Algorithmic Monetary Policies for Blockchain Participation Games
Diodato Ferraioli, Paolo Penna, Manvir Schneider, Carmine Ventre
TL;DR
This paper develops a framework for algorithmic monetary policies in blockchain participation games that balance short-term throughput against long-term decentralization. By modeling agents with type and stake in a multi-round setting where token value is endogenous to system health, the authors analyze how different reward-designs affect equilibria for myopic versus foresighted players. Key contributions include suffix-based equilibrium characterizations, the introduction of the μ^α and μ^ℓ policies, and the virtual-stake concept to interpolate between type- and stake-driven selection. The findings reveal that agent foresight is crucial to maintaining decentralization, while initial inequalities in virtual stake can persist, pointing to indirect levers needed to sustain healthy, decentralized ecosystems. The work lays groundwork for refining PoS protocols, DeFi governance, and token-stability insights under dynamic participation and strategic behavior.
Abstract
A central challenge in blockchain tokenomics is aligning short-term performance incentives with long-term decentralization goals. We propose a framework for algorithmic monetary policies that navigates this tradeoff in repeated participation games. Agents, characterized by type (capability) and stake, choose to participate or abstain at each round; the policy (probabilistically) selects high-type agents for task execution (maximizing throughput) while distributing rewards to sustain decentralization. We analyze equilibria under two agent behaviors: myopic (short-term utility maximization) and foresighted (multi-round planning). For myopic agents, performance-centric policies risk centralization, but foresight enables stable decentralization with some volatility to the token value. We further discuss virtual stake--a hybrid of type and stake--as an alternative approach. We show that the initial virtual stake distribution critically impacts long-term outcomes, suggesting that policies must indirectly manage decentralization.