Hyperdeflationary game theory and Agoras

The current shift toward what I call hyperdeflationary game theory

Analyzing the trends in the crypto economics I notice a shift. Ethereum EIP 1559 is an example of the shift away from inflationary crypto economics toward deflationary crypto economics. Ethereum EIP 1559 burns a percentage of the transaction fees which creates deflationary pressure on the token supply. Hex actually lead this trend toward deflationary game theory with the invention of T-Shares. Pulsechain developers are promising to beat Ethereum to the punch by launching with Proof of Stake and 25% transaction fee burning.

The mechanics of hyperdeflationary game theory

To understand hyperdeflationary game theory we first can discuss disinflationary game theory and inflationary game theory. If we look at Bitcoin for example we learn that Bitcoin miners generate new Bitcoins via inflation. Bitcoin has no disinflationary pressure through burning and instead relies on a fixed total supply cap and a fixed rate of inflation in the form of block reward halving. Bitcoin price is a result of demand and supply.

What is the difference between inflationary game theory and deflationary game theory? If we look at Hex for example it has deflationary game theory. The key to understanding what controls the price in Hex is not to focus on the market cap but instead to focus on circulating supply. The lower the circulating supply the more deflationary pressure there is. Hex is specifically designed to encourage circulating supply to trend lower by applying deflationary game theory which takes Hex out of circulation.

The reason circulating supply matters more than total supply is because the only thing which matters for the price is the circulating supply. The total supply of Hex can be 500 billion or 500 trillion, who cares? What matters is what percentage of the total supply is available to be sold at any given moment. Circulating supply in deflationary game theory shrinks indefinitely.

So let's explain how this works a bit more so everyone can understand. In Bitcoin the game we all play is the hash rate game. Participants called miners compete to acquire as much hash rate as possible so they can generate new Bitcoins. These Bitcoins have monetary value so miners are encouraged to generate as many Bitcoins as they can by acquiring as much hash rate as they can. Hex did better, and instead of going with inflation via generating new Hex via mining (which also is environmentally destructive etc), the way generate Hex is via time locking. T-Shares are roughly equivalent to hash rate or hashing power in Bitcoin mining. The more T-Shares you can get, the more Hex you can generate for yourself.

But how is Hex so different from Bitcoin? Bitcoin circulating supply does not go down as it's mined. Miners have to sell the Bitcoin to get their profits. When miners have to sell it crashes the price of Bitcoin for all holders. Hex solves this via time lock and because time locking removes Hex from the circulating supply it provides a supply sink resulting in deflationary pressure. When Hex is staked it is burned, and the key here is, the circulating supply of Hex trends toward shrinkage over time, while the cost in Hex to buy the same amount of T-Shares tends to go up with time. Longer time locking periods will tend to pay better due to the game theory, and everyone will compete to go for the longest best paying locking periods because it gives them a discount on the T-Shares.

How we can make Agoras hyperdeflationary from launch

Agoras has a major advantages over Hex, Ethereum, Pulsechain or Bitcoin. Hex in my opinion has very excellent deflationary game theory but the problem is Hex as a token has no utility. The only reason people buy Hex is as a store of value. Bitcoin has this same problem that Hex has. Ethereum is a bit more competitive because it does provide utility for DeFi and Pulsechain may offer utility also. Agoras has the advantage that the token itself represents something.

Agoras tokens represent all which you can redeem them for. According to the planned design for Agoras the Agoras token will be used for knowledge and computation markets. This will allow holders of Agoras tokens to redeem the tokens for computation resources, for knowledge. But Agoras tokens can be useful all they want but without deflationary game theory the price of the token will not rise (we see tokens like Storj, RLC(iExec)), which offer utility, but which have terrible game theory. So I'm going to attempt to start a discussion in the hope that the Tau community can avoid making the in my opinion critical error of launching a research tech without game theory.

In order for Agoras to achieve a market cap of hundreds of billions like Hex or Ethereum it in my opinion needs to reward the same behaviors as those communities. Agoras will need to be hyperdeflationary from the start. This will include using an equivalent to the T-Shares innovation from Hex which I call discount vouchers or discount shares. Why discount? Because in Agoras we value knowledge while and if people who time lock their Agoras token as early and as long as possible, are rewarded with discount vouchers, then you basically let them use the same time lock mechanism as Hex uses but with the added benefit that instead of just getting some meaningless AGRS out of it, they get more knowledge and computation out of it.

How might this work? What if instead of miners competing to generate knowledge and sell it for a fee, or instead of merely computing opinion maps for a fee, what if instead they get a percentage of the fees, while another percent of the fees get burned and another percentage distributed to the holders of the discount shares or discount vouchers? In this way the games available would be:

1. Time locking (long term hold), where whoever locks earliest for longest, gets the cheapest price on the discount vouchers/shares. The discount shares by design should go up in value (and price) with time, just as T-Shares do. Why? Because the computation resource requirements go up with time which means the value of the discount vouchers/shares may go up too. To tell a person in 1980 if they just buy stock in Seagate, and lock it so they cannot sell it for 20 years, and in return Seagate will give them a discount on all Seagate products which increases the longer they hold it? If you knew the value of computers in 1980, and you knew how important hard drive space could be, you might think it makes total sense. The competition for discount vouchers/discount shares could be equivalent in value to the Agoras community as the competition for T-Shares is in the Hex community or the competition for hashing power is for the Bitcoin community.

2. Burning fees (to reduce circulating and total supply of the AGRS token over time). Fees burned reward all by making the tokens more scarce. Competitions or games which encourage burning of fees would result in acceleration of reducing total and circulating supply.

3. Supply sinks in the form of collateralization, DeFi, such as what we see in the Ethereum ecosystem. These would remove Agoras from circulation but also put the Agoras to work which is better than merely holding it. For the to happen there needs to be derivatives markets where collateral is required from Agoras tokens. This seems to be the strategy Pulsechain will use with it's deflationary ecosystem to evolve toward hyperdeflationary.

Again the Seagate example is not the best because we are talking about crypto but it's just to illustrate the point that the concept behind the T-Share is what has to be captured and introduced to Agoras. The idea is to duplicate the game theory, the participant behaviors, while improving on things. So what happens when Agoras has knowledge markets, with time locking rewards for the Agoras token so the circulating supply of Agoras shrinks over time? In this case the price of Agoras might go up, as it would not suffer from inflationary pressure from knowledge producers constantly selling or dumping the price.

The behavior long term holders want is to encourage long term holding, and this means reduce inflationary pressure and increase deflationary pressure. If Agoras launches with knowledge markets, with no deflationary pressure to reduce circulating supply, then as more people use the Agoras token to buy services such as knowledge or computation, then the receivers of the fees will just dump the tokens just as Bitcoin miners tend to do, and this will collapse the price. If there are deflationary pressures then perhaps more tokens are burned than can be dumped by fee transactions? If a percentage of the fees are burned, if AGRS are constantly taken out of the supply such as if it's used as collateral, used in time locking, used in ways where the game theory is hyper deflationary, then I do not see why Agoras could not have the same sort of price appreciation as Hex, or Ethereum.

If you would like to learn more about Tauchain please go to http://www.idni.org

If you would like to learn more about Hex please go to http://www.hex.com

If you would like to learn more about Pulsechain please go to http://www.pulsechain.com

If you are part of the Agoras community in specific then this discussion which currently takes place on Hive may eventually take place via Agoras itself. When Agoras is empowered by Tau to the point where it allows us to apply it to discuss game theory then the first topic we can discuss is hyperdeflationary game theory. All token holders would benefit from getting this right in my opinion and we can learn from the best practices of other projects.