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1. How does CryptoFed know the exact Ducat money supply needed in the economy?

At any given time, there is an optimal money supply needed for the Ducat economy. CryptoFed uses the foreign exchange rate between Ducat and USD on crypto markets to identify the optimal money supply which is zero inflation (no Ducat oversupply) and zero deflation (no Ducat undersupply). The Target Exchange Rate is the theoretical ideal value. Please see sections of THE RELATIONSHIP BETWEEN DUCAT AND US DOLLAR AND MEASUREMENT OF DUCAT INFLATION AND DEFLATION on the home page. A deviation from the Target Exchange Rate will indicate either Ducat oversupply or undersupply, which can be made visible in real time on Ducat wallet apps.

2. What policy tools has CryptoFed innovated to adjust Ducat money supply to maintain sustainability?

CryptoFed has three innovative tools to adjust Ducat supply: Fiscal Policy, Monetary Policy and Open Market Operations.

CryptoFed’s Fiscal Policy is defined as rewards paid in Ducat to consumers within at range of 5.5% -10% and merchants within a range of 1% - 4% for every purchase at participating merchants. The rewards are the primary methodology of CryptoFed’s Ducat money supply. CryptoFed’s Fiscal Policy is the equivalent of government spending controlled by the US Congress, not by the Federal Reserve. Given that both merchants and consumers, acting in their own self-interest, have incentives to actively use Ducat rather than USD, the absolute amount of Ducat tokens in the hands of households and businesses (stock amount) will be far less than what is potentially needed by the Ducat economy, although the instantaneous increase of Ducat per day or per month or per quarter may generate inflation measured by the Ducat price against USD on crypto exchanges. The total stock amount of Ducat needed may be estimated by possible Ducat market share (such as 30%) of the total currency markets measured by the sum of M3 of major currencies. The sum of M3 of the top five (5) currency zones was 55 trillion worth of USD as of November 2023. (see Monetary Aggregates and Their Components: Broad Money and Components: M3 for United States, M3 for Euro Area (19 Countries), M3 for Japan, M3 for Canada, M3 for United Kingdom). Therefore, it may take a few decades for the Ducat economy to have the need to reduce the lower bound of the rewards to consumers (5.5%) and merchants (1%). 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.

CryptoFed’s Monetary Policy is defined as interest paid by CryptoFed to all Ducat holders. 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 accounts with the Federal Reserve. CryptoFed can increase its interest rate as high as necessary to deter or cure inflation. Interest rate increase has been proven to be an effective tool to control inflation. “Twenty-five years ago, on October 6, 1979, the Federal Reserve adopted new policy procedures that led to skyrocketing interest rates and two back-to-back recessions but that also broke the back of inflation and ushered in the environment of low inflation and general economic stability the United States has enjoyed for nearly two decades.” — FRBSF ECONOMIC LETTER, Number 2004-35, December 3, 2004. Given that the Federal Reserve does not have control over the Congress’s fiscal policy, if the US Congress authorizes inflationary government spending, the Federal Reserve must skyrocket interest rates to control inflation, creating recessions more often than not. CryptoFed, by contrast, has both fiscal and monetary policies under one roof and can ensure the consistency between fiscal policy and monetary policy to avoid recession.

Open Market Operations is defined as buying and selling Ducat at crypto markets to maintain the Target Exchange Rate and keep the deviation within a 2% lower and upper bound. While Fiscal Policy and Monetary Policy are adjusted on a quarterly basis to shift the fundamental economic conditions for those households (consumers) and businesses (merchants) who use Ducat for daily economic activities, Open Market Operations are conducted on a daily basis to shift temporary Ducat money supply.

Please see the sections of CONTROL OF DUCAT INFLATION AND DEFLATION and THE ECONOMIC RELATIONSHIP BETWEEN LOCKE TOKEN AND DUCAT TOKEN on the home page.

3. Why does Locke token have value?

Locke’s initial and intrinsic value will be derived from the expectation of its potential usage in both absorbing the value inflow from US dollar economy and representing governance votes.

On crypto markets, consumers buy Ducat with USD stablecoins to purchase goods and services at merchants, while merchants sell Ducat for USD stablecoins to pay operation costs, such as suppliers, wages, store rents, etc. Ducat’s primary buyers are consumers, while Ducat’s primary sellers are merchants.

