Game-theoretic equilibrium

Even if we accept the concept of compensating people for public goods through new coin issuance, what should this amount be? As we shall see, the game-theoretic equilibrium would be at the value where compensation is equal to the economic growth created by the public good (i.e., maintaining the value of the currency).

The rationale for this equilibrium is as follows: if there was just one event where an individual published their work as a public good, then the game-theoretic equilibrium compensation would be 0. That is because the work is already published and people prefer to keep the public good’s related currency appreciation, and have no economic incentive to want their money to be devalued back. However, we are dealing with infinitely repeated games, where individuals would continually publish and propose public goods for compensation. It is evident that in this case the compensation would have to be a positive value, since otherwise individuals would have no economic incentive to produce public goods in the economy.

We have to consider the role of the currency as a store of value; while the scarcity of money is important for it to be an effective store of value, no less important is for the monetary policy to be disciplined and predictable, since at the end of the day what matters is public trust in the economy’s long term monetary policy. For example, if the Bitcoin protocol suddenly decided to cut new BTC issuance to make the currency more scarce, that would have severe adverse effects on the protocol. That’s because even though the currency would become more scarce it would also be much harder to predict future changes to the policy (and to issuance).

The same logic applies to the Abundance Protocol — it is much better (for the value of the currency) to have coin issuance that is consistent with the economic value of public goods than if individuals were trying to preserve the value of the currency by shortchanging public goods producers. For the same reason, compensating public goods in a consistent manner would help everyone throughout the economy, and particularly those active in the decentralized public goods sector, to better estimate their expected returns, thus reducing structural risks in the sector. Notice also that individuals in the economy don’t have fixed roles — in other words, any individual can be proposing a public good on Monday, and then be a user, validator or investor on Tuesday. It is therefore in the interest of everyone within the economy for compensation to be both fair and predictable. That still doesn’t say what the optimal compensation is, but it helps us understand people’s incentives a bit better.

So far, we’ve established that the compensation has to be fair, consistent, predictable, and correspond to the economic growth resulting from the public good, but we have yet to establish the actual equilibrium value. Suppose for example that the compensation amount is equal to half the economic growth produced by the public good. In that case there will be less incentive to create public goods, while the currency will be deflationary. A deflationary currency would also mean that people would prefer not to spend money that is appreciating in value, which would mean less production and an economic slowdown. Moreover, since we’re dealing with a blockchain-based economy, contributors would prefer to go to protocols that offer better compensation for producing public goods, which also means that there will be fewer improvements that are specific to the ecosystem and its related technologies, while other protocols would be growing at a much faster pace. This would suggest that the protocol should better compensate public goods contributors. But to what extent? If the compensation is higher than the economic value generated by the public good, users would not want to participate in such an economy since their buying power would be eroding over time — they too would want to switch to a different protocol that is less inflationary — thus also resulting in less activity in the economy.

We therefore arrive at the game-theoretic equilibrium value where public goods contributors are compensated the monetary equivalent of the economic growth associated with the public good. This is the equilibrium value where neither public goods contributors nor other participants have an incentive to defect from the ecosystem, and where every participant has the incentive to contribute to the economy. It is also where public goods-induced economic growth is maximized, and where compensation is both fair and predictable, thus resulting in greater public trust in the long-term viability of the economy.