Crypto Monetary Policies
The fine art of token supply in crypto
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Written by Florent Moulin
We’ve been focused on cryptoasset supply curves since day one at Messari.
For the past six months in particular, we’ve spent time building full liquid supply curves for the top ~100 assets. Our work has confirmed our initial intuitions: the variety of approaches taken across cryptoasset projects requires a more precise — if novel — way of defining and categorizing outstanding, liquid and circulating supply.
Our current Cryptoasset Supply Method defines five tranches of supply: maximum, diluted, outstanding, liquid, and circulating.
Liquid and diluted (Y2050, Y+10) supplies are already included on our OnChainFX dashboard. We’ve been working feverishly behind the scenes to add maximum, outstanding, and circulating supply metrics for the rest of the top 100 assets.
This framework is useful to understand the varied nature of cryptoasset supply management. But it doesn’t tell us how this observable supply, be it circulating, liquid or outstanding, has been or will be generated or destroyed over time.
Indeed, we can go one step further and classify and measure other aspects of supply:
- Launch Style (largely inspired by Nic Carter’s master’s thesis, “A Cross-Sectional Overview of Cryptoasset Governance and Implications for Investors”) defines how the first coins were issued and distributed.
- Initial Supply defines how many coins were initially issued and how these coins were allocated among different stakeholders (investors, founders and project operation budget, community airdrop, premined rewards).
- Emission type defines the monetary policy ruling the issuance of new coins for a given cryptoasset.
- Supply cap defines whether a cryptoasset supply is capped (maximum hard-coded supply) or uncapped (constant emission).
Now that we have defined those categories, let’s take a look at the variety of monetary policies among the top 80 cryptoassets.
I) Launch Style and Initial Supply
Instamines and stealth mine: Refers to a situation best defined by Nic Carter himself: “founders used asymmetric advantages to mine large percentages of the coin at launch or failed to announce the inception of the coin, thus mining stealthily.” Examples include Bytecoin and Steem.
Built-in centralized treasury: The founding team / foundation receives on-going mining rewards to fund the development of the project (% of block rewards or superblocks). This does not include decentralized treasury funding such as Decred or Bitshares. Examples include Zcash and Zcoin.
Airdrop: Part of the initial supply was distributed to the community either for free or in exchange of small tasks. These coins are often airdropped to coin holders from large chains such as Bitcoin, allowing for a fair, distributed and transparent distribution. Examples include Decred, Nano and Ardor.
Centralized Distribution: Some of the coins may be airdropped, sold to private investors or distributed to partners through time but the entirety of the initial supply is managed centrally. Examples include XRP and Ontology.
Ledger Fork: The owners of the original cryptoasset receive proportional amounts of the new cryptocurrency created in the contentious hard fork. Examples include Bitcoin Cash and Ethereum Classic. Sometimes, the fork includes an additional premine or stealth mine to cover fork costs and future development expenses and reward the team. Examples include Bitcoin Gold and Bitcoin Diamond.
Below is the distribution of launch styles among top 80 assets by Liquid Market Cap:
Of course, some assets might feature a mix of different launch styles such as Private Sale and Crowdsale, Crowdsale and Airdrop, Ledger Fork and Built-in treasury etc.
Yet, it’s worth noting that only 1 in 10 top 80 cryptoasset was “fairly launched.” More than half of them sold tokens to investors via a crowdsale.
The built-in centralized treasury model a la Zcash isn’t widely used among the top 80 assets but other projects like Veil have also implemented a similar treasury model, with superblocks rewards instead of percent of block rewards.
Apart from pure Fair Launch assets and Ledger Forks without Premine nor built-in treasury models, almost all projects allocated parts of their initial supply or on-going mining rewards to the founding team and project operation treasuries.
On average, those projects even allocated as much as 40% of the initial supply to Founders and Project Operation treasuries. The other distribution categories are investors (both from private sales and crowdsales) and Airdrop and premined rewards. Premined rewards are mining or staking rewards that have been premined and are held in treasury to be distributed throughout the years. Waltonchain, GXChain and AElf feature this kind of premined rewards.
II) Emission Type and supply cap
Inflationary Monetary Policy:
The on-going emission structure of a cryptoasset can be defined based on issuance (absolute amount of coins generated) or inflation rate (percent of growth of the outstanding supply).
Increasing issuance: The amount of coins generated per period (block, day, year) increases through time. This is the case for Waltonchain that features a progressive mining reward program. In Year Six, Waltonchain will transition from an increasing issuance policy to a decreasing issuance policy.
Fixed inflation rate: Also leads to an increase of coins generated per period through time, since the monetary base grows. Examples of fixed inflation rate include EOS and Aion which both feature a 1% yearly inflation rate.
Decreasing inflation rate: Depending on the reduction rate of inflation, this can lead to an increasing, fixed or decreasing issuance per period. Examples include Steem whose inflation rate decreases by 0.5% per year until it reaches a perpetual 0.95% yearly inflation rate, and Decentraland continuous token model, although the inflation hasn’t yet been activated.
Decreasing Issuance: The amount of coins generated per period (block, day, year), decreases through time. This leads to an exponential decrease of the inflation rate. The issuance reduction is frequent for PoW coins with halvings and can also be implemented through a constantly decreasing block reward. Over 75% of the coins that feature a decreasing issuance policy are PoW coins and 80% of PoW coins feature a decreasing issuance policy. Examples include Bitcoin, with a 4-years halving interval, and Monero which features a constantly decreasing block reward until the reward reaches 0.6 XMR, in 2022, when Monero will eventually transition to a fixed perpetual issuance (0.6 XMR per block).
