How to Make a Digital Currency on a Blockchain Stable

TL;DR

This paper proposes minimal design modifications to blockchain-based digital currencies to automatically stabilize their prices, reduce volatility, and promote their use for payments by controlling supply and incentivizing behaviors.

Contribution

It introduces a novel set of simple, minimal changes to blockchain protocols that enable automatic price stabilization and discourage hoarding, enhancing currency stability and usability.

Findings

Basic design checks show potential for price stabilization.

Simulations suggest improved currency sustainability.

Proposed measures disincentivize hoarding behaviors.

Abstract

Bitcoin and other similar digital currencies on blockchains are not ideal means for payment, because their prices tend to go up in the long term (thus people are incentivized to hoard those currencies), and to fluctuate widely in the short term (thus people would want to avoid risks of losing values). The reason why those blockchain currencies based on proof of work are unstable may be found in their designs that the supplies of currencies do not respond to their positive and negative demand shocks, as the authors have formulated in our past work. Continuing from our past work, this paper proposes minimal changes to the design of blockchain currencies so that their market prices are automatically stabilized, absorbing both positive and negative demand shocks of the currencies by autonomously controlling their supplies. Those changes are: 1) limiting re-adjustment of proof-of-work targets, 2) making mining rewards variable according to the observed over-threshold changes of block intervals, and 3) enforcing negative interests to remove old coins in circulation. We have made basic design checks and evaluations of these measures through simple simulations. In addition to stabilization of prices, the proposed measures may have effects of making those currencies preferred means for payment by disincentivizing hoarding, and improving sustainability of the currency systems by making rewards to miners perpetual.