Highlights

Abstract

Keywords

۱٫ Introduction

۲٫ Blockchain currency based on proof of work

۳٫ Market price mechanism of a blockchain currency based on proof of work

۴٫ Measures against positive demand shock

۵٫ Measures against negative demand shock

۶٫ Simulation

۷٫ Discussion

۸٫ Related work

۹٫ Conclusions

Declaration of Competing Interest

References

Vitae

Abstract

Bitcoin and other similar digital currencies on blockchains are not ideal means for payment, because their prices tend to go up in the long term (thus people are incentivized to hoard those currencies), and to fluctuate widely in the short term (thus people would want to avoid risks of losing values).

The reason why those blockchain currencies based on proof of work are unstable may be found in their designs that the supplies of currencies do not respond to their positive and negative demand shocks, as the authors have formulated in our past work.

Continuing from our past work, this paper proposes minimal changes to the design of blockchain currencies so that their market prices are automatically stabilized, absorbing both positive and negative demand shocks of the currencies by autonomously controlling their supplies. Those changes are: 1) limiting re-adjustment of proof-of-work targets, 2) making mining rewards variable according to the observed over-threshold changes of block intervals, and 3) enforcing negative interests to remove old coins in circulation. We have made basic design checks and evaluations of these measures through simple simulations.

In addition to stabilization of prices, the proposed measures may have effects of making those currencies preferred means for payment by disincentivizing hoarding, and improving sustainability of the currency systems by making rewards to miners perpetual.

۱٫ Introduction

Digital currencies such as BTC on Bitcoin [1] blockchain and Ether on Ethereum [2] blockchain are now well-known, and are accepted means for payment in some countries. However, these currencies are not ideal as methods of payment because of instability of their market prices. Their prices tend to go up in the long term, and to fluctuate widely in the short term. Therefore, people are incentivized to hoard those currencies, and would want to avoid risks of losing values by using them for payment. Stability of their market prices needs to be achieved if these currencies are intended to be used as monetary media instead of as investment products.

In the authors’ past work [3] (an improved version of the discussion paper with the same title), we have formulated the mechanism of instability by analyzing the economics of those blockchain currencies based on proof of work. We have also proposed measures to stabilize the market prices of such currencies. The contributions of this paper are refinements of the work as follows:

۱٫ We have refined the formulation of the economic model of blockchain currencies based on proof of work, using abstractions closer to actual currency system designs, and
۲٫ We have refined our proposed measures for stabilization of market prices of the currencies that would absorb both positive and negative demand shocks.