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CHRONOBANK - PHASE 1: A NON-VOLATILE DIGITAL TOKEN BACKED BY LABOUR-HOURS 7 necessary7, the LOC stands to lose: C +H((1 + IB)t − 1) −HIIt . The stability of the ChronoBank system hinges on the (6) The first term corresponds to the upfront cost of the loan, the second term to total interest owed at time, t, and the final term is potential interest earnings from external investments. Here we’ve defined an average yearly interest gain from external investments, II. Alternatively, the LOC may participate with the ChronoBank system. If the LOC offers H hours of labour, it would receive H(1 − ρ) LHT in return, and would be required to pay (1 + σt)H worth of LHT back upon the expiration of the contract (assumed at time, t). Here σ is a percentage representing the average yearly price increase8 of LHT. It quantifies an inflated price of LHT due to an assumed increase in average wage over the contract period. Therefore, with the ChronoBank system, the LOC stands to lose, H(ρ + σt) − (1 − ρ)HIIt . (7) The first term here originates from the initial sum taken by ChronoBank, Hρ, and from the price fluctuation of LHT over time. The second term comes from the potential earnings from external investments with the (1−ρ)H LHT received. In this simplistic example, an LOC would be economically incentivised to participate in the ChronoBank system if the total fees of the ChronoBank system are less than the total fees of the alternative bank loan, explicitly: H(ρ + (σ + ρII)t) < C +H (1 + IB)t − 1   . (8) Here, (σ + ρII) represents the average yearly price fluctuation of LHT combined with ρ percent of an average expected investment return. With the reasonable assumption that this quantity is less than the interest rate of a bank loan, IB, equation (8) can always be satisfied for some time period, t, given all other variables fixed. In fact, the longer the contractual time, t, the greater the cost-saving is to the LOC. So in this simplistic example, we can see that this system incentivises LOCs to participate in the ChronoBank system for longer periods of time9. Furthermore, the CBE and LOC are able to adjust both H and ρ during the negotiations of their initial contractual agreement, enabling the tuning of economic incentives in less favourable economic regions/scenarios. As for LHT holders, their economic incentive is more obvious. LHT, compared to its stable-coin predecessors, is inflationary-resistant. Therefore, holders should have an economic incentive to use LHT as its value should increase relative to local inflationary fiat currencies. We should note that buying and holding LHT as an investment (and therefore decreasing the liquidity of the token) is not in a holder’s best interest, as the gains in doing so are often less than external investment strategies. 3.2. System Stability This section is concerned with the ability of the ChronoBank system to sustain various economic hurdles, which we refer to as its stability. CBE correctly managing the minting process. Through the minting process, the two funds, Liquidity Reserve and SGF, are controlled and maintained. As the system grows, funds will accrue in both the Liquidity Reserve and the SGF. LHT is only removed from the SGF in the event of an LOC defaulting. The Liquidity Reserve only decreases in value in the event that a held volatile currency devalues. Therefore, both funds should grow as the system evolves. As the funds reach a sustainable level, the percentage of LHT taken during the minting, ρ, can be decreased, further enhancing the economic incentive for more LOCs to join the system. A greater number of LOCs participating will mean a greater number of LHT in existence and a greater volume of funds accrued in both the SGF and Liquidity Reserve. The stability of the system will be proportional to the value stored in the SGF and Liquidity Reserve and, therefore, we expect the system to become more stable as it develops. 3.3. Potential Pitfalls A number of potential pitfalls can occur during the operation of this system. In this section we briefly summarise the major and most obvious ones, along with our proposed solutions. • An LOC defaulting on its promise of labour-hours. As previously mentioned, this will be covered by the SGF. The CBE will burn the necessary LHT from the SGF fund to maintain the 1 to 1 relation of LHT to labour-hours. • Large supply/demand causing price fluctuations. This can be handled by a sufficiently deep Liquidity Reserve, which will provide demand in times of high supply and vice versa. Initially funds from the crowdsale will be placed into the liquidity fund, and as the system grows the liquidity fund will be maintained at a level deemed operationally safe to cover this scenario. • Redemption of all LHT. The LHT at any given time will always be backed by contractual labourhours in a 1 to 1 mapping. Therefore, this scenario is possible and the system will continue to function in this event. However, the risk in this occurrence lies with the participating LOCs, who will be required to pay back their LHT in the form of labour. The SGF (Section 2.3.1) can also absorb some of the cost of this scenario. It will be at the CBE’s discretion to use the SGF to assist in this very unlikely scenario. • Increased demand at contract expiry. As a contract expires, an LOC will be required to buy back an equivalent amount of LHT to the labour-hours that are left on the contract. This could potentially create periods of large demand. In these scenarios, we will counter the demand with the Liquidity Reserve and, if necessary, the SGF. 8This could also potentially decrease. 9Adding regular repayments to bank loans adds complexity to this simplistic example and although decreasing the size of the right-hand side of equation (8) it does not change our final result.

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