EthCC 2: Cassidy Daly

good I thank you for your patience and I'm gonna go ahead and get started so this talk is a little bit more on the basic side but I feel like it's important to bring it back to basics sometimes I hope that it doesn't feel condescending in any way to go back and say what is inflation really but I think it's important to go back sometimes and say if I can really truly understand this basic concept then I can really grow a lot further from there I apologize that I I wanted to have a more interactive blog post ready for you to to play with so that's what this slide is but at this link I will publish it very shortly and you can follow along and go through some of the the demo yourself also on on Twitter just at Cassidy daily I have a Google sheet linked there for you so you can go ahead and open that up if you'd like and and start playing with the demo and hopefully the demo will make a little bit more sense once we go through this presentation so what are the questions that I want to answer for you today what is inflation what is the downside of inflation so what are the negative aspects of it that we would like to avoid but then what are the positive outcomes of a growing money supply so specifically then taking that from traditional economics into token economics how can a growing token supply really support the growth of a token based economy and then what are some of the the benefits and vulnerabilities from there when we use something like a growing token supply in a token economy so what is inflation really one definition is a fall in the purchasing power of money but what that really means is that it's the growth of the money supply less the growth of the economy so oftentimes people refer to inflation when they really mean the growth of the money supply and there are two very different things actually so it's really important to take that into account and just a really funny infographic to help you understand this so if we are increasing the money supply of the network where we're hopefully getting that money into the hands of consumers and when they have more money they spend more money that makes prices go up but when prices grow up and you have the same amount of money in your pocket you can't buy as many things so a really simple example I'd say imagine you are a poor college student and you have a budget of $15 a day that you can spend on food today you already spent $14 so you only have a dollar left and you're super hungry and you just got out of class and you want to buy some food but there's a pizza place around the corner and you can buy a pizza for a dollar that's great so you're gonna buy that pizza today but imagine that there was inflation a fall in the purchasing power of your money what that would really look like is that the pizza after the inflation might cost a dollar 50 and your budget for the day was still only $1 because your wages didn't go up your amount of budget didn't go up so now the pizza is 150 and you only have $1 so now you just have to go to sleep hungry that's a very simple explanation but I hope it really drives the point home that the inflation is very different than just the growth and the money supply so what ends up happening if prices go up what is the next step for you in that example well generally what ends up happening is that you ask for a growth in your wages you say hey the pizza price went up to a dollar 50 boss I'd like to make more I'd like a raise so generally what you find in economies is when prices go up wages also go up and then you end up spending even more money so this can create a loop actually where prices are going up you're asking for a raise and you spend more money so prices go up again and this is what's known as an inflationary spiral which is definitely something that that you'd like to avoid something that seems kind of easy to avoid actually but it's actually quite hard in practice and the reason for that is who is in control of trying to control this inflation but just to reiterate the growth of the money supply versus inflation itself so this is a graph of money supply over prices and the equilibrium interest rate so if you see M s over P money supply over the price if you grow the money supply it's it's actually it's actually only growing one side of this equation and it's actually the money supply over the price that's important in traditional economies it's the central bank that's responsible for increasing and decreasing the money supply so you could think of it as printing or burning money although it's actually the Treasury that's really in control of printing and burning physical money but the objective of central banks really is to ensure the financial stability and the way that they do this in an economy they have two tools that that are known as the transmission mechanism for the central bank the way that they're actually able to impact inflation in the economy and those two tools that they have are printing money which is really buying assets actually and so they buy up things like mortgage-backed securities and on the other side controlling the interest rate that they charge to banks and the problem in controlling inflation in an economy is that this transmission mechanism of what the central bank actually has control of and getting money into your pocket is a little bit uncertain I would say broken and I hesitate to say broken because it's not necessarily that it's broken it's just not efficient and it doesn't really work in practice so it's something that central banks struggle with and and lots of research has done on and how exactly this tool can get money into your pocket but that is the real problem there and that is why although it can be beneficial to have inflation and although there are the downsides of an inflationary spiral and we're aware of these things and we know how to fix them our ability to fix them is quite limited so taking this into a token economy and why would you want to to introduce something that introduces financial instability into your token economy and the reason that you would want to do this is actually to enhance the security of that token based economy and to pay for the work that is done within that economy with this growing token supply and I say growing token supply not inflationary token supply although many times it's used inflationary token supply but I'd like it to get you into the habit of saying it's the growth of the token supply that we're talking about here actually and and if you think about a token economy that is growing where many more users are coming onto the platform many more transactions are happening there's actually likely going to be deflation in that token economy because you have a much higher growth of the value of the token economy and and likely a much lower growth of the actual token supply that's existing so even if you have a token supply that's growing if your token economy is growing at a much faster rate you might even have a growth in the value of each individual token and so what what isn't important to do with these tokens that you're minting um and I think I think it's important to understand what is the work that you want to get done in your system and where that work is being done is where