Dynamic Issuance and Inflation rate: The amount of coins generated per period (block, day, year) or the inflation rate, depend on specific network conditions such as the % of network staking. Examples include Cosmos whose monetary policy target a total network stake (if the total network stake is lower than the target, the inflation rate increases, if the total network stake is higher than the target, the inflation rate stays fixed), Ethereum 2.0 with a sliding scale issuance based on total network stake (the more supply staked, the higher the issuance rate, but the issuance rate grows less than the stake, thus the yield becomes lower for stakers) and Komodo (the inflation generated by staking is capped at 5.1% APR, but depends on the proportion of UTXO > 10 KMD stored in wallets).
Most of the coins that feature a fixed supply are non-native tokens that do not have to incentivize miners or validators with newly generated coins to provide security to the network.
However, in some cases, even PoS and dPoS native tokens have a fixed supply.
Indeed, there exist other ways to incentivize validators: transaction fees, premined rewards and secondary token issuance. Waves’ rewards are denominated in another asset, the Miners Reward Token and participants also receive transaction fees. Loom Network will reward PlasmaChain Validators by distributing premined tokens that had been allocated to a reserve fund.
Deflationary Monetary Policy:
Non-programmatic deflationary monetary policy: The outstanding supply shrinks through time due to non-programmatic mechanisms such as Binance quarterly burn policy: the equivalent BNB supply of 20% of Binance profit is burned each quarter until the outstanding supply reaches 100 million BNB (half of the initial supply). The diluted supply of those coins is really hard to forecast. For BNB our model relies on a variety of assumptions (costs and revenue structure, previous burn analysis, upcoming development). We estimated future coinburns to include 600,000 BNB, and we applied a similar relative deflation to each supply tranche (Binance, Angel Investors and ICO Participants) until 2050.
Programmatic deflationary monetary policy: The outstanding supply shrinks through time due to programmatic mechanism (Fees burnt, slashing penalties, % of transaction value burnt). The BOMB token is an interesting experiment of this kind:
- There were originally 1,000,000 Bomb in existence.
- Each time a Bomb is transferred, 1% of the transaction is destroyed.
- There will never be newly minted Bomb.
So far, over 27,000 BOMB tokens have been destroyed.
Burn and Mint
Burn and Mint equilibrium: Tokens are burned to access an underlying service of the network. Independently of the token burning process, the protocol mints new tokens per period (block, day, year) and allocates these tokens to service providers. The percent of newly minted tokens allocated to a given service provider is equal to the percent of tokens burnt to access its services. If 10% of tokens burnt were in the name of a given service provider, this service provider will receive 10% of newly minted tokens. Factom was the first protocol to introduce a Burn and Mint equilibrium model. Kyle Samani from Multicoin Capital analyzed this model in its article “New Models for Utility Tokens”.
Other Burn and Mint models: There exists different burn and mint models. Maker supply for example is generally deflationary (MKR tokens are burnt when borrowers pay the stability fee). So far, according to Maker Tools, 1,558 MKR have been burned and the annual burn rate, calculated as (Outstanding DAI Supply * Stability Fee) / MKR price, is over 20,000 MKR (2% of the initial supply). However, in the case of Multi Collateral Dai, new MKR could be minted through the flop auction contract to cover bad debt. Moreover, it’s important to have in mind that some assets could well transition from an inflationary policy to a deflationary policy. For example, ETH 2.0 staking rewards could well be under transaction fees burnt due to EIP 1599 where the idea is to replace the first price auction” fee model in Ethereum by a mechanism that adjusts a base network fee based on network demand. The BASEFEE would be burned and miners / stakers would only get to keep the tips, on top of the BASEFEE. This would lead to a deflationary situation where more supply is destroyed than generated.
A given asset does not always feature the same emission type throughout its history. As written above, Monero will go from a decreasing issuance policy to a fixed issuance policy in 2022. Zcash was launched with a slow-start mining and an increasing issuance for the first 20,000 blocks (2 weeks), before transitioning to an halving-based decreasing issuance (every 4 years). Ethereum will transition from a fixed issuance policy to a dynamic issuance with a sliding scale based on total network stake. Eventually, it could even become a deflationary asset. The monetary policy changes may be determined by off-chain governance and in some cases on-chain governance. For example, EOS block producers voted to reduce the outstanding inflation rate from 5% to 1% last month. At Messari we are tracking closely these changes and are constantly updating our supply dilution forecasts.
Another important aspect of a cryptoasset monetary policy is whether the supply is capped (maximum hard-coded supply) or uncapped (constant emission). 80% of the cryptoassets in our sample have a defined maximum supply.
While Bitcoin supply cap will only be reached in 2140, other inflationary assets are already very close from reaching their supply cap. Bitcoin Diamond’s premine of 14 million BCD has for example drastically accelerated the transition to a fee-only reward structure for miners, which should happen around August 2024. The question remains if there will be enough incentives for miners to keep securing the chain from there.
Being able to see cryptoasset supply across these metrics will provide investors with one of the most basic and important fundamental valuation components. The ability to precisely even talk about supply across assets, let alone calculate it, is sorely lacking in crypto today.
At Messari, we’re building as quickly as we can towards implementing our supply frameworks across our products. In the coming months, we’ll be surfacing our data on launch style, initial supply, emission type and supply cap on both OCFX and asset profiles.