Fixed Monetary Policy

Fixed monetary policy refers to a predefined, unchangeable supply of a currency that limits the total amount that can ever be created. Once the maximum supply is reached, no additional units of the currency can be issued, ensuring that the total supply remains fixed permanently. This approach contrasts with traditional fiat currencies, where central banks can print more money as needed.

Cardano’s Fixed Monetary Policy

In the case of Cardano, its native cryptocurrency ADA follows a fixed monetary policy. Cardano’s monetary policy is embedded into the blockchain protocol, with a maximum supply of 45 billion ADA. Once all 45 billion ADA have been minted, no new ADA can be created. This policy ensures that the supply of ADA is predictable and capped.

Key Features of Cardano’s Fixed Monetary Policy:

1. Maximum Supply: Cardano has a total maximum supply of 45 billion ADA. This amount is hard-coded into the protocol, meaning that the supply will never exceed this cap.
2. Minting Schedule: New ADA is introduced into circulation through the process of staking rewards and transaction fees. Early in the network’s life, a larger portion of ADA is distributed to stakeholders, and over time, the rate of new ADA issuance decreases. This gradual decrease follows a predictable curve that will eventually taper off as the remaining ADA approaches the 45 billion limit.
3. Deflationary Nature: Once the maximum supply is reached, the policy ensures no new ADA will be minted, making ADA deflationary over time, especially if coins are lost or removed from circulation.
4. Predictability: Cardano’s fixed monetary policy ensures predictability in terms of inflation, minting, and distribution. It contrasts with systems where central authorities can increase the money supply unpredictably, often leading to inflation.

Benefits of Fixed Monetary Policy

1. Protection Against Inflation: With a fixed supply, ADA cannot be inflated by the creation of new tokens. This is similar to how commodities like gold have intrinsic value due to limited supply. Over time, as demand grows and supply remains constant, the value of ADA could increase.
2. Economic Stability and Trust: Since Cardano’s monetary policy is transparent and unchangeable, it builds trust among users and investors. They can be confident that no unforeseen events, like unexpected minting or inflation, will devalue their holdings.
3. Incentive for Early Participants: Early stakeholders benefit from the gradual issuance of ADA through staking rewards, which provides an incentive for them to support the network from the beginning.
4. Scarcity: As ADA becomes more widely adopted, the scarcity resulting from the fixed supply could drive up its value, similar to how Bitcoin’s value has been influenced by its fixed supply cap of 21 million coins.

How Fixed Monetary Policy Differs from Traditional Systems

In traditional fiat currency systems, central banks can adjust the money supply based on economic needs, such as printing more money during economic crises. This can lead to inflation and devaluation of the currency over time. In contrast, Cardano’s fixed monetary policy ensures that ADA’s supply remains limited and predictable, which can protect it from inflationary pressures commonly seen in fiat systems.

Long-Term Implications

• Sustainability: As the total ADA supply is capped, once the 45 billion ADA are fully distributed, the system will rely primarily on transaction fees as rewards to incentivize network participants (like stake pool operators). This ensures the network remains secure without the need for further ADA minting.
• Price Dynamics: Over time, the combination of fixed supply and increasing demand (due to network growth and ADA usage) could create deflationary pressure, potentially driving the price of ADA higher.

Other Examples of Fixed Monetary Policy in Cryptocurrency

Several cryptocurrencies employ a fixed monetary policy similar to Cardano, where the total supply of the currency is capped, and no more units can be created once the limit is reached. Here are some examples of cryptocurrencies with fixed monetary policies:

1. Bitcoin (BTC)

• Maximum Supply: 21 million BTC
• Monetary Policy: Bitcoin is the most well-known example of a fixed supply cryptocurrency. The total number of bitcoins that will ever be created is capped at 21 million. New bitcoins are introduced through mining rewards, which halve approximately every four years (in an event known as the halving). Once all 21 million bitcoins are mined, no more will be created.

2. Stellar (XLM)

• Maximum Supply: 50 billion XLM (after burn)
• Monetary Policy: Stellar initially had no fixed cap, but in 2019, the Stellar Development Foundation burned about 55 billion XLM tokens, reducing the total supply to 50 billion XLM and setting this as the fixed supply. No more XLM will be issued in the future.

3. Ripple (XRP)

• Maximum Supply: 100 billion XRP
• Monetary Policy: XRP has a fixed supply of 100 billion tokens. Although Ripple, the company behind XRP, controls a large portion of the supply and releases tokens over time, the total supply is capped, and no more XRP can be created.

Are there any examples of fixed monetary policy outside of cryptocurrency?

