Fragments is developing a low-volatility cryptocurrency that counteracts inflation
Fragments aims to create ‘ideal money’ by solving the problems associated with Bitcoin (BTC) and Tether (USDT). The company is developing an inflation-protected cryptocurrency that maintains purchasing power over the long run while retaining characteristics of fiat money.
Fragments resembles a stablecoin pegged to the US dollar, much like Tether. However, unlike other stablecoins, when demand for Fragments increases, increased supply is automatically allocated to current coin holders.
The Fragments team does not use the term ‘stablecoin’ to describe the project. Instead, they refer to Fragments as a ‘low-volatility cryptocurrency’.
The envisioned outcome is an ERC20 token that acts as a long-term store of value while exhibiting low volatility – money that people can spend and save.
What is ideal money?
Nobel prize winning mathematician and economist John Nash first conceived of ideal money in the 1960’s since he felt that fixed exchange rates between countries could lead to excessive inflation in the long run.
Regular fiat money (e.g. the US dollar) is defined by three characteristics:
- Unit of account: money should provide a common measure of the value of goods being exchanged
- Store of value: money should hold its value over time.
- Medium of exchange: money should facilitate transactions between parties.
However, while fiat money stores value over the short term, it becomes diluted over the long term due to inflation. Gold, on the other hand, does retain purchasing power over the long term.
Therefore, ideal money should share the combined characteristics of fiat money and gold. It should demonstrate stable purchasing power over the short and long term. Fragments claims that it will create this ‘ideal money’ digital currency that is algorithmically bound to store short and long-term value.
The problem with Bitcoin, Tether and crypto in general
There are three problems with today’s cryptocurrencies: volatility, lack of scalability and their high correlation with each other.
Bitcoin’s fixed supply theoretically allows it to behave as a long-term store of value. However, its price volatility (driven by fluctuating demand) makes it unsuitable to store short-term value or serve as a unit of account.
Tether, on the other hand, is allegedly backed by US dollars and therefore seems to be equivalent to fiat money. It can serve as a short-term unit of account, store of value, and medium of exchange. However, Tether is heavily centralized and hard to scale, which limits its long-term utility.
Another problem with cryptocurrencies in general is that most cryptocurrencies are highly correlated with Bitcoin and each other – that is, they move up and down together in price. Because of this, the holders have no sense of control over when they can responsibly withdraw or spend their cryptocurrencies.
The Fragments solution
The Fragments protocol stabilizes price by transferring volatility from coin price to coin count. In other words, this represents a move from the standard price model to the stable Fragments model:
- Standard model (today): If you purchased 1 BTC at $1 many years ago, your 1 BTC is now worth $6,568 (at the time of writing!)
- Stable model (Fragments): If you purchased 1 BTC at $1 many years ago, you now have 6,568 BTC each worth $1
Basically, it works like this: whenever the price of a Fragments token goes up, the protocol automatically issues new Fragments tokens. Some of these newly issued tokens enter the wallets of existing users. The rest will go into two reserve funds: one that funds future development and another that buys Ether (ETH). When Fragments price falls, the Ether reserve is used to shrink the supply of Fragments.
It is important to note that the Fragments protocol will not use airdrops to distribute new tokens to wallets. Since airdrops inefficient and hard to scale, the Fragments protocol uses an innovative solution to ‘split’ tokens in wallets without congesting the Ethereum network.
In supply and demand terms, Fragments stabilizes purchasing power by increasing or decreasing token supply in response to demand:
- When high demand drives up token price, the protocol increases supply. The protocol adds to reserves and proportionally distributes tokens to wallets
- When low demand decreases price, the protocol decreases supply. The reserve purchases tokens to removes them from the supply in exchange for bonds (Fragments bonds are explained below).
This model creates stability in token price while benefiting token holders. The Fragments protocol does not allow price to fall to zero and there is theoretically no limit to how much your Fragments holdings could be worth over the long-term.
Fragments plans to introduce three asset classes that will work together:
- USD Fragments: the primary asset class which is a stable ERC20 token pegged to the US dollar;
- USD Fragments bonds: a secondary asset class used by the Fragments reserve to decrease the supply of USD fragments. When the Fragments protocol needs to decrease supply, it purchases USD Fragments from existing holders and issues Fragments bonds. Bondholders are entitled to receive USD Fragments in future when new tokens are issued;
- Reserve fund: An ETH reserve that is programmed to purchase USD Fragments in exchange for Fragments bonds when supply needs to be reduced.
Fragments claims to solve major problems with today’s cryptocurrencies:
- Spendable short-term store of value: 1 Fragment is worth approximately 1 USD;
- Long-term store of value: Holders see increased reserves over time with inflation. The value of each token stays roughly the same, but holders will have more tokens;
- Inflation and deflation do not generate gains/losses for token holders;
- Uncorrelated with major cryptocurrencies: Traders will theoretically retreat into stable currencies like Fragments when wider cryptocurrency prices fall, which turns Fragments into a hedging instrument.
Fragments use cases
Fragments is designed to:
- Serve as a medium of exchange: much like Tether today. Fragments allows cryptocurrency users to transfer into a stable currency with an auditable supply and on-chain reserve policy;
- Serve as a hedging instrument against other cryptocurrencies: since Fragments should be uncorrelated with major cryptocurrencies;
- Allow developers to offer stable pricing: for their products and services, instead of offering a service for 0.5 BTC today and having to constantly update their price due to fluctuating BTC price.
To find out more, please visit Fragments’ website https://www.fragments.org/.
White paper: https://www.fragments.org/paper/
Disclaimer: Investing in Initial Coin Offerings, cryptocurrencies, and digital tokens is highly risky and speculative. The material presented here is for information purposes only. This information presented here is not intended to provide any sort of investment advice, nor does it recommend any company, Initial Coin Offering, or digital token and should not be taken as the basis for any investment decision or strategy.