Monetary policy for cryptocurrency

Foreword: The monetary policy of crypto assets mainly involves its distribution model, such as release method, initial supply, additional issuance, destruction, and capping. What is the current mainstream approach? This article has a basic summary, the author is Messari's "Florent Moulin", translated by the "HQ" of the "Blue Fox Notes" community.

The five-part supply is defined in the cryptographic asset supply method we currently use: maximum, diluted, uncirculated, flowing, and circulated.

The framework helps to understand the diversity of crypto asset supply management. But it does not tell us how these observable supplies, whether circulated, flowing or uncirculated, are produced or destroyed over time.

In fact, we can further categorize and measure other aspects of supply:

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· The publishing method defines how the first cryptocurrencies are issued and distributed.

· The initial supply defines the amount of cryptocurrency initially issued and how these cryptocurrencies are distributed among different stakeholders (investors, founders and project operating budgets, community airdrops, default rewards).

· The issuance model defines monetary policy in terms of new token issuance for a particular asset.

· The supply cap defines whether the crypto asset supply is capped (hard top) or infinite (continuously issued). Now that we have defined these categories, let's take a look at the various monetary policies used in the top 80 crypto assets.

I) Release method and initial supply

Mining distribution

Fair online: Without pre-excavation, cryptocurrencies can be mined from the blockchain. Examples include Bitcoin, Monroe, and Dogecoin.

Timely pre-excavation, secret mining: The most appropriate description is defined by Nic Carter: "The founder used the asymmetry advantage to dig up most of the cryptocurrency when going online, or does not announce the cryptocurrency activation, so as to secretly dig Mine." For example Bytecoin and Steem.

Built-in centralized finance department: The founding team/foundation uses ongoing mining incentives to fund project development (based on block rewards or percentages of superblocks). This does not include decentralized financial funds such as Decred or Bitshares. Examples include Zcash and Zcoin.

Pre-drilling distribution

Crowdfunding: Part of the initial supply is another crypto asset (usually ETH or BTC) that is exchanged for token sales in exchange for investors. For example, Tezos, BAT and Augur.

Private placement: Part of the initial supply is sold privately to investors (usually investment funds or angel funds). For example Cosmos, Neo and Vechain.

Airdrop: Part of the initial supply is distributed to the community through free or small tasks. These cryptocurrencies are often dropped to holders of large currencies, such as bitcoin, to achieve fair, distributed, and transparent distribution. Examples are Decred, Nano and Ardor.

Centralized distribution: A part of the cryptocurrency is distributed to partners through airdrops, private placements or through time, but the initial supply is all centrally managed. Such as XRP and ontology.

Fork distribution

Book Bifurcation: The owner of the original encrypted asset will be prorated to obtain the new cryptocurrency created in the disputed hard fork. For example, Bitcoin Cash BCH and Ethereum Classic ETC. Sometimes forks include additional pre-excavation or secret mining to pay for fork costs, future development costs, and team rewards. For example bitcoin gold and bitcoin diamonds.

The following is the top 80 cryptographic asset issuance by liquidity market capitalization:

As of November 19, 2011, Messari (note: it can be seen that more than 80% of the distribution methods are achieved through crowdfunding and private placement, of which crowdfunding is close to 60%)

Of course, some cryptographic assets may have a variety of different distribution styles, such as private placements and crowdfunding, crowdfunding and airdrops, book forks, and built-in finance.

However, it is worth noting that only one-tenth of the top 80 crypto assets in the market capitalization are “fairly online”, and more than half of the crypto assets are sold to investors through crowdfunding.

The built-in centralized treasury model, such as Zcash, is not widely used in the top 80 crypto assets of market capitalization, but other projects such as Veil also apply a similar treasury model, replacing the percentage area with super block rewards. Block rewards.

Initial supply

Except for the cryptographic assets that are purely online and bifurcated, without pre-digging or built-in treasury models, almost all projects allocate part of their initial supply or ongoing mining awards to the founding team and as a project operation. funds.