you're capturing security in your system as well so you can pay for the work that is done let's imagine a token economy where you have blockchain validators and you're paying them to validate transactions you can use both the transaction fee but you can also use a growing token supply to pay validators and it's actually the question what is the optimum here for the balance of the transaction fee and the growing token supplied to pay these validators for the work that they're doing in the system so that's what's shown here as the deadweight loss and the idea there is really that if you were to pay for everything only in transaction fees the equilibrium that you would get to in terms of transaction load in that economy would actually be lower than optimum and you could raise you could achieve a higher transaction load in that same system if you are paying those validators in both transaction fees as well as a growing token supply so I think there are a lot of reasons to start thinking about the fact that you want to introduce a growing token supply into your system but what are the things to really keep in mind when you're actually wanting to implement this I think it's important to understand who you're actually targeting here who is doing the work if you actually need to pay them for the security in your system or is the security actually exogenously in' is it exogenous from your network itself and it's something that you can rely on some other platforms some other core chain for that security then the question there is do you really need to have an inflationary token supply in that case another question from there is say you decide that you actually do want to use a growing token supply to pay for this security to pay for the work that is done and making sure that this supply is actually paying for that security so what I mean by this is really not having something like a dividend in your token economy so not just a minting tokens that are going into the wallets of all token holders in the economy but specifically going to those who are actually doing work and then the questions from there is this really accomplishing that security effectively um and I think although I love models for this and I think it's important to to think about modeling if if you've achieved optimum balance of transaction fees and a growing token supply it's also something that you're likely going to learn in practice so I guess it's something that I believe we're at that point in in the space that a lot of things we're going to be able to solve in practice and so I'm really curious to see how token based economies evolve in that respect I do encourage you to look at the Google sheet that I published it's just a small demo but some of the things that I'd like you to play with in that context if we stick with this example of having validators in a token economy some of the the variables that you might want to look at are what percentage of the token supply you actually want to use as part of this growing token supply of that percentage what is the growth rate that you'd like to introduce and what amount of growth rate is optimal for the value of the network that you're looking at for the the number of transactions that you'd like so these are some of the things that you can think about as well as the number of validators that you might have that are actually eligible for this growing token supply and the percentage of the network that you imagine and in this example that might be staked by the validators so there are a lot of different variables to think about and and a lot of important reasons that I think a growing token supply is something that will enhance the security and the value of token based economies thank you so I have a few minutes if anyone has any questions I don't know yeah this works great so you were saying that the inflation not the inflation the growth of the token supply should kind of pave or it's optimal to pay the validators for example with growth of the token supply because you get this better equilibrium but how do you know not only like yeah how do you determine that because that might change over time like there is no use of your chain from January to February and then it spikes or something like that and how can that be adoptive like to what how can that yeah that growth question so one element I think is the growing token supply and the other element is the transaction fees and I think they're both going to have to absorb the change in the use of the network so in terms of inflation you might want it to depend on you might actually want the inflation in inflationary supply or the growth in the token supply and that rate to be dependent on the percentage of tokens that are staked in the network so something that's actually variable and reactive to the use of the network itself one good example of that is live peer and I I like that they have a reactive growth rate of the token supply and specifically to the amount of token holders that are staked in their network which is I guess a symbolic of the amount of use of the network but I think on the other side of that the transaction piece will also have to be variable and so you have a different equilibrium depending on how much uses in the network in both of those sites okay thanks oh thank you for the presentation um so my question is about like I totally agree for networks you know having the inflation and the fear and the transactional based fee because you need those validators and more validate is a better for a lot of different reasons but on outside of the network itself so like tokens that are built on top of a given network what are your thoughts on like inflation and those systems right we're like validators might not be as necessary but there might be other reasons why you might want to add the inflation outside of just the validators it so inflation on utility v'n utility but any type of token that isn't a protocol token and that is a concept and you do think that that isn't it yeah yeah a growing token supply in that case and and it really depends on what the work is being done in the system so I mean like I always go back to life period there's one example of that you have transporters it's not a core chain but they're doing work in the case of the the company that I work for centrifuge we're doing supply chain finance and we have users who are providing data to each other and this is work that we would want to incentivize in our network so it's not a core chain in in in that respect for that specific use case of the token but it is something that we want to incentivize we have a degree of security that we need to keep around it in terms of keeping users honest and providing data that is actually accurate so I think there are use cases where you're providing work to a network where you would want a growing token supply to support the growth of that yeah I agree I just I guess that the way those those validators you want the Valadez heat to be distributed is different and something like live Pierre or like it doesn't really matter if there's just one amazing transcoder right all three of them were five of them but on something like a theorem that matters like a lot more I guess I agree thank you [Applause]