UF and UNIT: A Unit of Account, Not a Currency

While most nations use their currency for both valuation and transactions, Chile has made a bold and unique financial innovation by introducing the Unidad de Fomento (UF) as a separate unit of account from its currency, the Chilean Peso (CLP). Though not a currency in the traditional sense, UF has had a profound impact on Chile’s financial stability, particularly in preserving purchasing power during inflationary periods.

So, why did the Chilean government opt for UF instead of relying solely on the Peso? And how does this innovation relate to decentralized solutions like UNIT?

Why UF Instead of the Peso?

In the face of hyperinflation during the 1970s and 1980s, the Chilean Peso became too volatile to serve as a reliable measure of value. The Chilean government introduced the UF to provide a stable unit of account that adjusts regularly to inflation, ensuring that prices and savings retain their real value over time. 

The Strength of UF as a Value Preserver

The UF adjusts daily, reflecting changes in inflation. This means that while the Chilean Peso may lose value due to inflation, the UF retains its purchasing power. For example, if inflation rises by 5%, the UF’s value also increases by 5%, ensuring that the same amount of UF can still buy as much as it did before the inflation spike. In this way, the UF protects savings and long-term contracts, offering a reliable measure of value even during turbulent economic times. 

The Limitations of UF

Despite its many advantages, the UF has some notable downsides, particularly regarding its centralized nature, limited accessibility, and restrictions on everyday use. The UF is primarily utilized for long-term financial contracts such as mortgages, pensions, and real estate transactions. While it provides a stable benchmark for valuing goods and services in the economy, shielding individuals and institutions from inflation, it is not designed for everyday transactions like buying groceries or paying for transportation.

Furthermore, the UF is centrally controlled by the Chilean government, which manages its adjustments and dictates its value. This makes the UF largely confined to Chile and inaccessible to people outside the country. Its impact is further limited as it only influences specific financial sectors, leaving out day-to-day valuations for common goods and services.

This is where UNIT improves upon the UF, building on its strengths and offering the same stability and preservation of purchasing power, but in a decentralized and global context.

Decentralized and Borderless

UNIT operates through open-source algorithms that leverage a basket of leading cryptocurrencies, ensuring a stable and accurate measure of value. Its decentralized nature removes dependence on any single authority, making it accessible to anyone, anywhere. This makes UNIT a truly global unit of account, applicable to everything from on-chain to off-chain.

Everyday Use and Accessibility

Unlike the UF, which is limited to specific high-value contracts, UNIT is available for everyday transactions. Its blockchain-based structure ensures that anyone with internet access can benefit from its transparent and unbiased system, making it more accessible than UF.

Transparency and Fairness

UNIT’s value is determined by open algorithms, reflecting true market conditions without centralized control. This guarantees that UNIT remains a fair and unbiased measure of value, improving upon the UF's centralized structure.

The true power of a unit of account is that it brings clarity and stability to an otherwise chaotic system, allowing individuals and institutions alike to make informed decisions, plan for the future, and protect their wealth. As we move into a decentralized future, UNIT represents the next evolution of this concept, offering a borderless, transparent, and unbiased measure of value that can be used every day by anyone, anywhere.