On Long-Term Cryptocurrency Distribution Models

The Quest for Fair Distribution: A Look into Long-Term Cryptocurrency Models

Cryptocurrencies have revolutionized the way we think about money and digital transactions. However, one of the most pressing challenges in creating a new cryptocurrency is figuring out how to distribute its units in a fair and sustainable manner. Despite its importance, this question has received relatively little attention compared to other aspects of cryptocurrency design, such as consensus algorithms and feature sets.

The Problem of Distribution

The problem of distribution is particularly challenging because it requires decentralization. In other words, a cryptocurrency's continued operation should not depend on the existence of any specific party in the long term. This means that the distribution model should be able to function without relying on a central authority or a small group of powerful individuals.

Current Distribution Models

Most cryptocurrencies today follow one of two strategies for long-term distribution: nothing at all or mining. The fixed, never-growing supply of a cryptocurrency with no distribution model can lead to wealth concentration and a static community of holders without an effective way for new people to get in. On the other hand, mining has been considered necessary for securing the network and providing a distribution model, but it has its own set of challenges.

The Limitations of Mining

Mining generally serves two functions: securing the network and distributing coins. However, the rise of both ASICs and professional GPU farms is turning mining into an increasingly concentrated and quasi-centralized community. This means that any new mining-distributed currency will quickly be dominated by professional companies and not "the people" at large.

Alternative Distribution Models

There are several alternative distribution models that have been proposed, including:

• Pretend that the problem does not exist: This is the solution that has been taken by most proof-of-stake cryptocurrencies and surprisingly enough even proof-of-work currencies today.
• Centralized distribution: Let some central authority hand out coins according to some formula.
• Useful proof-of-work: Hand out coins to anyone who performs a particular socially useful computation, eg. weather prediction.
• Algorithmic consensus distribution: Essentially, some kind of dynamic, adaptive consensus-based process for determining who gets new coins.

Useful Proof of Work

Useful proof of work is likely the simpler idea. Initially, it was considered impossible to make a proof of work based on useful computation because of the verification problem: a proof-of-work task cannot take longer than a few thousands steps because every node in the network also needs to verify it to accept the block. However, thanks to the existence of a programming environment with a built-in computational stack trace mechanism, there is actually an alternative approach that removes this particular obstacle.

Algorithmic Consensus Distribution

Algorithmic consensus distribution is the more interesting possibility. What if there can be a consensus algorithm to distribute tokens over time, where that algorithm can reward arbitrary good work? For example, one might want to pay bounties to people who contribute to the ecosystem, or even to the world in general.

Parliaments and Better Algorithms

Parliaments and voting are only the simplest and crudest form of having a decentralized organization; there are almost certainly better alternatives based on principles such as holarchy, liquid democracy, futarchy and various combinations of these and other ideas that we have not thought of but that will become possible because of the much higher degree of both interconnectedness and information processing efficiency provided by modern technology.

Futarchy-Based Implementation

A simple futarchy-based implementation might work as follows. Suppose that there are N projects asking for a grant consisting of the entire currency supply to be distributed during some time period, and the desire is to select the one that will maximize the value of the coin after one year. We create N sub-tokens, T[0] ... T[N-1], where the value of T[i] is zero if project i does not get chosen but can be redeemed for one currency unit after one year if the project does get chosen.

Conclusion

Ultimately, both of these approaches could be combined. One can have a parliament, or a futarchy, select useful proof of work algorithms or even data for specific useful proof of work algorithms, or one can have a parliament or futarchy with useful proof of work as its voting mechanism. However, one important conclusion here is that both of the algorithms described are complicated; there is no easy solution to figuring out how to distribute coins in a good way.

Source: https://blog.ethereum.org/en/2014/05/24/on-long-term-cryptocurrency-distribution-models