The Issue of Inflation
In our latest episode on YAP Cast, we shift direction as we focus on why money loses its value and what, exactly, a Consumer Price Index (CPI) is and how it relates to the US dollar. As we carry on with our series on YAP Cast, we’ll continue to discover where money has come from and how our future may eventually see cryptocurrencies and decentralised finance playing an important role.
Our fifth episode on The Story of Money looks at the scariest of money issues: inflation, what it is, and what can be done about it. Turning back to the people of Yap, they originally thought they had their idea of money sorted by basing their value on the Rai stones that were mined on an island hundreds of miles across the ocean.
This all changed, however, when David O’Keefe, an Irish adventurer, arrived and started an industry of mining the stones. By doing so, he undermined the system as the stones started losing their value. But is inflation a bad thing? Does it undermine all currencies regardless of what form they take and what can the likes of crypto do about it?
Money’s Worth and the CPI
Most of today’s trade is denominated in US dollars, but one of the things that people aren’t aware of is that the US dollar is a floating currency. Because it’s not hard pegged to something like gold or silver, for instance, who decides how much dollars are worth? In essence, it’s the US government whose intent is to loosely track the dollar against the CPI.
This is a basket of goods such as the average price of automobiles in the US, food items, including bread and milk or even the average price of rent that the US government calculates and defines as people’s standard of living. The CPI tracks this basket of goods rather than gold or something else because the idea behind it is that the dollar should always be able to buy this basket of goods.
Cryptocurrency is a Misnomer
When it comes to the US dollar as a currency, no one debates whether or not it’s a currency because it maintains a standard of living. When it comes to the word cryptocurrency, which is an umbrella term for all the crypto assets and tokens in existence, it’s considered a misnomer and an area of confusion for a lot of people. Regardless of the fact that the US dollar may be doing a terrible job and that it’s inflating too much, the US dollar remains the predominant currency in the world. And whether it’s achieving what it needs to, it’s meant to keep people’s standards of living the same by following the CPI.
Cryptocurrencies, however, are considered as investments, which is the exact opposite of what a currency is. When someone makes an investment, they are trying to make more money, which, in turn, pushes their standard of living up. This is why the word currency applied to crypto is a misnomer because when someone tells another person to buy a particular crypto asset, it’s not to keep their standard of living the same.
Will Stablecoins be Adopted?
People are already adopting and using stablecoins more than Bitcoin, simply because most stablecoins are pegged to the US dollar.
Because of this, Frax, which is a fractional reserve stablecoin that is pegged to the US dollar, but isn’t fully backed, are asking themselves several questions: if Frax is pegged to the US dollar and the US dollar is pegged to the CPI, then is Frax pegged to the CPI? And could Frax create their own or better version of the CPI?
Part of Frax’s long-term goals is to create a Frax Price Index or FPI, pegging Frax directly to it. It’s not happening any time soon, but the team at Frax believe this is where stablecoins are heading. The aim, after all, is to deliver a stable blockchain in a decentralised manner without having to rely on the US government or pay into the US dollar.
In episode six, Samantha Yap welcomes back Professor Cathy Mulligan, Co-Director of the Imperial College Centre for Cryptocurrency Research and Director of DCentral Lab from the University of Lisbon, to discuss Money as a Social Construct.
We hope you enjoy the Story of Money by YAP Cast.
The fifth episode launched here.
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