American CryptoFed DAO

Axioms of CryptoFed's Economics

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Economic thought inspiring the mission and structuring the mechanism design.

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Axiom 1: Inflation is Not an Option

Milton Friedman (Nobel laureate 1976)

"Inflation tends not only to be higher but also increasingly volatile and to be accompanied by widening government intervention into the setting of prices. The growing volatility of inflation and the growing departure of relative prices from the values that market forces alone would set combine to render the economic system less efficient, to introduce frictions in all markets, and, very likely, to raise the recorded rate of unemployment."

Milton Friedman, 1976, page 283 – 284, Inflation and Unemployment, Nobel Memorial Lecture, Economic Sciences

Axiom 2: Deflation is Not an Option

Ben Bernanke (Nobel laureate 2022)

"The length and depth of the deflation during the late 1920s and early1930s strongly suggest a monetary origin, and the close correspondence (across both space and time) between deflation and nations' adherence to the gold standard shows the power of that system to transmit contractionary monetary shocks. There is also a high correlation in the data between deflation (falling prices) and depression (falling output), as the previous authors have noted and as we will demonstrate again below."

Ben Bernanke and Harold James, 1991, page 33, “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison” in Financial Markets and Financial Crises, ed. R. Glenn Hubbard, University of Chicago Press

Axiom 3: A Currency Must Be Stable

Friedrich A. Hayek (Nobel Laureate 1974)

“The chief attraction the issuer of a competitive currency has to offer to his customers is the assurance that its value will be kept stable (or otherwise be made to behave in a predictable manner).”

Friedrich A. Hayek, 1976, page 46, Denationalization of Money

Axiom 4: Money Was Invented to Reduce Transaction Costs

Ronald H. Coase (Nobel laureate 1991)

"I know of only one part of economics in which transaction costs have been used to explain a major feature of the economic system and that relates to the evolution and use of money. Adam Smith pointed out the hindrances to commerce that would arise in an economic system in which there was a division of labour but in which all exchange had to take the form of barter. No-one would be able to buy anything unless he possessed something that the producer wanted. This difficulty, he explained, could be overcome by the use of money."

Ronald H. Coase, 1991, The Institutional Structure of Production, Lecture to the memory of Alfred Nobel.

Axiom 5: Transaction Costs are Governance Issues

Oliver E. Williamson (Nobel laureate 2009)

"The overall object of the exercise essentially comes down to this: for each abstract description of a transaction, identify the most economical governance structure--where by governance structure I refer to the institutional framework within which the integrity of a transaction is decided. Markets and hierarchies are two of the main alternatives."

Oliver E. Williamson (Nobel Laureate 2009), 1979, page 234-235, Transaction-Cost Economics: The Governance of Contractual Relations, Journal of Law and Economics, Vol. 22, No. 2.

Axiom 6: A DAO Governance Can Be an Alternative to Political Agents (Government Agencies) Who Work for Their Own Interests Rather Than People’s

James Buchanan (Nobel Laureate 1986)

“Policy options must remain within the realm of the feasible, and the interests of political agents must be recognized as constraints on the possible.”

James Buchanan, 1986, The Constitution of Economic Policy, Lecture to the memory of Alfred Nobel.

Axiom 7: A Decentralized Mechanism of Incentive-compatibility Can Be Designed (Innovated) to Motivate Self-interested Participants to Act for Public Goods (Adam Smith’s Invisible Hand)

Leonid Hurwicz (Nobel Laureate 2007)

“Finally, it may be possible to create systems in which rational self-interest, due to a variety of rewards and punishments, leads, or may lead, to legal and ethical behavior. The validity of Samuelson’s second conjecture (that is, that there may be no successful implementation for public goods under decentralization) remains, in my opinion, an open question. The example of voters removing a corrupt official from office suggests that successful decentralization is possible.”

Leonid Hurwicz, 2007, BUT WHO WILL GUARD THE GUARDIANS?, Prize Lecture

Axiom 8: Monetary Dynamics Is the Interaction of Foreign Exchange Market and the Goods and Services Market

Robert Mundell (Nobel Laureate 1999)

“…I think the key element, breakthrough, that I thought for myself that I was making was in the seeing the economy as determined by a combination of two basic macro economic conditions. One is equilibrium in the goods and services market, and equilibrium in the foreign exchange market.”