With the expansion of Ducat economy driven by 3% paid to merchants for covering transaction costs of merchants’ own crypto vendors (3%), reward incentives paid to consumers in the range of 5.5% -10% and merchants in the range of 1% - 4%, merchants may be able to pay certain operation costs in Ducat, such as suppliers, wages, store rents, in whole or in part. Therefore, merchants may elect to keep more and more Ducat for their own operations and sell less and less Ducat on crypto markets, while more and more consumers will continue to buy Ducat.

As a result, CryptoFed has to sell Ducat to meet consumers’ demand for Ducat. The USD-pegged stablecoins received will solely be used to buy back Locke tokens from crypto markets for burning (destroying). This Open Market Operation will increase the price of Locke tokens on crypto markets. The more the Ducat economy expands, the more USD-pegged stablecoins will be received for Locke buyback, the higher the Locke price will be. A virtuous cycle mechanism between Locke price and the expansion of Ducat economy has been designed for a long-term growth and will benefit both Locke and Ducat holders, setting Locke tokens apart from other governance tokens, such as UNI for Uniswap, and MKR for MakerDAO.

4. How many methods has CryptoFed designed to put new Ducat into circulation?

There are only six methods through which CryptoFed can put new Ducat into circulation:

i) Ducat is sold to consumers who purchase Ducat with USD-pegged stablecoins on crypto markets. The USD-pegged stablecoins received by CryptoFed will solely be used to buy back Locke tokens from crypto markets for burning (destroying).

ii) Ducat is paid to its holders as an interest payment.

iii) Ducat is paid to reward consumers (5.5% - 10%) and merchants (1% - 4%) when consumers make purchases at merchants in Ducat.

iv) Ducat is paid to merchants to shield merchants from foreign exchange loss caused by conversion from Ducat to USD.

v) Ducat (3% per transaction) is paid to participating merchants directly by CryptoFed so that merchants can select their own crypto payment processors to achieve zero transaction costs, even if CryptoFed will never “charge any transaction fees in any form” (CryptoFed Constitution, Section 1. Mission).

vi) Ducat is paid to consumers as a sign-up bonus.

All Ducat amounts paid by CryptoFed through the methods above will constitute the new money supply which has an impact on inflation or deflation for a given time period.

5. How different is CryptoFed money supply mechanism from the Federal Reserve’s?

The Federal Reserve is a monetary system of privately-issued debt-based money, while CryptoFed is a monetary system of privately-issued debt-free money.

The privately-issued debt-based money is created by commercial banks’ lending activities through which the Federal Reserve puts new money supply into circulation. “Private money includes ‘commercial bank money’—dollar-denominated balances in commercial bank accounts…There is currently at least $19.4 trillion in private money in the United States.” (p.3, U.S. Department of the Treasury Report). The Federal Reserve’s money supply mechanism requires the simultaneous creation of private debt on bank balance sheets. Money supply depends on private commercial banks’ lending activities, but the Federal Reserve has no direct control over the lending activities of commercial banks. What the Federal Reserve can do is to induce the lending activities of commercial banks through the Federal Funds Rate decided by the Federal Open Market Committee and implemented by the Federal Reserve Bank of New York. As a result, the Federal Reserve’s fractional reserve banking system legitimately institutionalizes the inherent and inevitable macroeconomic risks in the US dollar economy, periodically causing boom and bust business cycles (economic expansion and contraction) and subsequent large-scale bailout by the FDIC and tax-payer money through government intervention. Furthermore, when the absolute level of debt accumulation is too large to be paid back, the Federal Reserve’s mechanism of money supply will stop functioning well. The burden of existing loan repayments will ultimately reach a level that even at a low interest rate close to zero, the borrowers cannot meet the lender’s criteria to pay back additional loans. Consequently, no sufficient money can be supplied to private sectors to maintain and increase effective demand for economic growth.

