Speculative function of money interferes with its basic function as a standard of value.
Back in 1995, an average daily currency volume of 1.3 trillion US$ was exchanged globally. This corresponds to 30 times the daily gross domestic product (GDP) of all of the developed countries (OECD) together Only 3 percent of that volume has to do with real trade or investment, the remainder is speculation (stock markets, forex markets etc.).
Right now monetary stability depends more and more on speculative markets, the interventions of governments or central banks in central markets can give signals at the best, but the government money for interventions are only a fraction of the total trading volume. Overreactions of financial markets will therefore have bigger effect on the real economy.
It is probably fair to say that almost all financial crisis since the tulip mania of the 1630s can be attributed to some sort of mass speculation. There is no question that speculation caused the financial crisis of 2008, first in housing, and then in derivative securities.
Speculation is never good, at least in the sense that it never contributes to the productive economy. The principle negative economic effect of speculation is to divert resources away from production and into the speculative game.
Centralization and Economic Instability
The functions of money have expanded over time. These are the most essential functions of of money:
- As a medium of exchange; money facilitates multi-party barter or trading
- As a standard of value; in order to compare the value of goods and services, we express them in Dollars, Pounds, Marks, etc.
- A tool for speculative profit: today more than 95% of all currency transactions are motivated by speculation; less than 5% are for trades of goods and services
In the current banking system, the money creator needs an authorization from a commercial bank before he can put money into circulation. The bank evaluates the loan applicants credit-worthiness and the value of his collateral. In fact the bank has not created anything, it has just used its legal authority to convert the value of the applicants collateral in a negotiable form: generally accepted currency. The bank then approves the creation of money, the real origin of the new money is the proposal formulated by the borrower.
Unlike savings banks and credit unions, when a commercial bank makes a loan, it does not use the savings of some clients to give credit to others. In fact the bank creates new money, as credit, by the process of fractional reserve banking: only a small fraction of the loan (usually between 10 and 20 percent) really exists in the bank’s reserve account at the central bank. The rest is created, simply by crediting the account of the borrowing client.
The extra money required to pay the interest over these commercial bank loans is not available within the circulation. The principal amount is created at the time the loan is made, but the money to pay the interest is not created. In other words, the total amount of debt in a conventional money system always exceeds the total amount of money available in the system.
An unfair system and instability, combined with centralization is a disaster for the world’s future.
Bancor Protocol tries to democratize the value creation in economic system, to give fair distribution of wealth to all citizens. The Bancor protocol enables anyone to create a new type of cryptocurrency called a Smart Token™, a popular ERC 20 standard token. If you ever heard of Bitcoin, then Smart Token™ has similar function but with better technology.
Each Smart Token™ holds a reserve balance in one or more other cryptocurrencies, thereby enabling anyone to exchange between itself and any of its reserve tokens. The Smart Token’s™ smart contract issues new tokens (buying) to anyone who purchases it with any of its reserve tokens, and withdraws tokens from the reserves (selling) for anyone choosing to liquidate the Smart Token™. The price of a Smart Token™ vis-a-vis any of its reserve tokens is calculated as a ratio between the current Smart Token’s™ supply and its reserve balance, at the pre-set Weight.
Cryptocurrency is the future of economy because it is backed by consensus to decide its value; not like fiat money with nonsensical value on each paper. It is the first time that anyone can create money for their own purpose; family, community, business, social and many more.
To avoid any kind of speculations, Bancor Formula will be implemented to determining the price at which they can be converted to/from their Connectors. When Smart Tokens™ are purchased from the Smart Token’s™ smart contract (in exchange for any of their Connectors) the payment for the purchase is added to the balance of the Connector held by the contract, and based on the calculated price, new Smart Tokens™ are created and added to the buyer’s balance. Due to the calculation above, each time the tokens bought the price will increase and each time the tokens sold then the price will decrease. It is bad news for speculators who want to take short term profits from the market.
It leads to a more stable market with less speculation, to guarantee a fair and equal distribution of wealth in a decentralized way.
