Examining Kin’s Inflation Management Proposals

Personal ruminations of a Kin enthusiast

Inflation is a funny thing. Too little and you miss the intended effect, too much and it starts to hurt (like whiskey). History is ripe with stories of empires that rose and fell based on their inflation management strategies.

Properly managed, inflation works well coupled to economic growth. It keeps the prices of goods and services constant, encourages spending and promotes growth. In crypto, it is the incentive that drives miners, minters and for kin, developers to grow economies.

Managing inflation through the KRE cap

Managing inflation helps to control kin’s price point, and make rewards more worthwhile for developers.

Investors/ Developers compete to obtain Kin

Kin’s price point comes from the tension in exchanges between investors and developers. Increasing the tension between these two creates a higher, stable price. The key to this is to manage:

1. Investor perception (marketing/ branding)
2. Developer incentives (KRE incentives)
3. Inflation (KRE cap)

Previously, we examined a framework to rank KRE incentives. Will will now consider a way to rank KRE inflation proposals.

Begin with the end in mind (Z)

At the heart of it, kin flowing in the vectors below is always a good thing. X incentivizes developers, and Y and C cause Z to increase (tension).

Ideal vector flows of Kin

The vector equation is summarized below:

Y + C - X = Z

As long as the sum of Y and C is greater than KRE distribution (X), kin needs to flow from exchanges (Z) to make up the difference. If users demand a lot of kin, and developers need to hold kin, they have to obtain more directly from exchanges.

Simply put, Z is the indicator to watch. A high value of Z means there is enough tension from the left to pull Kin from exchanges.

Note how reducing X automatically increases Z

There have been several proposals at managing X to this effect:

1. Directly throttle X : Cap it to USD 5,000/ KIN 250 MM per day
2. Throttle X in relation to Z: Use an ‘absorbency’ formula
3. Eliminate X by issuing a stable-coin instead of KIN

Are X and Z the only considerations?

Developers have legitimate concerns about X. If you allow X to be too high, you get too much inflation. If you allow too little, you dis-incentivize developers. Outside of issuing a stable coin, what else can you do?

When examining suggestions, we must ask ourselves:

1. How does this affect Z
2. How does this affect developers
3. How simple is the equation

A balanced approach

Consider the equation below per app i that receives a total KRE_reward per month:

KRE_adjusted = KRE_reward * (Y + C)/X

The equation throttles the reward for each individual app based on how it manages X, Y and C. For example, if app i received 100 KIN last month (X) and sent 50 KIN to cold storage (C) and 50 KIN to its users (Y), KRE_adjusted would be = to KRE_reward (no throttle).

If, however it sent most of its kin to exchanges, the adjusted reward this month would be much lower. This equation releases Kin to individual apps, based on how they individually manage inflation.

To balance this further, and to give developers time to adjust to this method, we can add the following parameter:

KRE_adjusted = KRE_reward * max[(Y + C)/X , 0.5]

This puts a floor to the throttle, meaning that the lowest a reward can be throttled to is 0.5 of KRE_reward. This is similar to Kik’s proposed adjusted cap to reduce KRE inflation by half. However, it does not affect apps with little to no inflation. Apps with deflation actually gain.

This value can be negotiated with developers, with the goal of lowering it over time. Theoretically, you could allow developers to earn more than their original reward, if they can get Y and C high enough.

The method has the following advantages:

1. Self adjusts rewards monthly, per app
2. Empowers developers to control their own inflation rates
3. Rewards performant apps for deflation (Y + C > X)
4. Allows for negotiation of incentives over time

Conclusion

A lot of great suggestions have been proposed to manage inflation. While examining them, the factors to consider are:

1. To what degree will the proposal increase Z
2. How will the proposal affect the incentivization of developers
3. How simple is the equation