The privately-issued debt-free money is created by the six methods through which CryptoFed puts new Ducat money into circulation (see FAQ 4). CryptoFed’s money supply mechanism is direct distribution of Ducat money to consumers (households) and businesses (merchants). After President Richard Nixon ended dollar convertibility to gold, the US dollar became fiat: “fiat money is not redeemable, in that holders of money cannot claim repayment in something other than money.” (P.6, Chicago Plan Revisited, IMF Working Paper). Similarly, Ducat holders cannot claim repayment in something other than Ducat. Therefore, in theory, Ducat can be a privately-issued debt-free money by mutual consent among participants in accordance with a set of rules for direct distribution (CryptoFed Constitution). Because the Ducat money supply mechanism is separated from entities engaged in Ducat lending and borrowing, the Ducat money supply function will not be affected by any failure of entities engaged in Ducat lending and borrowing, eliminating the necessity of insurance and bailout in the Ducat economy.

6. What blockchain protocols will CryptoFed use?

CryptoFed will use both Ethereum protocol and EOS protocol to create Locke tokens and Ducat tokens. Locke and Ducat tokens in Ethereum protocol can take advantage of Ethereum protocol’s widespread acceptance across the globe for buying, selling, and trading. Locke and Ducat tokens in EOS protocol can take advantage of EOS protocol’s transaction speed, scalability and flexibility. “To build an enterprise-grade financial product using blockchain with high scalability, low latency and zero transaction fee, EOS was our choice.” The article “Why we built our blockchain business on EOS instead of Ethereum” provides a great testimony. Furthermore, EOS is an open-source protocol which enables CryptoFed to build its own CryptoFed Blockchain (sister-chain). There is a challenge to bridge Locke and Ducat tokens on two different blockchain protocols, but tools for cross-chain bridges will be available.

7. What is CryptoFed's deployment roadmap?

After ensuring that its business model complies with federal and state laws and regulations (see Regulatory Compliance tab at the top of the page), CryptoFed will pursue the rough deployment roadmap outlined below:

i) Q4 2024 – Q1 2027
a) Initial Distribution of Locke Tokens: CryptoFed plans to distribute a large amount of Locke tokens in the form of Ethereum ERC-20 to contributors, free of charge. CryptoFed will invite merchant members of the Merchant Advisory Group (MAG) and these merchants’ employees to become CryptoFed’s contributors and accept Locke tokens, free of charge. Due to regulatory restrictions, these contributors must be either Wyoming residents or Wyoming legal entities. Otherwise, the recipients must set up Wyoming legal entities to receive the Locke tokens.

b) Secondary Market Formation of Locke Tokens: Contributors, at their own discretion and for their own interest, may elect to sell the Locke tokens on centralized or decentralized crypto swaps or exchanges which have national or global reach. The natural result of this activity is the independent formation of a secondary market for Locke tokens.

ii) Q2 2027 – onwards
(a) Ducat Pilot in Wyoming: If Locke token maintains a price above $0.10 per unit for at least one continuous month, upon confirming regulatory compliance, CryptoFed will discuss with merchants to prepare for a pilot toward accepting Ducat payments in Laramie or Cheyenne or both.

(b) National Expansion: Upon confirming the success of Wyoming Ducat pilot and regulatory compliance, CryptoFed will consider Ducat’s national expansion.

(c) International Expansion: Upon confirming the success of at least five (5) states in the U.S. and regulatory compliance, CryptoFed will consider Ducat’s international expansion.

8. What are the differences between CryptoFed (Locke/Ducat) and Terra Protocol (Luna/UST)?

Like CryptoFed, Terra Protocol was also a 2-token economy. Terra collapsed within three days in May 2022, wiping out the entire valuation of UST and LUNA of $50 billion in total. LUNA was the native cryptocurrency of Terra Protocol with unlimited issuance. UST was the stablecoin of Terra Protocol pegged against the US Dollar. Because UST was backed by LUNA, swapping LUNA for UST was the only way to create new UST. Anchor was a borrowing and savings protocol developed by Terra. The holders of UST could deposit their UST at Anchor at a stable 19.5% yield until April 2022, one month prior to the collapse of Terra, when the Federal Funds Effective Rate was still less than 1%. For analysis of Terra’s failure and its impact, see Anatomy of a Run: The Terra Luna Crash and Interconnected DeFi: Ripple Effects from the Terra Collapse.

There are two major differences between CryptoFed (Locke/Ducat) and Terra Protocol (Luna/UST).