Robert Mundell,1999, Interview with Professor Robert A. Mundell

2-Token Economy

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Ducat and Locke will be issued pursuant to the token definition in Token Safe Harbor Proposal 2.0 outlined by SEC Commissioner Hester Peirce. The purposes of Locke and Ducat are to implement the 8 axioms of CryptoFed's economics, the requirements and implications of which must be simultaneously satisfied. In no event can functions of Locke and/or Ducat contradict with any axioms of CryptoFed's economics.

your currency

An inflation and deflation protected currency token with unlimited issuance, constrained only by zero inflation and zero deflation. Ducat is used for daily transactions without the need of conversion to US dollar, functioning as a store of value, a unit of account and a medium of exchange. Ducat comes from “Swiss Ducat,” prescribed by F. A. Hayek (Nobel Laureate 1974) in Chapter “VIII. Putting Private Token Money into Circulation,” Denationalization of Money, page 46, 1976.

Interest payment to Ducat holders, payment to merchants for covering transaction costs of merchants’ own crypto vendors (3%), and purchase rewards to both consumers (5.5%-10%) and merchants (1%-4%) are the primary methodologies for Ducat supply, other than conversion from US dollar (USD pegged stablecoins) to Ducat. Therefore, Ducat supply depends on and is endogenous to the process in which consumers use Ducat for purchases and hold Ducat for saving. This endogenous process sets Ducat apart from these cryptocurrencies (such as BTC, ETH, XRP, Doge, Sol, etc.) whose supplies are irrelevant and exogenous to consumers’ purchase at merchants.

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your voice

A governance token with a maximum authorized finite number of 10 trillion. Locke is used to participate in governance by holders. The name Locke is derived from John Locke who defined money from the perspective of mutual consent, enunciating the spirit of American CryptoFed DAO, “And thus came in the use of money; some lasting thing that men might keep without spoiling, and that, by mutual consent, men would take in exchange for the truly useful but perishable supports of life.” Two Treatises of Government, page 125, 1689.

Pursuant to CryptoFed Constitution, Locke will be distributed, free of charge, to contributors who may sell the Locke on open crypto markets for their own interest, leading to an independent formation of a secondary market for Locke. When consumers purchase Ducat with USD pegged stablecoins from CryptoFed on open crypto markets, the proceeds of USD pegged stablecoins can only be used to buy back Locke from open crypto markets for burning (destroying). Under the restriction of finite number of 10 trillion, new Locke can also be issued to buy back Ducat from open crypto markets for burning (destroying). Thus, Locke can not only absorb the value inflow from US dollar economy but also stabilize Ducat economy.

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Relationship Between Ducat and USD

“The Federal Reserve seeks to achieve inflation at the rate of 2 percent over the longer run as measured by the annual change in the price index for personal consumption expenditures (PCE).” “The PCE price index, released each month in the Personal Income and Outlays report, reflects changes in the prices of goods and services purchased by consumers in the United States.”

Given that USD targets 2% inflation and Ducat targets 0% inflation, then Ducat must start, from day 1, to accrue the accumulated loss of purchasing power caused by the USD’s inflation. Therefore, the theoretical ideal value of 1 Ducat should be equal to 1 USD plus all the accumulated USD inflation. This relationship can be defined as the Target Exchange Rate and expressed in both a mathematical formula and a corresponding diagram.

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Measurement of Ducat Inflation and Deflation

At any given time, if the Ducat market value against USD in crypto exchanges, e.g. foreign exchange (FX) rate, is lower than the Target Exchange Rate calculated by the formula, Ducat will have inflation (Ducat oversupply).

At any given time, if the Ducat market value against USD in crypto exchanges is higher than the Target Exchange Rate calculated by the formula, Ducat will have deflation (Ducat undersupply). The closer the Ducat market value to the Target Exchange Rate curve, the less the inflation or deflation.

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Shield For Merchants' Foreign Exchange Loss

Consumers may initially acquire Ducat as sign-up bonus or buy Ducat from open crypto markets, and then use Ducat to purchase goods and services at merchants. In addition to zero CryptoFed transaction costs (3%) paid in Ducat directly by CryptoFed to merchants so that merchants can select their own crypto payment processors, for each purchase, CryptoFed’s smart contracts automatically deliver rewards to both consumers (5.5%-10%) and merchants (1%-4%). Merchants receive Ducat from consumers and may convert certain amount of Ducat to USD on crypto markets where consumers are primary buyers. This process will establish the Ducat circulation.

