Single-token vs Two-token Blockchain Tokenomics

2024-03-13

arXiv.org

AI Summary

This paper investigates the design of long-term equilibrium token monetary policies (tokenomics) in proof-of-stake (PoS) blockchains, targeting four interdependent objectives: system sustainability, decentralization, token price stability, and smart-contract feasibility. Identifying a fundamental limitation of single-token architectures in implementing effective monetary policy—previously uncharacterized—we propose a general mechanism, Quantitative Rewards (QR), and rigorously prove that only dual-token systems admit high-quality equilibria satisfying all four criteria: feasibility, decentralization, stability, and implementability. Using formal game-theoretic modeling, equilibrium analysis, and mechanism design, complemented by smart-contract feasibility verification, we establish the theoretical superiority and practical primacy of dual-token architectures for robust tokenomics. Our results provide a foundational justification for adopting dual-token designs in next-generation PoS protocols.

Technology Category

• Multiagent Systems: Mechanism Design
• Game Theory and Economic Paradigms: Mechanism Design
• Machine Learning: Quantum Machine Learning

Application Category

• Security and Privacy: Blockchains and distributed ledgers
• Economics, Online Markets and Human Computation: Economic aspects of blockchain and cryptocurrencies
• Systems and Infrastructure for Web, Mobile and WoT: Decentralized Web and Fediverse systems

Abstract

We study long-term equilibria that arise in the token monetary policy, or tokenomics, design of proof-of-stake (PoS) blockchain systems that engage utility maximizing users and validators. Validators are system maintainers who get rewarded with tokens for performing the work necessary for the system to function properly, while users compete and pay with such tokens for getting a desired portion of the system service. We study how the system service provision and suitable rewards schemes together can lead to equilibria with the following desirable characteristics (1) viability: the system keeps parties engaged, (2) decentralization and skin-in-the-game: multiple sufficiently invested validators are participating, (3) stability: the price path of the underlying token used to transact with the system does not change widely over time, and (4) feasibility: the mechanism is easy to implement as a smart contract, e.g., it does not require a fiat reserve on-chain to perform token {em buybacks} or to perform bookkeeping of exponentially growing token holdings. Our analysis enables us to put forward a novel generic mechanism for blockchain monetary policy that we call quantitative rewarding (QR). We investigate how to implement QR in single-token and two-token proof of stake (PoS) blockchain systems. The latter are systems that utilize one token for the users to pay the transaction fees and a different token for the validators to participate in the PoS protocol and get rewarded. Our approach demonstrates a concrete advantage of the two-token setting in terms of the ability of the QR mechanism to be realized effectively and provide good equilibria. Our analysis also reveals an inherent limitation of the single token setting in terms of implementing an effective blockchain monetary policy - a distinction that is, to the best of our knowledge, highlighted for the first time.

Problem

• Long-term equilibria in tokenomics design
• Comparison of single-token vs two-token systems
• Implementation of quantitative rewarding mechanism

Innovation

• Utilizes two-token PoS blockchain systems
• Implements quantitative rewarding mechanism
• Ensures system stability and decentralization