It’s Hayek’s mechanism, not mine.
Satoshi gives up “fixed exchange rate” then BTC has other two:
- independent monetary policy: 21M total and reward halves per 4 years.
- Free capital flow: anyone can buy/sell BTC as they wish, no worries about being filtered out with their addresses.
Nu’s trouble is to challenge the impossible trinity, although Nu tries to shrink NBT in circulation by raising parking rate(independent policy), the free market doesn’t like it.
Impossible trinity’s principle is well demonstrated below:
Assume that world interest rate is at 5%. If the home central bank tries to set domestic interest rate at a rate lower than 5%, for example at 2%, there will be a depreciation pressure on the home currency, because investors would want to sell their low yielding domestic currency and buy higher yielding foreign currency. If the central bank also wants to have free capital flows, the only way the central bank could prevent depreciation of the home currency is to sell its foreign currency reserves. Since foreign currency reserves of a central bank are limited, once the reserves are depleted, the domestic currency will depreciate.
Hence, all three of the policy objectives mentioned above cannot be pursued simultaneously. A central bank has to forgo one of the three objectives. Therefore, a central bank has three policy combination options.
This is exactly what’s Nu’s crisis. For some reasons, investors want to sell your currency for another high liquidity currency, such as in 1997 south east Asia’s hot money wanted to leave and transferred for USD, or in 2016, when BTC price went up so investors wanted to sell NBT for BTC.
After the limited (partial) reserve is depleted, the peg failed.
So Nu’s crisis is just another typical “financial crisis” like The Mexican peso crisis (1994–1995), the 1997 Asian financial crisis (1997–1998), and the Argentinean financial collapse (2001–2002).
@Phoenix If you cannot shrink your money in circulation effectively, you cannot challenge the “impossible trinity”. Nu’s fate depends on whether you can find the way, while Hayek’s mechanism is a good option.