Autonomous Money Supply Strategy Utilizing Control Theory

ArXiv ID: 2407.13232 “View on arXiv”

Authors: Unknown

Abstract

Decentralized Finance (DeFi) has reshaped the possibilities of reserve banking in the form of the Collateralized Debt Position (CDP). Key to the safety of CDPs is the money supply architecture that enables issued debt to maintain its value. In traditional markets, and with respect to the United States Dollar system, interest rates are set by the Federal Reserve in an attempt to influence the effects of excessive inflation. DeFi enables a more transparent approach that typically relies on interest rates or other debt recovery mechanisms being directly informed by asset price. This research investigates contemporary DeFi money supply and debt management strategies and their limitations. Furthermore, this paper introduces a time-weighted approach to interest rate management that implements a Proportional-Integral-Derivative control system to constantly adapt to market activities and protect the value of issued currency, while addressing observed limitations.

Keywords: DeFi, Collateralized Debt Position, Money Supply Architecture, PID Control System, Stablecoins, DeFi (Cryptocurrencies)

Complexity vs Empirical Score

  • Math Complexity: 6.5/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Lab Rats
  • Why: The paper introduces a PID controller—a classic control theory concept with associated differential equations and tuning parameters—representing moderate-to-high mathematical complexity. However, the summary and excerpt describe a theoretical proposal and analysis of existing protocols, with no indication of backtests, implementation code, or statistical validation, resulting in low empirical rigor.
  flowchart TD
    A["Research Goal:<br>Develop Adaptive Money Supply for DeFi CDPs"] --> B["Methodology: Literature Review<br>(DeFi Money Supply & PID Control Theory)"]
    B --> C["Data & Inputs:<br>Asset Prices, CDP Parameters, Inflation Targets"]
    C --> D["Computational Process:<br>Time-Weighted PID Controller<br>Calculates Optimal Interest Rates"]
    D --> E["Key Outcome:<br>Resilient Money Supply Architecture<br>Protects Currency Value & Addresses DeFi Limitations"]