What should cryptocurrencies maximize?
Maximizing token price will not maximize social welfare
At the end of day, cryptocurrency is currency. It makes it easier to do transactions. It has some advantages over traditional currency, and some disadvantages. The lessons we’ve learned regarding currency can be applied to cryptocurrency as well.
Meta-DAO is an organization with one goal — to maximize the value of its token. All of its decisions are tested with prediction markets, to find whether or not it will make the price go up. This should make it very effective at finding the optimal policies to increase price. The problem is that token price is correlated with, but does not guarantee, maximizing social welfare.
Consider examples from government currencies. The Great Depression came during a time of — indeed, it was due to — the rapidly increasing power of the dollar. Real wages increased during the worst times of the Depression, too! If you had a job, you’d be able to buy considerably more with your dollar. The trouble was, of course, that the rapid appreciation of the dollar caused massive unemployment, firm collapses, and reduction of industrial output. This could have been avoided if the Federal Reserve had taken aggressive action to increase the money supply — see here and here. Maximizing social welfare would have required reducing the value of the dollar. The token price was a bad target!
Bitcoin is running into a conflict between social utility and token price. Issuing tokens is necessary for the security of the chain. Transactions fees in the absence of issuance is insufficient. They do not actually have a plan for how they will prevent the chain being constantly forked. Bitcoin seems nevertheless dead set on stopping after 21 million. The world would be better if Bitcoin issued more tokens. Doing so would, in all likelihood, reduce the value of the tokens. The total value — incalculable though that may be — is a far better proxy for social welfare than token price.
The demand curve for a financial asset, such as a token, is also downward sloping. Policies which would cause fewer transactions to occur may make the measured value of the token go up, while reducing the real value of the token. Imagine that we increase the fixed cost of a transaction. The value of those units which *do* get sold should rise, because only the people most confident in the value of the asset will be willing to buy. Inserting arbitrary transaction costs would be a bizarre epicycle to insert to your currency, and more importantly would make the system as a whole worse. Yet, under reasonable conditions, it can increase token value. The token price was a bad target!
This has been a very short post. I hope it shakes us out of our complacency. The choice of output measure in a prediction market for decision making really matters.