Funding Large Projects with a Blockchain Based Automated Fractional Reserve Currency

Abstract

Public entities trying to raise funds are typically faced with, at best, two options: a public-private partnership or issuing municipal bonds. The former leaves the investee susceptible to value extraction or rent-seeking. The latter requires working through networks of intermediaries and the extensive infrastructure to support a municipal bond market. Moreover, current initial coin offering based blockchain fund raising methods do little to address the most significant issues with modern-day fundraising while adding complexity and risk. In this paper, we present a novel blockchain-based solution using a fractionally fiat-backed reserve currency using distributed ledger technology to increase transparency and democratization of investment while lowering fundraising costs. Our solution is an automated value engine letting investors hold a currency representative of their investment. At the same time, its supply is automatically burned or minted to algorithmically manage the ratio between funds raised and return on investment. When applied to a real-life bond issuance case, results show that our solution raises the required funds, provides a 0.25% higher return on investment, and yields an estimated reduction in direct costs of up to 58.48 % through eliminating intermediary overhead.