...by Daniel Szego
"Simplicity is the ultimate sophistication."
Leonardo da Vinci

Monday, November 6, 2017

On the money multiplication of a cryptocurrencies

Cryptocurrencies are usually heavily criticized that they are not heaving the same characteristic of the traditional monetary systems, namely the money supply multiplication of the bank system. However, that should not necessarily be always that way. 

Let we suppose the following idea: considering an ICO, some tokens will probably reach the necessary success, implying the necessary network effect, price stability and liquidity. That means that these tokens will be probably part of the monetary supply. In this sense a successfully executed  ICO might extend the total monetary crypto supply, as a consequence it works as a crypto multiplication. Actually, in some sense, the system works similarly as the traditional banking system, the money is not multiplicated just for fun, it is used to be given for financing new companies, or new projects. 

The real question if the multiplication can be controlled in centralized or decentralized way based on the token supply and ignoring the such concepts as interest rates for the first run. Let we imagine that the issuance of the new tokens are controlled by some incentives, like with taxes. In this way there is a possibility to control the whole economy, like:

1. In case the economy is overheated, the ICO-s can be made more difficult or highly taxed, decreasing the general demand for new ICO-s and making the increase of the monetary supply less intensive. 

2. In case of depression, the ICO-s can be made more easy to do, like with less taxed, meaning that the demand for new ICO-s will increase among with the general monetary supply. 

Certainly, there are some elements of the model that might be fine-tuned. 
- It is a little bit misleading that the general monetary supply is not only represented by one token but with a several ones. It is a general question if there is a model that assumes only one token. 
- As the general monetary supply can be easily increased, it is more difficult to actually decrease the supply. 
- The model still does not capture the time perspective of a payment, like giving a loan and paying back in a later timepoint. It is actually an open question if it is actually a general problem.