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CHRONOBANK - PHASE 1: A NON-VOLATILE DIGITAL TOKEN BACKED BY LABOUR-HOURS 6 (1) LOCRisk Mitigation - During the minting process, an LOC will be paid (1 −ρ) percent of the labourhours they contractually agree to provide. Therefore LOCs inherently take some risk in the form of immediate redemption. If an LOC’s promise of labour-hours is immediately redeemed, they stand to lose ρ percent of these hours. To mitigate this, the CBE will store a percentage of minted LHT, LI (see Section 2.2.1) for each LOC, to reimburse the LOC in the event that more than (1−ρ) labourhours are redeemed. LI will cover all excess (i.e. more than (1 − ρ) ) redeemed tokens until the reserve, LI, is depleted. We formalise this by introducing the mitigated tokens payed to an LOC, LM, as LM = min(LI, E) . (4) where E is the excess LHT to be redeemed by the LOC, defined as: E =  R− (1 − ρ), 0, if R > (1 − ρ). if R ≤ (1 − ρ). (5) with R being the total percentage of LHT redeemed. The mitigation reserve, LI is not constant, but is gradually transferred to the SGF (Section 2.3.2). The rate at which this fund is transferred is derived from the parameter, M, which specifies the total number of months until the funds are entirely transferred, and is negotiated during the minting process. The mitigation reserve funds will be transferred monthly at a uniform rate (LI/M). This procedure then allows the CBE to statistically choose ρ, LT and M given the risk profile and reputation of any given LOC during the minting process. For example, ρ, LT and M can be designed such that within a 95 percent confidence interval, an LOC does not lose more than (ρ − ζ) worth of the labour-hours promised over a given time5. Here ζ is a number that quantifies the risk that the LOC is willing to accept. This degree of freedom allows the CBE to manage LOCs of varying risk profiles. (2) LHT Liquidity - The price of LHT will ultimately be governed by the price at which the CBE buys and sells LHT6. The funds used for this are stored in the Liquidity Reserve. L0 of newly minted tokens (see Section 2.2.1) will be accrued in this fund. The CBE will then stabilise the price of LHT and provide liquidity in various markets by buying and selling LHT at the fundamental price detailed in Section 2.2.3. The parameter, l, chosen during contract negotiations, specifies the percentage of LT that goes to LI (the amount used for LOC insurance and which is gradually transferred to the Safety Guarantee Fund) and L0 (the amount that is permanently used for liquidity). Through careful management of the parameter, l, the CBE can maintain the desired volume of funds in the Liquidity Reserve. As this fund will hold both LHT and volatile currencies, care must be taken to manage volume due to the potential price fluctuations of the held currencies. One immediate-use case of this fund will be in the initial system set-up. When the first LOCs become part of the system, the freshly minted LHTs will need to be sold to transfer the resulting funds to the LOC. Initially the demand for LHT will be low and funds from the Liquidity Reserve will be used to bootstrap this process. A percentage of the crowdsale funds will be deposited into the Liquidity Reserve for this purpose. 2.3.2. Security Guarantee Fund One of the major drawbacks in a debt-backed currency system is the possibility of backers (LOC in our case) defaulting on their contractual obligations. Despite the care in vetting LOCs during the minting process, we expect there to be a percentage of companies that will inevitably default. The SGF’s main purpose is to provide a fund reservoir as insurance to protect against defaulting companies. In practice, this fund will burn held LHT tokens to the equivalent amount of outstanding labour-hours promised by the defaulting LOC. Statistical estimates should be taken for the average probability of LOCs defaulting. These estimates will give a measure defining the amount of LHT that should be stored inside the SGF fund at any given time. The amount stored in the SGF will be proportional to the amount of debt, and hence be proportional to the amount of LHT in existence (as every LHT is backed by one owed labour-hour). This required value can be reached and maintained through the management of the minting variables, S, l and LT. 3. Economic Considerations In this section we briefly mention some interesting properties and immediate economic consequences of this system. 3.1. Economic Incentives First and foremost, the system must be designed such that there are economic incentives for both LOCs and LHT holders to participate in the system. For an LOC, the incentive to participate in the ChronoBank system comes in the form of an interest-free-like loan. When an LOC agrees to participate in the system and offers labour-hours, the company effectively receives an interest-free loan, which needs to be paid back when their contract expires. For this to be enticing to an LOC, we require that over the period of the contract the amount of money paid for the service of the loan is less than that of alternate means for loans, e.g. local bank loans. We consider a simplistic example to demonstrate the feasibility of such a scenario. Consider that a bank loan, which charges IB percent in interest per annum, has an upfront cost of C and is of total amount H. Over a period of time, t, and assuming no regular repayments are 5This can occur because the holdings of an LOC increase over time due to assumed external investment. 6Combined with the fact that one LHT has a fundamental intrinsic value of one labour-hour. 7We use a no-repayment loan to clarify the analogy to our system and remove some mathematical complexity which obscures our point.

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