The first difference is that new Ducat is primarily created by rewards paid to both consumers and merchants upon the purchasing of goods and services, while new UST was created by swapping LUNA to UST. The money creation mechanism guarantees that Ducat can be used to directly purchase goods and services at merchants without conversion to US dollar, while UST does not have this guarantee. During financial crises, Ducat will be more stable than UST because Ducat can purchase goods and services, while UST could not.

The second difference is that Ducat is a floating exchange rate against USD, while UST was a fixed exchange rate. “As easily demonstrated in a Mundell-Fleming framework, it is generally not possible for a country to simultaneously enjoy (1) a fixed (or managed) exchange rate, (2) an independent monetary policy, and (3) free international capital mobility.” (Nobel Laureate 2022 and the Fed’s Chair 02/1/2006 – 01/31/2014, Ben S. Bernanke, 2015, p. 11, Federal Reserve Policy in an International Context, Brookings Institution). However, Terra Protocol (Luna/UST) completely ignored the Mundell-Fleming framework. UST tried to simultaneously enjoy (1) a fixed exchange rate against USD which was 1UST = 1USD, (2) an independent monetary policy which was 19.5%%, significantly higher than 1% of the Federal Funds Rate for USD, and (3) free international capital mobility which meant that UST could be sold or bought without any restrictions.

Because UST had to maintain 1:1 fixed exchange rate between UST and USD, money could convert (flee) from UST to USD without suffering foreign exchange loss (in contrast to floating exchange rate). The bank run against UST could not be stopped once it started, leading to the death spiral of UST, because there was no self-stabilization mechanism to bring UST back to its previous peg, given that LUNA’s value also decreased rapidly during the crisis and could not provide sufficient support for UST.

To maintain an equilibrium under a fixed exchange rate between US dollar economic zone and a USD-pegged stablecoin economic zone, without restricting the capital mobility (free conversion between UST and USD) between the two economic zones, Mundell-Fleming framework dictates that the USD-pegged stablecoin must have the similar or identical monetary policy as the US dollar (around 1% for USD, not an independent 19.5% yield for UST). As a result, to maintain a stable peg, a USD-pegged stablecoin economic zone must be a subset of the US dollar economic zone and cannot be an independent economic zone. In other words, a USD-pegged stablecoin economic zone is similar to a private commercial bank serving its customers under the Federal Reserve’s federal funds rate. Furthermore, a USD-pegged stablecoin economic zone must maintain 100% backup with US dollar or short-term US Treasury Bill (not backup by LUNA whose value could decrease rapidly during the crisis), otherwise it will be subject to fractional banking with the inherent risk of a bank run.

Historically, fixed exchange rate (currency peg) regime without 100% reserve of the pegged currencies or assets tended to fail. Below are two examples:

[1] The peg between the US dollar and gold was broken by economic dynamics. Fifty years ago, the world changed. On August 15, 1971, US President Richard Nixon slammed shut the “gold window,” suspending dollar convertibility. Although it was not Nixon’s intention, this act effectively marked the end of the Bretton Woods system of fixed exchange rates. — IMF Blog, From the History Books: The Rethinking of the International Monetary System.

‍[2] The peg between the British pound and ERM was broken by economic dynamics. In the summer of 1992, hedge fund manager George Soros was contemplating the possibility that the European Exchange Rate Mechanism (ERM) would break down. Designed to pave the way for a full-scale European Monetary Union, the ERM was a system of fixed exchange rates linking together twelve members of the European Union, including Britain, France, Germany, and Italy. — Who Broke the Bank of England?

In contrast to Terra Protocol (Luna/UST), by learning lessons from history and following the guidance of Mundell-Fleming framework, CryptoFed has designed a floating exchange rate between Ducat and USD, instead of a fixed exchange rate. Floating exchange rate enables CryptoFed to enjoy freedom of its own monetary policy (interest rate) and fiscal policy (rewards to consumers and merchants) to manage its own money supply and control inflation and deflation, without restricting the capital mobility (conversion) between Ducat and USD. Ducat economic zone is independent of US dollar economic zone, because Ducat has a floating exchange rate against US dollar which plays a role of a wall separating the two economic zones.

