Tokenomics: Optimal Monetary and Fee Policies

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