Alonso de Gortari
Alonso de Gortari 5 minutes reading from Bitcoin

Between $BTC and $BTC: Can FEE Revolutionize Tokens?

1: lots happening today -- here's some thoughts on sustainable tokenomics to clear your mind

in particular, can a finite supply token like BTC ๐ŸŸ  be economically viable in the long-run? these ideas influence @SuiNetwork tokenomics design ๐Ÿงต๐Ÿ‘‡

2: when building out a network's incentives, you need to align interests between

- token holders ๐Ÿช™ - users ๐Ÿ‘ฉโ€๐Ÿ’ป - network operators ๐Ÿ–ฅ๏ธ

3: we've written in the past about different monetary rules -- what are the trade-offs between finite supply and inflationary regimes?

but conditional on the monetary rule, the network still needs to be economically viable๐Ÿ•ด๏ธโ€โ™€๏ธ๐Ÿซฐ

Alonso de Gortari on Twitter

4: let's think about this through BTC, where: - long-run token supply capped at 21 million tokens - miners get rewarded with new BTC + transaction fees - most BTC has already been minted, which means transactions fees will need to dominate in future

5: a simple way of evaluating "economic viability" is - first, determine how much capital is needed by network operators to remain viable

- second, design mechanism to collect and distribute capital

for sake of argument, assume BTC miners need 1% of market cap to break even ๐Ÿง

6: here's three different mechanisms

I. INFLATION REGIME: you could modify BTC monetary rule so that 1% of additional BTC is minted each year and paid out to miners. over time, supply increases by 1% per year. ๐Ÿ’น

7:

II. ASSETS UNDER MANAGEMENT REGIME: instead, you could charge all BTC holders a 1% yearly tax and redistribute revenue to miners. over time, supply remains fixed at 21 million tokens. ๐Ÿฆ

8:

III. TRANSACTION FEE REGIME: or you could assume

each token has coin velocity of V, and set gas fees X such that: V * X = 1% of BTC supply ๐Ÿ’ณ

this is effectively BTC's current long-run model. the problem is V is unknown, X is endogenous. so unclear what V * X equals. ๐Ÿ™„

9: so here's a cool result: ๐Ÿ—’๏ธ - both the I. INFLATIONARY and II. AUM regimes are actually equivalent. miners receive the same revenue, and BTC holders face the same dilution. - III. TRANSACTION FEES is also equivalent, but only if you get gas fees right, which is hard to do.

10: there are a few hidden assumptions here, but at a high-level this is a positive result. because it means there are several ways to making BTC economically-viable in the long-run. ๐ŸŸ ๐ŸŽ‡๐Ÿฅณ

11: while the three models can be roughly equivalent, there is one big difference.

the I. INFLATIONARY and II. AUM models effectively tax BTC token holders while the III. TRANSACTION FEE model taxes BTC users. these are not necessarily the same entities. ๐Ÿช™๐Ÿ‘ฉโ€๐Ÿ’ป๐Ÿ–ฅ๏ธ

12: that said, the equivalence shows BTC's current model is probably the most complex one because it depends on an extra parameter (token velocity V) and that makes it really hard to model correctly. ๐Ÿซฃ

13: moreover, while the I. INFLATIONARY regime has faced a lot of backlash, it's comforting to know that its economic effects are actually roughly similar to the

II. AUM regime. this last one is quite reasonable, imho. ๐Ÿ˜ฎโ€๐Ÿ’จ๐Ÿค—

14: ultimately, favoring one model over the other kinda depends on your take on BTC.

- if you think BTC is digital gold, it makes sense to have either I. INFLATIONARY or II. AUM. ๐Ÿช™ - if you think BTC is a currency, then III. TRANSACTION FEES is defensible. ๐Ÿ’ณ

15: we use these ideas when designing general-purpose blockchains like @SuiNetwork. i'd say right now or model is closer to III. TRANSACTION FEES because we are a high-throughput chain. ๐Ÿ’ณ

but who knows, the space is evolving and we'll see what the future brings๐Ÿ˜ƒ๐Ÿ’ซ

This post is based on this twitter thread.

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