial peace of mind and rest easy knowing that the purchasing power of their wealth will be retained.
