Would Friedman Burn your Tokens?

TL;DR

This paper develops a framework for optimal cryptocurrency token supply policies, showing they align with the Friedman rule and can be implemented algorithmically through various mechanisms like block rewards and taxation.

Contribution

It introduces a novel economic framework for determining and implementing optimal token supply policies in cryptocurrencies, linking them to classical monetary theory.

Findings

Optimal policy aligns with the Friedman rule.

Policy depends on risk-free rate and platform growth.

Implementation feasible via supply adjustments, taxation, and oracles.

Abstract

Cryptocurrencies come with a variety of tokenomic policies as well as aspirations of desirable monetary characteristics that have been described by proponents as 'sound money' or even 'ultra sound money.' These propositions are typically devoid of economic analysis so it is a pertinent question how such aspirations fit in the wider context of monetary economic theory. In this work, we develop a framework that determines the optimal token supply policy of a cryptocurrency, as well as investigate how such policy may be algorithmically implemented. Our findings suggest that the optimal policy complies with the Friedman rule and it is dependent on the risk free rate, as well as the growth of the cryptocurrency platform. Furthermore, we demonstrate a wide set of conditions under which such policy can be implemented via contractions and expansions of token supply that can be realized algorithmically with block rewards, taxation of consumption and burning the proceeds, and blockchain oracles.