Cardano is a great project, certainly one of the most advanced technically. However, the economics seem to contradict the will to use it as a mean of payment and a tool for smart contracts.
To put it very simply, the price of the token is linked to the scale of its use (aka demand), the velocity of the transactions and the total number of tokens available on the market (aka supply).
The canonical equation is PY = MV where :
P : Price of a unit of money
Y : Volume of goods exchanged in the economy
PY : monetary GDP
M : Total coins available
V : Speed of circulation of money in the economy
Your aim, if I’m not wrong, is to create a coin used for transaction, such as a fiat money enhanced with a ledger and smart contracts. If your money gains enough traction, you will necessary encounter an increase of use to exchange goods, leading to an increase of Y.
SInce supply of money is follows a concave curve ending at 45G Ada, at one point M will stop to follow the growth of Y and thus P will need to increase to provide liquidity to the market. In layman’s terms, that means that the value of coins will increase, in a deflationary fashion. That’s what is happening with bitcoin at the moment. That’s what happened with gold or silver before.
What are the incitations of the stakeholder in such system? You may have many people willing to sell good in exchange of your coin, since they expect the price of your coin to increase in the future (million dollar pizza effect). However, no one will want to buy stuff using it when they can use inflationary cash ($). The best response is thus to keep it (HODL effect). This leads to the well known effect of a deflationary spiral
Since no buyer is willing to use the coin as a mean of exchange, the coin may as well be worthless. The only source of valuation on the market are the speculators that want to enter the market, resting on the irrationnal(?) belief that the coin will get traction and get used as a mean of exchange for goods (and not only classic fiat money). That’s again what we are seeing for bitcoin.
The classic role of a central bank is to keep the monetary creation is check with the GDP, ensuring a price stability and discouraging speculation in favor of investment and hard work.
My questions to the devs :
- Why don’t you adress this very well-known problem in the docs?
- How do you propose to avoid this effect?
- Why should I start contracting in your currency if I know I’ll earn more money holding my coins and cashing in later?