In order to ensure that merchants accepting Ducat will maintain the same price for goods and services in Ducat during crises, CryptoFed will make up the difference in Ducat between the Target Exchange Rate and actual exchange rate automatically via smart contract for merchants suffering foreign exchange loss. As a result, merchants will be protected from foreign exchange loss, while consumers will be subject to foreign exchange rate loss for conversion from Ducat to USD. Please see the section of SHIELD FOR MERCHANTS’ FOREIGN EXCHANGE LOSS on the home page.

During crises, the Ducat price against US dollar may fall sharply to a level far below the Target Exchange Rate. As long as consumers can purchase goods and services at merchants at the same price in Ducat, despite the sharp Ducat devaluation, consumers will buy more Ducat rather than fleeing from Ducat, because fleeing from Ducat means foreign exchange loss, and buying more Ducat for purchasing goods and services of daily life means foreign exchange gain. During a sharp Ducat devaluation, the larger the difference between the Target Exchange Rate and actual exchange rate becomes, the larger Ducat amount consumers will buy to enjoy the Ducat discount. As a result, the Ducat price against US dollar will be supported by consumers and will recover due to consumers’ action for their own interest (market force), given that CryptoFed will simultaneously adjust fiscal and monetary policies to cure the inflation during the crisis. This self-sustainability of Ducat does not rely on Ducat buyback with Locke and is completely independent of the value of Locke. Please see the section of THE ECONOMIC RELATIONSHIP BETWEEN LOCKE TOKEN AND DUCAT TOKEN on the home page.

“…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.”, said Professor Robert A. Mundell at his December 1999 Nobel Prize Reward interview. By design, in CryptoFed economy, the goods and services market and the foreign exchange market are consistently and cohesively integrated by the Ducat creation mechanism and a floating exchange rate between Ducat and USD. Conversely, Terra economy has neither goods and services market to absorb UST nor a foreign exchange market (no floating exchange rate) to isolate UST from rapidly draining, while still trying to have its own monetary policy of 20% interest rate under a fixed exchange rate 1UST = 1USD. “But was it sustainable? Obviously a 20% yield on more than $10B of UST — more than $2B a year in interest payments — could not be given out using interest paid by borrowers alone.”

9. How can Ducat compete with credit cards, central bank digital currency (CBDC) and USD-pegged stablecoins?

CryptoFed will pay merchants for covering transaction costs of merchants’ own crypto vendors (3%), rewards to both consumers (in the range of 5.5% - 10%) and merchants (in the range of 1% - 4%) when consumers make purchases at merchants, while maintaining zero CryptoFed transaction costs. Ducat will have zero inflation and higher real interest rate than US dollar. Credit cards, USD-pegged stablecoins and CBDC, collectively or individually, cannot provide these benefits to consumers and merchants. Therefore, consumers and merchants will have significant incentives to use Ducat as both a means of payment and store of value. Furthermore, Ducat and USD-pegged stablecoins are complementary, to the extent that USD-stablecoins will serve as a transitional bridge between Ducat economy and US dollar economy.

10. Why existing cryptocurrencies, such as BTC, ETH, Doge, Sol and XRP, cannot do what CryptoFed will do?

Like gold, the existence and production of which are independent of the economic activities of consumers and merchants, the creation of these existing cryptocurrencies (money supply) is an exogenous process completely independent of the economic activities of consumers and merchants. The creation and the stock of these existing cryptocurrencies can be inflationary (oversupply) or deflationary (undersupply) in terms of the demand originated from economic activities of consumers and merchants. Furthermore, the undersupply or oversupply of these existing cryptocurrencies cannot be adjusted in proportion to the demand originated from the economic activities of consumers and merchants, leading to an inevitable conclusion that neither inflation nor deflation in these existing cryptocurrencies, as measured by the annual change in the price index for personal consumption expenditures (PCE), is curable. In other words, the volatility of these cryptocurrencies’ pricing relative to goods and services is inherent and incurable. In contrast to these existing cryptocurrencies, Ducat creation (money supply) mechanism, by design, is not only an endogenous process based on the economic activities of consumers and merchants, but also includes policy tools to adjust money supply to maintain stable price relative to goods and services, e.g. zero inflation and deflation in Ducat economy. Please see the section of THE NECESSITY FOR A NEW CURRENCY on the home page.