How Central banks Stabilize Money

To understand how central banks respond to inflation targets- say, the average cost of a predefined good or basket of goods is $50. According to the Quantity Theory of Money, if you doubled the supply of money in circulation that everyone keeps in their savings accounts, then in the long run, the exact basket of goods will be $100. 

Consider a central bank has doubled the money in circulation, the nominal amount of money everyone has doubled, but at the same time, the value of the basket of goods remain the same. As a result, people should be willing to spend twice as much money to get the same value from the same basket of goods. Indirectly, the central bank has erased the value of people’s savings by 50%. 

On the other hand, if the central bank tries to slow down inflation, the price for a basket of goods is increasing meaning people are willing to spend more money. To decrease
 inflation, the central bank would increase interest rates in bonds to encourage people to save money and spend less. These are the two measures by central banks do to manipulate the value of money. Let’s look at these two high level adjustments by the central bank to adjust a currency’s supply to inflation: 

• Money Supply Expansion- central banks increase the money supply when basket of goods prices are going up. This will bring back value of the currency back down. 

• Money Supply Contraction- central banks decrease the money supply when basket of goods prices are going down. This will bring back value of the currency back up. 

In this paper, we introduce “Singular” as a cryptocurrency with price stability. Singular can be pegged to US Dollar, gold-based system, consumer price index (CPI) index or basket of goods, replicating how the Fed adjust to inflation targets today. 

In the first phase, Singular will be pegged to the USD and will always trade for 1 USD. Singular will also maintain a 100% collateral backing using a decentralized system to optimize the demand of supply of Singular tokens. In the later phase, the Singular protocol uses algorithm without the need of human judgement meeting the Singular token to ‘float’ while maintaining it’s stability and controlled only by voters of Singular holders. 

If cryptocurrencies are so great, why aren’t people using cryptocurrencies for day-to-day transactions? Although Bitcoin has proved the blockchain model is robust and secure, some would say it is still expensive and slow. 

First we examine the inherent volatility of Bitcoin and Ethereum. The problem with using Bitcoin as a medium of transaction is not viable due to the following reasons. Furthermore, it can take as long as 60 minutes to transfer Bitcoin. 

Secondly, consider that cryptocurrencies are immune to fraudulent chargebacks, and transaction fees can be ultra low compared to credit or debit cards. But why merchants are still refusing to accept cryptocurrencies? To understand this, let’s look at how Microsoft, Quickbooks and Spotify accepts Bitcoin using Bitpay which in return merchants will convert it into USD. 

Reason being, the volatility prevents these merchants from storing it as a primary source of payment and those merchants are not in the business of speculating on cryptocurrencies.