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

Sunday, January 7, 2018

Ethereum token with adjustable crypto-monetary policy

To realize tokens with adjustable monetary policy is actually pretty much a challenge. One way of doing it is to create something like a mintable token that has an explicit function called mint that is able to create new tokens on a certain account. However this structure actually does serve well in certain use cases, like:
- if the newly generated tokens should be distributed somehow to all of the possible accounts
- if the monetary supply is not only to be increased but, we should be able to decreased as well.

In such situations, perhaps another algorithm might be feasible, that has the analogy in the classical banking systems. Let we imagine as a simple situation that we have actually two monetary basis, M0 is practically the amount of cash in the system and M1 is the amount of electronic money in the system. In the most simple situation, M1 is based on the reserve rates of the banks that is identified by the central banks, so simply put: 

M1 = m * M0, where m is a multiplication factor  

Having this structure, tokens might be built up directly that captures this functionality in a direct way:
- balance: balance as an internal mapping would always store the M0 value, however a balance function can be derived that gives the M1 value back. 
- transfer: transfer should always be regarded to the M1 value, based on the current m multiplication factor, balance M0 balance should be as M1/m adjusted. 

Certainly, it a pretty good question how such a token could work from an end-user perspective. As certainly, having more token on the balance is pretty nice to have, having less is probably not really accepted. On the other hand, people might explicitly distinguish between M0 and M1 balance, which might cause some less welcoming economic behaviors, like spending more if the m value is high, but spending less if it is low.