From the dawn of human history, money has been serving as an unmistakable reflection of material worth, which deserved all members of the society placing trust in it. However, as the reality often showed, the economy - and money intertwining with it - has been prone to instability over a longer period of time: once the political stability has been undermined, money quickly eroded in value, making thousands of citizens tighten their belts or otherwise, look for alternative ways to escape the economic unease.
When Bitcoin first came on the horizon in 2008, it stored the promise of abolishing the problem money suffered for long: a revolutionary proposition of a self-regulated safe-heaven investment outside the governmental control appealed to all circles of the society. But the reality often proved to be more complex than that: on the wave of hype surrounding the DeFi space, countless enterprises rushed to tokenize their services, simultaneously failing to account for realistic demand projections and oftentimes, determining the initial price of the asset unfairly. As a result, the problems of oversupply and subsequent erosion of token value led to the general frustration of investors targeting the asset as a long-term investment, which often failed to back up their expectations with solid fundamental indicators.
In an attempt to gain a deeper insight into the current situation of the DeFi industry, I prepared a few questions for Mr. Worawat Narknawdee, the CEO of ACT (Acet), a new cryptocurrency.
The value of a given asset is based on the law of demand and supply. The more the investors want to hold the asset, the higher the value becomes. Also, if the supply is limited, it will drive the investors’ demand high because it is not enough for everyone to hold.
Then, how can the asset attract investors? The answer is by the plans and goals of the asset. For example, Bitcoin aims to be electronic cash for daily use. If investors find them practical and promising, they will buy the asset.
The stability and functionality of the underlying technology, and how the asset serves the investors’ demand are also the factors that attract the investors because it helps assure that the asset has potential. Therefore, financial technology companies nowadays keep exploring and developing the underlying technology to make the asset more user-friendly and get rid of the vulnerabilities as possible.
The rapid surge and collapse of the price are common situations in the digital asset market. It is caused by a few factors, and here they are:
The first factor is a move from influencers in the industry, including the company owners who hold a big chunk of cryptocurrency, and financial institutions. Even the slightest word from them about buying or selling can make the market go wild and follow the deeds because the investors tend to believe in these people’s decisions. Further, people today can get real-time news updates from social media platforms, so it is not surprising why the price swings up and down so fast.
The next factor is a move from financial regulators. The introduction of new financial regulations can influence the price surge and collapse. If the new ones are supportive, it will attract investors to buy more digital assets due to the encouragement by the officials. On the other hand, if the regulations discourage the holders, it may set off the sell-off.
Economic conditions, especially with the high inflation rate, are also factors of the rapid price surge. Many people consider cryptocurrency as another type of investment hedge against inflation. If the central bank points out that the inflation seems not to get better, people may keep their savings in cryptocurrency form instead.
Ensuring investors that the project is designed to address the real issues in DeFi and will continue to develop over time as outlined in its roadmap is a must for the stable value increase over time. In addition, the project must have a system that protects the data from hackers as well. As investors within the ecosystem start to see more benefits of owning the project’s token, it is likely that the price of the token will continue to increase due to the increasing demand for it.
The concept of the project is different from the majority of DeFi projects in the industry. ACT was designed to address the problem of oversupply under the “Zero Initial Supply” concept. The concept supports the idea that the initial supply of a digital asset with real value must be “0” and the supply will only increase according to holders’ demand. It means holders are able to have tokens built on demand.
The project’s roadmap mainly focuses on increasing the number of holders so that there will be more supply in circulation as these holders will have tokens built. Furthermore, the project has passed the audits from PeckShield and CERTIK, which assures investors that the project is safe for investment.
Cryptocurrency is similar to fiat currency in the way that both types of currencies are money that can be used to buy goods and services and transferred from one account to another. Apart from that, crypto can be divided into smaller units just like fiat currency.
Cryptocurrency does not rely on an intermediary in order for crypto transactions to happen. It is not regulated or supported by federal authorities or governments. Also, it is only in digital forms and more volatile than fiat currency as crypto investors focus more on making quick profits. On the other hand, fiat currency needs an intermediary, which is a bank, to make transactions. It is regulated and supported by federal authorities or governments. In addition, fiat currency is in both physical forms such as coins and bills, and digital forms such as cash in mobile banking applications.
A good anti-inflationary mechanism should include a supply control mechanism and a token burning mechanism to control the overall supply of a token. Aside from that, a healthy ecosystem is another important factor that helps prevent inflation. Therefore, our team applies all these mechanisms to its ecosystem.
There would be no exact answer for the question of what is the better resolution for digital currencies between ‘a free-float exchange rate’ and ‘a fixed exchange rate.’ It depends on where you want to position the digital currency in the financial world. If a digital currency should be used the same as fiat, then follow the fiat’s footsteps by using ‘a free-floating exchange rate’. If a digital currency should be a global intermediate currency, ‘a fixed exchange rate’ would be a great idea. Moreover, you have to consider how well you can handle the disadvantages of each one because either has its problematic weaknesses. For example, a free-floating rate leads to a speculative investment (which may cause market manipulation) instead of encouraging daily use. In the meantime, a fixed rate will put a financial burden on the providers to control the rate.
Therefore, either may not be the best resolution for digital currencies. The best one may be a system where there is the right balance between the strengths of these two exchange rates and their weaknesses are disposed of as much as possible. Then, there will be a new “secure” system that can reflect the demand for the currency. Let’s say, it could be a security-backed digital currency using a free-floating exchange rate, so its supply can be concretely limited.
Crypto is a new technology. Many people are afraid to invest in crypto because they think that they do not have enough understanding of it. Moreover, crypto is intangible, which makes a lot of people think it is not a real asset and not backed by other assets. That is why it is different from assets like cash, gold, stocks, or real estate, which are either tangible or backed by other assets. More importantly, crypto is a decentralized asset that does not depend on any intermediary in making transactions, and because of that, many governments are against it in fear of the fact that it may reduce their power by weakening their fiat currency, which is clearly not what they want to happen.
There are many ways to appropriately determine the supply-demand balance, but the one that the project chose is by increasing the supply only when there is greater demand because the balance between demand and supply happens when a token is in circulation as it is used in various ways such as yield-farming, spot trading, using it in a project that supports it, etc. When it comes to the price, the price of the token is determined by the sellers, who can sell it at any price.
Most DeFi tokens are launched with a large amount of initial supply created in advance. That can sometimes cause an oversupply which happens when there is more supply than demand. This kind of situation often results from the initial supply of a token being created in advance before the launch without knowing how much demand for the token there would be. When the supply of that token is greater than the demand, its value becomes lower than it should be.
ACT was designed to address oversupply problems under the “Zero Initial Supply” concept, which is based on the idea that the initial supply of a digital asset with real value must be “0” and the supply will only increase according to holders’ demand by using the fair launch distribution mechanism. That allows token builders and users to build tokens by “staking” assets in accordance with the terms of the project’s smart contracts on Binance Smart Chain to get rewarded with the project tokens. Therefore, the total supply is generated solely on the token builders’ demand.
The value is determined by the price control mechanism of decentralized exchanges (DEXs), which use the Automated Market Maker (AMM) system. The system determines the price by calculating the ‘exchangers’ and ‘liquidity fund treasury assets’ on it. The liquidity pools always rebalance the values of both tokens in a trading pair in a ratio of 50:50, resulting in tokens on DEXs having real values.
To reduce the “oversupply” in order to reach equilibrium, the system will burn tokens, which will, in turn, reduce the supply. As a result, all tokens in circulation will reflect the real amount and value, preventing inflation for holders.