Understanding the Evolution of Decentralized Open Source Monetary Policy: From the Federal Reserve to Bitcoin, and then to Maker and Fei

This article was published on ChainNews, author: Richard Burton, translation: Lu Jiangfei.

How should we make money? This is an interesting question that has taken me quite some time to ponder. How does a new type of currency come into existence? Who decides how many dollars, euros, yen, and pounds should be in circulation? Once these currencies are created, who distributes them? Why is there a need to issue currency? To be honest, the "rabbit hole" of monetary policy is really deep.

Of course, I am also a novice in this field, and if I make any mistakes in this article, I welcome corrections.

The history of currency is a grand narrative, and so far, my favorite book on the history of money is Niall Ferguson's The Ascent of Money, which details the phased transformations of currency, from markings on rocks to blockchain transactions that can sweep across the globe in seconds.

I want to focus on some changes that have occurred in recent years: from centralized banks to decentralized banks. If you want to understand some basic conceptual knowledge first, you can check this link.

Centralized Banks

Today, each of us lives in a globalized society. In the United States, people often spend a lot of time thinking about who should lead the country, but very little time considering who is leading our money.

Central banks around the world are establishing and maintaining monetary systems in various ways. It seems that the people managing these central banks are either appointed by high-level government officials or elected internally, but for the general public, it is basically difficult to understand the selection process of central bank management.

If we gathered the most powerful central bankers in the world in one room, there would probably be fewer than 1,000 people in that room.

Think about it: fewer than 1,000 people control the pulse of the world's currency—doesn't that seem a bit shocking?

For me personally, this is really crazy!

Euro

I really like the photo below, where former IMF Managing Director and current ECB President Christine Lagarde gathers with her colleagues in such a "high-end" environment. The only thing that feels a bit poignant is that everyone sitting at the table has gray hair.

When these older individuals decide to issue more euros, who do you think they stand with? Do they represent young people? Do they represent minorities? Or do they represent the poor? Even whether these individuals have ever thought about these questions is an unknown.

To be frank, these aging scholars should be responsible for the welfare of future generations, but perhaps I am mistaken.

Bank for International Settlements

Have you heard of Agustín Carstens? He is the General Manager of the Bank for International Settlements (BIS) and the embodiment of everything I disdain about central banks. If you look at this video, you will understand what this guy is up to: he clearly states that central banks should track all user spending in real-time. In some countries today, governments need a warrant to access user payment data. If Agustín Carstens—the "big boss"—gets his way, what are they most likely to do? It's simple: create Central Bank Digital Currency (CBDC).

Agustín Carstens shows no desire to hide the true intentions of the BIS; he even hopes to make comprehensive financial oversight the new norm.

It really makes me sick.

Federal Reserve

Without a doubt, the Federal Reserve is the most successful central bank on Earth. They have transformed the dollar from a national currency into a global settlement currency, and for that alone, the Federal Reserve has achieved something remarkable.

The image is from wtfhappenedin1971.com

The power the U.S. holds on the global stage is astonishing. When the Federal Reserve creates more dollars, the world must kneel. There is a funny meme video on Twitter about the Federal Reserve's recent performance, which you can check here.

But do you know who manages the Federal Reserve? Until recently, I only learned that there are only 7 people who have the power to control it.

As the global settlement currency, do you think the fate of the dollar is decided by just a few people? Does that seem reasonable to you?

For me, the level of centralization is too high!

21 Million Bitcoins

Bitcoin has completely changed the game. With innovative protocols and a very simple monetary policy, this new financial system is beginning to emerge: let's see what happens if we issue 21 million bitcoins over 144 years.

If we consider Bitcoin as a meme, then it can be said that this concept is amazing! Everyone is attracted to the "21 million" bitcoins. The concept of Bitcoin is simple, but at the same time, it is a bit too simplistic.

If 100 years from now, we can adapt well to "21 million" bitcoins, then we can solve all currency problems in the world. However, ideals are often grand, while reality is stark. I believe that truly effective monetary solutions are much more complex.

Do you think the first-ever monetary policy implemented on the blockchain will be the best solution humanity can come up with?

I don't think so.

Deflationary ETH

So far, Ethereum's monetary policy remains undecided. Unlike Bitcoin, which has a fixed supply from the beginning, Ethereum does not have a fixed monetary supply; it changes over time due to the passage of time or protocol development. However, Ethereum's monetary policy has matured and continues to be enhanced. I think Justin Drake's interview about Ethereum is one of the best ever, which you can check out here.

Justin Drake presents an innovative viewpoint: he believes that Bitcoin is expected to maintain inflation for decades, while Ethereum is likely to experience deflation within ten years or even sooner. If this really happens, the circulating supply of ETH will gradually decrease.

For a value store, do you think it's better to implement an expansionary policy or a contractionary policy?

For me personally, I prefer a digital and deflationary value store.

Maker

In the decentralized finance (DeFi) space, one of the most successful projects is Maker DAO, which absorbs collateral such as Ether and mints a stablecoin called "Dai." The system has undergone two major revisions, and the amount of collateral locked exceeds $7 billion.

The image is from defipulse.com/maker

I find the magic of Maker lies in the fact that anyone can contribute to the system or participate in the governance process surrounding its monetary policy, and many people gather every week to discuss interest rates and the risks of the financial system.

I spent a lot of time studying the Maker protocol interface and found that the people who built this system invested a great deal of time and effort to ensure it is safe for everyone, and all the work is open source.

Do you think a more decentralized monetary policy is worth trying?

For me personally, I believe decentralized monetary policy is one of the most exciting ideas ever.

Fei

For the past four months, I have been helping the team at Fei Labs prepare for the new protocol launch. The Genesis Group has just gone live, and now anyone can participate.

The Fei team is taking a brand new approach to creating decentralized stablecoins, aiming to further enhance the scalability and capital efficiency of stablecoins in the DeFi space, and is currently exploring many highly experimental new mechanisms.

In just a few months, many people are willing to try this brand new crypto-economic mechanism. Isn't that cool?

I am willing to join in.

What’s Next?

In fact, I prefer to see Ethereum as an open-source and open-ended economic engineering system where anyone can publish anything and interact with any type of code—"Ethereum is the protocol of protocols."

In the next decade, we will see various open-source monetary policies emerge. Nowadays, most stablecoins are pegged to the dollar or effectively create a synthetic asset.

In the near future, we will see more interesting forms of stablecoins, such as RAI, FLOAT, and OHM, which are elaborated in this excellent article by Messari columnist Ryan Watkins.

Are you excited?

I am excited!