In a hyperinflationary environment, could USD tank the Silk peg?
This question is an important scenario to model. And it could end up being more than theoretical.
In such an environment, if Bitcoin were $140k and Gold were $4k, what would Silk’s peg look like then? Would that compensate for potential losses of USD and other currencies?
Well… now you can click on this simple little calculator and find out! Please COPY it rather than modifying the original. So File > Make a copy.
(note: as you play with the Silk target peg price calculator, as column D indicates, the per unit amount for the assets is the constant in the equation. Don’t change those. Recommend just changing the asset price and everything else will change accordingly)
Observations on theoretical USD hyperinflation and Silk peg impact
Folks, correct me if I am wrong, but I’m not sure anything changes with USD in Silk peg in hyperinflation?!.. This is because the price of $1.00 wouldn’t change in the peg. These are the perks of being the global, default currency. Your value is “hard-coded” into the very fiber of finance.
The cascading effects would be there though. They would likely include:
- Devaluation of other currencies in the basket
- Appreciation of the gold and BTC
- (probably) minimal change in USD’s weight in the index
So if this is correct… if we aren’t tapped into a magical oracle that will somehow reflect the shift in USD’s true value…Then a simple question emerges.
“Is that right?” Even more specifically, “Is that ethical?”
Carter has rightly stated that modern monetary policy has created “post-truth” money. Silk is a remedy for that. However, what is our recourse when/if that “lie” has worked it’s way into the peg.
If it’s not clear enough, here’s what I mean. Suppose a scenario where USD compounded inflation over the next four years was 336% (this is the average data from the 27 most recent inflationary deleveraging events).
In that scenario, we should look at USD value relative to today and it should be ~.30. But, again, my understanding of our current oracle structure is that this wouldn’t be so. It’s not an indictment on the protocol. Just the fact that we don’t have a way to monitor the true price of USD (apart from tools like Truflation).
To summarize, at a certain point, USD involvement in the peg becomes a mathematical lie.
How do you feel about that? Is it right? What - if anything - could be done to provide a more accurate picture of USD’s true impact in Silk’s peg composition?
Here are some potential sentiments that come to mind:
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“This is too complicated. Yes, USD has functionally “hard-coded” $1.00 into everything. But because of that, Silk’s value won’t be impacted. Leave well enough alone.”
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“Let’s lower the basket weight of USD.”
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“Yeah, get USD out of the peg yesterday. Along with other low performing currencies. Replace them with responsible currencies even if less global value is stored there.” Note: Previous post might also be relevant here → Silk’s approach to currency risk factors in peg composition
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“Yeah, if a hyperinflationary scenario played out, we should pull the plug on USD in the peg at that point.”
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“Truflation has solved for this with their data set. We could set the USD value in the peg accordingly. For example:
$1.00 / $1.25 (or whatever their 2019 dollar is valued)
This would then yield a “true” value for USD rather than a false value that is unchanging regardless of hyperinflation.”
So… does a USD value that remains constant make sense for Silk? Is it true? Is there a better way?
I am eager to hear community thoughts on this. Thanks for your feedback and discussion.