In general, these projects even allocate up to 40% of the initial supply to the founders and the “Ministry of Finance” responsible for project operations. Other allocation categories include investor private placements and crowdfunding, airdrops, and pre-drilling rewards. Pre-drilling rewards are mining or mortgage awards that are pre-digging or stored in the “Ministry of Finance” for distribution throughout the year. Waltonchain, GXChain and AElf both use pre-drill reward mode projects.

As of November 19,.11, Messari

II) Issuance method and supply ceiling

Inflationary monetary policy:

The continuous issuance of encrypted assets is defined by the issuance (the absolute number of tokens issued) or the inflation rate (the percentage increase in the unsupply volume).

Additional Issues: The number of tokens generated in each period (block, day, year) increases over time. This is the case with Waltonchain, which is characterized by a progressive mining reward program. From the sixth year onwards, Waltonchain will transition from an issuance policy to a reduction policy.

Fixed inflation rate: As the monetary base grows, the cryptocurrency generated during each period will also increase over time. Examples of fixed inflation rates include EOS and Aion, which have annual inflation rates of 1%.

Aion's supply curve

Fixed issuance: The number of cryptocurrencies generated per period (block, day, year) remains the same. This will lead to a drop in inflation. Examples of fixed issuance policies include Tron (wave field) and Dogecoin (dog money).

Dog coin supply curve

Declining inflation rate: This will result in an increase, fixed or reduced circulation per cycle due to a reduction in inflation. For example, Steem, its inflation rate drops by 0.5% per year until it reaches a permanent annual inflation rate of 0.95%, and the continuous token model used by Decentraland, although its inflation has not yet been activated.

Decrease in circulation: The number of cryptocurrencies generated per period (block, day, year) decreases over time. This will cause the inflation rate to decline exponentially. Release reductions often occur in PoW tokens, halving production or continually reducing block rewards.

More than 75% of the cryptocurrencies that use the reduced issuance policy are PoW tokens, and 80% of PoW tokens use a reduced issuance policy. For example, Bitcoin is halved every four years; while Monroe is characterized by a continual decrease in block rewards until it reaches 0.6 XMR, and in 2022, Monroe will eventually transition to a fixed permanent issuance mechanism (per block) The reward is 0.6 XMR).

Monroe coin supply curve

Dynamic issuance and inflation rate: The amount of cryptocurrency or inflation rate generated per period (block, day, year) depends on specific network conditions, such as the percentage of token collateral on the network. For example, Cosmos's monetary policy depends on the total amount of mortgages on the network (if the total network mortgage is below the target, the inflation rate rises, and if the total network mortgage is above the target, the inflation rate remains the same). (Blue Fox notes: This is a clever mechanism that encourages token holders to join the pledge)

Ethereum 2.0, based on the dynamic size of total network mortgages (the more supply is mortgaged, the higher the issuance rate, but the issuance rate is less than the mortgage rate, so the mortgager's yield is lower) and Komodo (the year generated by the mortgage) The upper limit of inflation is 5.1%, but it depends on the ratio of UTXO stored in the wallet to more than 10 KMD). (Blue Fox Note: Although the Etherfang 2.0 model has a higher pledge rate, the overall yield is lower, it tries to reach a balance, when too little, incentive pledge, when too much, incentives are used elsewhere.)

Fixed supply

Most cryptocurrencies with a fixed supply are non-native tokens, and do not have to use newly generated cryptocurrencies to motivate miners or verifiers to provide security for the network.

However, in some cases, even PoS and dPoS native tokens have a fixed supply.

In fact, there are other ways to motivate the verifier: transaction fees, pre-excavation rewards, and secondary token issuance. Waves rewards are another asset, and miners’ reward tokens and participants receive transaction fees. The Loom network will reward the Plasma chain certifier by distributing pre-extracted tokens to a reserve fund.

