Tokenomics: Optimal Monetary and Fee Policies

36 Pages Posted: 10 Oct 2022

See all articles by Urban J. Jermann

Urban J. Jermann

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

Haotian Xiang

Guanghua School of Management, Peking University

Date Written: October 3, 2022

Abstract

We determine optimal token issuance and fee rates for issuers with varying degrees of commitment. For the polar cases of no commitment (Markov perfect) and full commitment (Ramsey) we study the conditions under which equilibriums exist. Assuming convex maintenance costs guarantees well-defined equilibriums, and we show that under some conditions a Ramsey issuer, in steady state, has lower money growth and lower fees than a Markov-perfect issuer. We show that a Ramsey issuer who maximizes profits, after the initial period, makes choices that maximize the utility value of all tokens. We present a model where commitment is probabilistic and solve analytically for steady states. Money growth and fees are declining in the commitment probability. Matching the annual money supply growth rates of 5% or less characterizing several large projects that have reached some maturity requires commitment probabilities in a narrow range with values above 0.9.

Keywords: Cryptocurrencies, money growth rates, commitment

JEL Classification: E52, G32

Suggested Citation

Jermann, Urban J. and Xiang, Haotian, Tokenomics: Optimal Monetary and Fee Policies (October 3, 2022). Available at SSRN: https://ssrn.com/abstract=4236859 or http://dx.doi.org/10.2139/ssrn.4236859

Urban J. Jermann (Contact Author)

University of Pennsylvania - Finance Department ( email )

The Wharton School
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Philadelphia, PA 19104
United States
215-898-4184 (Phone)
215-898-6200 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Haotian Xiang

Guanghua School of Management, Peking University ( email )

Beijing
China

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