First, let's understand 'Purchasing Power':
In 1940, you could get a cup of coffee for 25¢.
Today, you need to pay $4 for the same.
This increase in prices of things over time, is called inflation.
Where $1 could buy 4 cups of coffee in 1940.. now it doesn't even get you one! In other words, with inflation, the 'purchasing power of your dollars goes down.
- And do I even need to mention the gas prices?
In order to maintain the purchasing power, your dollars need to grow at the same rate as inflation.
In TradFi, that is near impossible to achieve because most banks pay 0-2% interest rate, and inflation is currently around 8%
Let's see what that means:
Currently, most stablecoins are pegged to the $USD
example: 1$DAI = $1
This means, that as $USD loses its purchasing power, so do these stablecoins
In other words, $FPI is a stable coin resistant to inflation. It is a 'Stable' because its PURCHASING POWER stays constant unlike any other coin or fiat currency. But how does it work?
- Price of $FPI should increase to $1.02
- Value of your 1000
= 1.02*1000 = $1020
But the treasury only contains $1000 in value from your $FRAX
Where would the extra $20 come from? For this purpose, @fraxfinance invests the treasury to earn interest on it In our example: if the treasury earns 5% interest for the month, the value of the treasury will grow to $1050
Now, what the hell is $FPIS?
It is not a stablecoin, and can move at price with the market. $FPIS holders:
- Get to vote on strategic decisions of $FPI
- Earn profit from the treasury ($30 in our example)
But what happens if the treasury yield is less than inflation? Continuing our example, let's say the treasury earns only 1% interest and inflation is at 2%
- Value of your $FPI = $1020
- Value of treasury = $1010
Where would the extra $10 come from?
In this case, $FPIS will come to the rescue.
So if you hold $FPI, you will be able to maintain your purchasing power irrespective of what the inflation is. As @samkazemian mentioned, inflation-pegged coins are the next logical step in the evolution of Stablecoins, and $FPI is just the start.
if you want to learn more