Whenever merchants suffer foreign exchange (FX) loss caused by conversion from Ducat to USD, CryptoFed’s smart contracts will automatically issue additional Ducat to these merchants who keep price in Ducat unchanged for the past 24 hours. At the same time, because consumers can buy the same goods and services at the merchants with the same Ducat, and because consumers can buy more Ducat with the same amount of USD pegged stablecoins during Ducat’s devaluation, consumers will buy more and more Ducat to enjoy the Ducat discount, and consequently bringing Ducat price back to the Target Exchange Rate. This invincible market force will play an important role, during unexpected economic shocks causing freefall of Ducat price, to automatically maintain Ducat stability.

Control of Ducat Inflation and Deflation

Fiscal Policy: CryptoFed pays rewards in Ducat to consumers (5.5% -10%) and merchants (1% - 4%) for every purchase on the assumption that the rewards will drive the expansion of Ducat economy by incentivizing more and more people to use Ducat to pay goods, services, rents, wage, mortgage, etc. When inflation occurs, rewards will be reduced within the range. When deflation occurs, rewards will be increased within the range. When and only when, for four (4) consecutive quarters, Ducat inflation cannot be cured by the combination of fiscal policy (reward rate 5.5% to consumers and 1% to merchants) and monetary policy (5% interest rate), will the lower bound of the reward rate to consumers (5.5%) and to merchants (1%) be lowered 20% quarterly until the inflation is cured.

Monetary Policy: CryptoFed pays interest to Ducat holders in Ducat to influence the borrowing and lending markets of Ducat, which in turn influence people’s decisions to save or invest or consume in Ducat. Interest rate can go as high or low as needed, but it will never be negative and must be higher than the real federal funds rate which is defined as the effective federal funds rate minus the annual PCE core inflation rate (excluding food and energy). CryptoFed Standard Ducat Interest Rate is 2% higher than the real federal funds rate. When inflation occurs, interest rate will be increased. When deflation occurs, interest rate will be decreased. CryptoFed’s interest rate is the equivalent of the Federal Reserve’s interest rate on reserve balances. The difference is that CryptoFed pays interest to Ducat holders consisting of ordinary households and businesses, while the Federal Reserve pays the interest only to those banks which have master accounts with the Federal Reserve Banks.

CryptoFed’s adjustment of reward rate (fiscal policy) and interest rate (monetary policy) is a methodology to shift the fundamental economic conditions for these households (consumers) and businesses (merchants) who use Ducat for daily economic activities. The combination of fiscal and monetary policies will be implemented quarterly and will be able to cure inflation and deflation to maintain self-sustainability.

An Example of Reward and Interest Rate Adjustment

For example, a life cycle of adjustment of monetary and fiscal policies consists of the following steps. (i) The combination of 20% consumer reward rate reduction, 15% merchant reward reduction and 0.25% increase of interest paid to ducat holders can be implemented and repeated every quarter until the inflation is cured. (ii) Once the inflation is cured, the next quarterly adjustment is to cut interest rate 0.25% each quarter towards the Standard Ducat Interest Rate which is 2% higher than the real federal funds rate, while continuing the reduction of 20% consumer reward rate and 15% merchant reward. (iii) After Standard Ducat Interest Rate is reached, the quarterly reduction of 20% consumer reward rate and 15% merchant reward will continue until the inflation is cured or both the lower bounds of the reward rate to consumers (5.5%) and to merchants (1%) are reached, whichever comes first. (iv) Interest rate will be raised 0.25% each quarter until the inflation is cured, if inflation continues under the lower bounds of the reward rate to consumers (5.5%) and to merchants (1%).

The Economic Relationship Between Locke and Ducat Tokens

The combination of fiscal and monetary policies will only be implemented and adjusted quarterly. During the three-month interval, Ducat’s price against USD in crypto markets may be higher (deflation signal, Ducat undersupply) or lower (inflation signal, Ducat oversupply) than the Target Exchange Rate.
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• Whenever Ducat price is 2% higher than the Target Exchange Rate, CryptoFed’s smart contract will automatically create and sell new Ducat in exchange for USD-pegged stablecoins on crypto markets, to drive the Ducat’s price down towards the Target Exchange Rate.

