Monetary Policy

Setheum's Monetary Regime

The existential objective of a stable currency is to retain its purchasing power. Given that most goods and services are consumed domestically, it is important to create cryptocurrencies that track the value of local fiat currencies. Though the US Dollar dominates international trade and Forex operations, to the average consumer the dollar exhibits unacceptable volatility against their choice unit of account.

Recognizing strong regionalism in money, SETT aims to be a family of cryptocurrencies in an “STP258 Standard” (‘Setheum Tokenization Protocol’ Standard) that are each pegged to their respective equivalents. SETT is the ‘basket token’ (a token which is made up of all the tokens on the STP258 Standard) of the Setheum Finance and all the stablecoins on that protocol are defined by the Sett standard. (So when i say Sett, i might mean any of the tokens of the Sett family and i might mean the basket token, it depends on the context of the statement.)

Unlike today’s popular monetary policies, it is a unique one in the Setheum Reserve, first of all the Monetary Aggregates are extended and incorruptible in Setheum Finance, so Setheum does not compute high-powered money (HPM) into SETT, which is basically the multiplication of the Monetary Base (MB or M0) with Fractional Reserve Banking.

Setheum mints Sett through an elastic money supply relying on PES, so the amount of Sett to be minted is proportional to the pairing of Dinar versus the corresponding Sett currencies relative to its fiat peg and its market cap.

Once the system has detected that the price of a Sett currency has deviated from its peg, it must apply pressures to normalize the price. Like any other market, the Setheum Financial market follows the simple rules of supply and demand for a pegged currency.

So, contracting money supply, all conditions held equal, will result in higher relative currency price levels. That is, when price levels are falling below the target, reducing money supply sufficiently will return price levels to normalcy. Expanding money supply, all conditions held equal, will result in lower relative currency price levels. That is, when price levels are rising above the target, increasing money supply sufficiently will return price levels to normalcy.

Of course, contracting the supply of money isn’t free; like any other asset, money needs to be bought from the market. Central banks and governments shoulder contractionary costs for pegged fiat systems through a variety of mechanisms including intervention, the issuance of bonds and short- term instruments thus incurring interest expenses, and hiking of money market rates and reserve ratio requirements thus losing revenue. Put in an easy way, central banks and governments absorb the volatility of the pegged currencies they issue. In the short term, validators absorb Sett contraction costs through validating power dilution. During a contraction, the system mints and auctions more validating power to buy back and burn. This contracts the supply of Sett until its price has returned to the peg, and temporarily results in mining power dilution. In the mid to long term, validators are compensated with increased staking rewards. First, the system continues to buy back staking power until a fixed target supply is reached, thereby creating long run dependability on available validating power, the system increases validating rewards afterwards. In summary, validators bear the costs of Sett volatility in the short term, while being compensated for it in the long-term. Compared to ordinary users, validators have a long-term vested interest in the stability of the system, with invested infrastructure, trained staff and business models with high switching cost.