Deflationary monetary policy:

Unplanned deflationary monetary policy: Due to unplanned mechanisms, such as the quarterly destruction policy of the currency, the uncirculated supply is reduced over time: BNB supply equivalent to 20% of the profit of the company is destroyed every quarter until uncirculated supply Reach 100 million BNB (half of the initial supply).

For BNB, our model is based on various assumptions (cost and revenue structure, historical destruction analysis, future development, etc.). We estimate that by 2050, future token destruction will reach 600,000 BNB, and we use similar relative deflation for each source of supply (coin, angel investors, and 1CO participants).

BNB supply curve

Planned deflationary monetary policy: Due to planned mechanisms (including destruction, reduction of penalties, percentage of volume destruction), uncirculated supply decreases over time. BOMB tokens are an interesting experiment:

· There were initially 1 million Bombs.

· 1% of the transaction volume will be destroyed each time Bomb is transferred.

· Never create new Bomb tokens

As of now, more than 27,000 BOMB tokens have been destroyed.

Destroy and generate

Destruction and generation balance: To access the underlying services of the network, tokens are destroyed. The process of generating new tokens at each time (block, day, year) is independent of the token destruction process, and these tokens are assigned to the service provider. The percentage of newly generated tokens assigned to a particular service provider is equal to the percentage of tokens that are destroyed in order to access their services.

If 10% of the token is destroyed on behalf of a particular service provider, the service provider will receive 10% of the newly generated token. Factom is the first protocol to introduce a model for destruction and generation.

Other destroyed and generated models: There are different token destruction and generation models. For example, the supply of Maker is usually deflation (when the borrower pays a stable fee, the MKR token will be destroyed). So far, according to the data of Maker Tools, 1,558MKR has been destroyed, and the formula is: annual burning rate = (unpaid DAI supply * stable cost) / MKR price, exceeding 20,000 MKR (2% of initial supply). (Blue Fox notes: The total number of MKR tokens exceeds 1 million, of which more than 4,602 are destroyed by October 2nd.)

However, in the case of multi-collateral DAI, the new MKR can generate a bad debt through a failed auction contract. In addition, it is important to remember that some assets are likely to transition from inflation policy to deflationary policies.

For example, according to EIP1599, the ETH 2.0 mortgage award is likely to be lower than the transaction cost of destruction. EIP1599 proposes to replace the cost model of the “first price auction” in Ethereum with a mechanism to adjust the basic network fee according to network demand. The basic cost will be destroyed and the miner/mortgage can only keep a tip on a basic fee basis. This will lead to deflation, and the supply will be destroyed more than the generated amount.

Even the same asset does not always have the same distribution mechanism throughout its history. As mentioned above, Monroe will change from a declining issuance policy to a fixed issuance policy in 2022. Zcash launched a slow start mining, as well as an increase in the first 20,000 blocks (2 weeks), and then transitioned to a halving basis for derating (every 4 years).

Ethereum will transition from a fixed issuance policy to a dynamic issuance, and the scale of issuance will continue to decrease according to the proportion of total network mortgages. In the end, it could even become a deflationary asset. Changes in monetary policy may depend on sub-chain governance and, in some cases, on chain governance.

For example, EOS block producers voted to reduce the uncirculated inflation rate from 5% to 1%.

Supply ceiling

Another important aspect of the crypto-asset monetary policy is whether the supply has an upper limit (the largest hard-coded supply) or no upper limit (continuous issuance)? In our sample, 80% of the crypto assets have a fixed maximum supply.

Although the supply cap of Bitcoin will not be reached until 2140, other inflation assets are already very close to their supply ceiling. For example, Bitcoin Diamonds pre-died 14 million BCDs, and its premium has greatly accelerated the shift to the miner's fee-only structure, which should only occur around August 2024. The question is whether there will be enough incentives for miners to continue to protect the security of the network.

Bitcoin diamond supply curve

Seeing the supply of encrypted assets through these indicators will provide investors with one of the most basic and important basic valuation factors. Nowadays, in the field of encryption, people can't even accurately give the supply of assets, let alone calculate them.

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