• The USD-pegged stablecoins received will solely be used to buy back Locke tokens from crypto markets for burning (destroying). CryptoFed must buy back Locke tokens, whenever the Locke’s price falls 3% below its previous price for a 24-hour period or falls 5% below its previous price for a 1-hour period. Whenever the Locke’s price falls 30% below its previous price for a 24-hour period, CryptoFed must use all available CryptoFed’s USD-pegged stablecoins to buy back Locke tokens. This Open Market Operation will increase the price of Locke tokens on crypto markets.

• Whenever Ducat price is 2% lower than the Target Exchange Rate, CryptoFed’s smart contract will automatically create and sell new Locke in exchange for Ducat tokens on crypto markets for burning (destroying), to bring the Ducat’s price back to the Target Exchange Rate. This Open Market Operation will decrease the price of Locke tokens on crypto markets. In order for Locke to obtain certain value to buy back Ducat, CryptoFed will not launch Ducat until Locke reaches $0.10 USD per Locke.

If the net amount (Ducat sold minus Ducat purchased) during the three-month interval is positive, there is deflation pressure in the system, and vice versa. The positive or negative direction will be the objective guidance for the quarter adjustment of fiscal and monetary policies.

During the three-month interval, when the net amount (Locke purchased minus Locke sold) becomes negative, there will be high inflation pressure. When the amount of Locke sold exceeds twice the amount of Locke purchased, it will be obvious that the inflation pressure cannot be cured by Ducat buyback with Locke. Then, preventive fiscal and monetary policies which should be twice stronger than the regular three-month adjustment, will be implemented immediately, while Ducat buyback with Locke will continue unless Locke price already falls below $0.01 USD per Locke. As a result, interest rate for Ducat holders will be increased significantly, while rewards to consumers and merchants will be reduced significantly. During Ducat devaluation, merchants will continue receiving additional Ducat to cover foreign exchange loss caused by conversion from Ducat to USD, while consumers will buy more Ducat to enjoy more discount. After the implementation of preventive fiscal and monetary policies, whenever Ducat price falls 10% below its previous price for a 24-hour period, the same preventive fiscal and monetary policies will be repeated until the accumulated effect cure the inflation. Once the Ducat price is back to the 2% deviation range, Locke can be used again to buy back Ducat as usual.

Over time, with accumulation of large amounts of data, Machine Learning will be able to optimize automatically the fiscal and monetary policies to maintain zero inflation / deflation and maximize Ducat expansion and Locke value.

American CryptoFed Economics

Creates a decentralized monetary system and automates money supply function.

Decouples money supply function from bank’s lending function.

Liberates macroeconomy from the risks of debt accumulation.

Ensures the flexibility of money supply for constant economic growth and job creation.

Shifts the paradigm of fiscal policy of economic stimulus from government spending to consumer purchase incentives (consumers: 5.5%-10% and merchants: 1% - 4%) to generate effective demand for job creation across all industrial sectors through the free market without government intervention and taxation.

Keynes’ Effective Demand generated by the "Visible Hands" of government

Hayek’s Private Token Money with zero Inflation and zero Deflation

By engrafting Hayek’s “Denationalisation of” into Keynes’ “The General Theory of Employment, Interest and Money”, two schools of thought gave birth to CryptoFed’s Economics: The General Theory of Employment, Interest, and Denationalisation of Money. In Ducat economy, the economics of Keynes and Hayek are cohesively reconciled and integrated, despite ongoing debate in the economy of fiat monopolies.

“The debate about the validity of their economics remains open. It hinges on the question of the extent to which full employment is the normal or strong tendency of a decentralized system. Hayek thought it was; Keynes thought it wasn’t. Both could appeal to the facts to support them. Hayek could point out that the capitalist market economy had been the major factor in lifting the world out of poverty and reducing violence, Keynes to the fact that it achieved full employment only in ‘moments of excitement’; that its progress was punctuated by crashes which periodically threw millions out of work; and that the capitalist era had witnessed two of the most devastating wars in history.” — Robert Skidelsky, Keynes v Hayek: The Four Buts, page 164-165, in From the Past to the Future: Ideas and Actions for a Free Society, January 15-17,2020, A Special Meeting, The Mont Pelerin Society.