The SagaCoin Supply Mechanism
By: Lawrence H. White PhD., Senior Economic and Monetary Policy Advisor
There are two phases to the expected price path of SagaCoin, the initial growth phase and the mature phase. By analogy, a satellite first has a launch trajectory and then achieves an orbital path. Let’s consider the mature phase first.
In the words of our white paper, the primary goal for SagaCoin is to create “a cryptocurrency usable for general commerce” in its mature phase. That means a cryptocurrency with a reasonably stable purchasing power, where “purchasing power” means its ability to buy a reference basket of goods and services. Operationally, purchasing power can be measured by the coin’s US dollar price divided by the US consumer price index (CPI). We stabilize purchasing power by programming a mechanism to continually adjust supply in the right direction.
The mechanism manages the quantity of coin something like the classical gold standard managed the quantity of monetary gold. More rapid growth in demand, when it starts to push up the coin’s purchasing power, automatically triggers an increase in the growth rate of supply to bring the coin’s purchasing power back down to a flat target path. A slackening in demand growth means slowing the growth of SagaCoin or even contracting the supply. Supply growth is adjusted by varying the net difference between mining rewards and Treasury burns.
Bitcoin, by contrast, has a predetermined supply without feedback, so zero supply response to demand variations. It consequently has a high volatility of purchasing power that makes it unattractive as a medium of exchange.
Operationally, oracles will feed in the coin’s price on exchanges and the dollar CPI (or a weighted average of CPIs for dollar, euro, yen). The ratio of the two is purchasing power. CPIs are reported monthly. The supply program sets coin supply growth for each coming month based the difference between the target path and a four-month moving average of purchasing power. With a large enough internal economy, the system will transition from CPI oracles to an index of internal SagaCoin prices, still targeting zero price inflation.
We think a coin with reliably self-correcting purchasing power, so that prices denominated in SagaCoin exhibit a zero average inflation rate, will be an attractive alternative to US dollars or euros (or stablecoins denominated in US dollars or euros) that chronically lose 2–10 percent of their purchasing power each year, and to other cryptocurrencies whose prices vary unpredictably.
In the initial growth phase, the program will aim for a high growth of coin price and market cap. The coin will be allowed appreciate as demand grows faster than supply. Expansion of the stock of coins will be governed by a rising purchasing-power target. The reference price path will slow down eventually as the PraSaga economy matures. The initial growth phase satisfies the secondary goal of bringing the PraSaga network to sufficient scale, while the target of zero price inflation satisfies the primary goal of a cryptocurrency usable for general commerce.