Yes, there are examples of fixed monetary policy outside of the cryptocurrency world, though they are relatively rare in modern economies. Traditional monetary systems typically rely on central banks that have the flexibility to adjust the money supply to manage inflation, unemployment, and economic growth. However, there are historical and conceptual examples where fixed or constrained monetary policies have been applied or considered:

1. The Gold Standard

• Overview: Under the Gold Standard, a country’s currency was directly tied to a fixed amount of gold. The money supply was limited by the amount of gold reserves held by the central bank, and paper currency could be exchanged for a specified amount of gold.
• Fixed Nature: Since the money supply was constrained by the gold reserves, it functioned similarly to a fixed monetary policy. Governments could not issue more currency than they had in gold reserves, creating a cap on the money supply.
• Examples:
  • United States (1879–1933): The U.S. operated under the gold standard, where the dollar was pegged to gold. This limited the ability of the government to print more money unless they had the gold reserves to back it.
  • United Kingdom: The UK used the gold standard intermittently, with various periods of adherence and abandonment until fully abandoning it in 1931.
• Outcome: The gold standard helped stabilize inflation but restricted governments’ flexibility to respond to economic crises. The rigidity of this system contributed to the Great Depression, which led many countries to abandon it.

2. Currency Boards

• Overview: A currency board is a monetary authority that pegs a country’s currency at a fixed exchange rate to a foreign currency, such as the U.S. dollar or the euro. The issuing authority can only issue domestic currency if it has sufficient reserves of the foreign currency it is pegged to, essentially creating a cap on the money supply.
• Fixed Nature: Similar to the gold standard, a currency board operates with a constrained monetary policy where the supply of local currency is limited by the foreign currency reserves.
• Examples:
  • Hong Kong: Since 1983, Hong Kong has operated a currency board that pegs the Hong Kong dollar to the U.S. dollar at a fixed exchange rate. The Hong Kong Monetary Authority can only issue more local currency if it has the foreign reserves to back it.
  • Bulgaria (since 1997): Bulgaria has a currency board that pegs its currency, the Bulgarian lev, to the euro (formerly the Deutsche Mark).
• Outcome: Currency boards can provide stability by limiting inflation and maintaining a stable exchange rate. However, they also reduce a country’s ability to respond to economic downturns, as the country cannot print more money or devalue its currency to stimulate growth.

3. Sovereign Wealth Funds with Fixed Rules

• Overview: Some countries use sovereign wealth funds with strict rules governing how much money can be withdrawn and how the fund is invested, effectively creating a fixed policy for managing certain aspects of a nation’s wealth.
• Fixed Nature: Although not a direct monetary policy, the rigid rules governing withdrawals and investments from these funds can resemble a form of fixed financial policy in practice.
• Example:
  • Norway’s Government Pension Fund Global (GPFG): Norway’s sovereign wealth fund is designed to save and invest the country’s oil revenues. The government can only withdraw a small, fixed percentage of the fund’s value each year (typically around 3%), regardless of short-term economic needs. This ensures that the fund remains sustainable over the long term.

4. Commodity Money Systems

• Overview: Commodity money refers to a system where the currency is made up of physical commodities with intrinsic value (e.g., gold, silver, or other precious metals). These systems have an inherent limit on the supply of money because the availability of the commodity is limited by nature.
• Fixed Nature: Since commodity-based currencies are tied to physical resources, the supply of money is limited by the availability of the commodity, much like a fixed monetary policy.
• Examples:
  • Ancient Civilizations: Many early economies, such as those in Ancient Greece and Rome, used gold or silver coins as currency. The amount of money in circulation was directly tied to the amount of precious metal the government could mine or acquire.
  • Colonial America: Some colonies used tobacco as a form of commodity money, where the amount of currency in circulation was tied to the amount of tobacco available.

5. Friedman’s Rule (Theoretical Example)

• Overview: Milton Friedman, a prominent economist, proposed a form of fixed monetary policy known as Friedman’s Rule. He argued that central banks should follow a fixed rule for money supply growth, such as increasing the money supply by a small, constant percentage each year, regardless of economic conditions.
• Fixed Nature: This theoretical rule would constrain central banks from adjusting the money supply based on economic fluctuations, creating a more predictable and controlled form of monetary policy.
• Outcome: While Friedman’s rule has not been implemented in practice, it has influenced monetary policy debates, especially regarding the dangers of discretionary monetary policy and inflationary pressures.

While fixed monetary policies are more common in cryptocurrency, historical examples like the Gold Standard and currency boards show that similar concepts have been used in traditional finance. These systems provide stability and predictability but often come at the cost of flexibility, making them challenging to maintain in the face of economic crises. Cryptocurrencies with fixed supplies, such as Bitcoin and Cardano, draw on these principles to ensure scarcity and long-term stability.

Conclusion

Cardano’s fixed monetary policy ensures that the supply of ADA is capped at 45 billion, creating a transparent and predictable economic framework. By limiting the total supply, Cardano offers protection against inflation and ensures scarcity, which could increase ADA’s value over time. This fixed supply model aligns with the broader vision of decentralization and trustlessness that underpins the Cardano ecosystem, providing stability for long-term investors and network participants.