Thank you to all those who have reached out about our Proof-of-Deposit proposal to create a perpetual, market determined deposit rewards rate for cStable depositors.
We are posting this to give people a better appreciation of how we see our proposal enhancing Celo’s mission beyond bootstrapping near-term adoption! Be sure to give us comments
If we look at the wider economic context, we find that prosperity for the people is the essence of what government fiscal policies (how to spend money), and central bank monetary policy (how to control the supply of money) are supposed to be about.
However, for many developing nations, the people have found that those in authority have at times diverged from this path, damaging credibility with respect to national finances.
Even when responsible policies are restored, these developing nations find themselves in a vicious cycle:
government is unable to borrow at reasonable interest rates because the economy is weak, and the government has historically lacked credibility
economy is weak and unable to grow because government is unable to borrow at reasonable interest rates and have little means to build their credibility
This forces many of these developing nations to dollarize. But this is a brittle state of affairs as once a domestic crisis hits, the government finds itself unable to stimulate the economy as its central bank has near zero control of monetary policy.
Often, when talking with people in the crypto space, there is a view that decentralization is for fighting back against corporate control or government overreach. But are these the only applications?
Whilst we recognise the above are indeed important applications, our research has uncovered another application:
Decentralization can be a tool for central banks to transparently and verifiably set limits to their discretion over monetary policy
This has the potential to help developing nations break out of their vicious cycle, as international investors will be more willing to extend affordable credit when they have significantly more confidence that the value will not be inflated away. In this way, decentralized blockchain offers a solution to a well-known problem in macro economics which has remained unsolved for decades–see for example Calvo (1978).
The way we envision this being spearheaded by Celo in the future is by allowing central banks to create their own decentralized sovereign currency where:
The decentralized sovereign currency will be a cStable that is pegged to an index of the central bank’s choosing (e.g. some basket of goods)
Smart contracts will limit the amount of decentralized sovereign currency that can be created (say, per year)
The market is in control of expanding and contracting the decentralized sovereign currency using current cStable technology
The market is in control of dynamically adjusting the base interest rate on this decentralized sovereign currency using Proof-of-Deposit
This is our vision for enhancing Celo’s mission, with the first step being piloting Proof-of-Deposit to show that a market can dynamically adjust the deposit rewards rate for a currency without it trending to zero.
This is a bold vision, but we believe achieving prosperity for all is worth it.