Optimal Allocation of Excess Blockchain Network Token Funds

Distribute? Burn? Donate to a WPS?

Introduction

Your blockchain network has some percentage of inflation, or maybe it offers services, such as the EOS premium name bids and RAM trading fees, etc. What ought to be done with excess system funds in your blockchain network to maximize positive impact on the value of the blockchain? You could burn it, you could distribute it proportionally to token stakers, or it could be distributed through a WPS or foundation, or something else.

Burning

Burning is deflation, which is effectively a “perfect” redistribution of value back to all holders of the token proportional to the amount of tokens they hold. This additional value takes the form of upward pressure on the price of the token.

Direct Redistribution to Stakers

Direct payment back to the stakers of your token is similar to burning, except that those with stake are more likely to invest the revenue back into the network than the average token holder of arbitrary conviction. Therefore this seems preferential to burning, however, each token transfer has a cost, not only in transaction fees, but also in tax obligations. This friction causes some value to be permanently lost.

The Magic of a Flexible Supply

Messing with the total supply of an asset feels like magic, in that it effectively instantly redistributes value across a network of arbitrary size. In computer science terms, it’s algorithmic complexity is O(1), or constant, as opposed to redistribution via transfer, which is O(n), or linear.

Donation to a WPS

So, is there a O(1) way to redistribute value proportionally to those with stake? Donating funds to a sufficiently uncapturable WPS controlled by coin-voting gets close. The WPS will behave beneficially to those who control it, which are the stakers.

The Assumption of Uncapturability

Uncapturability is, however, a high bar, given that wealth accumulation follows a pareto distribution. Economic designs which attempt to decentralize political control of systems in spite of the pareto principle is an ongoing field of research. Assuming uncapturability is solvable, donation to a WPS is a direct upgrade to other mechanics (burning or direct payment) for maximizing the impact that excess funds can have in growing the total value of a blockchain network. Minimal value is lost in friction, and value is distributed roughly proportionally to those who are staking the network token.

Optimize for Impact

Impact can be measured by the rate of growth in preference of the network asset over all other assets (price) over a given time period. The function which represents impact for a given investment of size N is likely logarithmic; there would be diminishing returns on the impact of each additional unit of investment into a network. The challenge for the free market is therefore to follow the changing optimum rate of inflation-fueled redistribution to achieve maximum network growth of network value.