Let us define a “perpetuity tokens” as a special token with the property that it pays its owner 1 tez immediately, then
γ tez after a period
γ^2 tez at time
2 Δ_t, and, in general,
γ^n tez at time
n Δ_t. The constant
0 < γ < 1 represents how fast the payout decays. In principle,
γ = 1 should be a perfectly fine choice, but people might get weirdsies out of it, so let’s stick with
γ < 1. Over time, this perpetuity token would mint and pay out about
1 / (1 - γ) tez.
Note that if a perpetuity token is issued at time 0, by time
Δ_t it is equivalent to
γ perpetuity tokens issued at time
Δ_t and thus the two are fungible.
The reason I’m referring to those as “tokens” is to insist on the fact that they can be owned and transferred like a regular token. In order to periodically introduce these perpetuity tokens into the ecosystem, they could be created as rewards for the bakers, instead of tez.
Now, on to the why.
To get this out of the way immediately, this is not a way to create “passive income” or anything of the sort. There is no underlying economic activity represented by the tez minted by a perpetuity, it’s pure inflation. If you thought this is the point, it’s ok, it’s a common fallacy. You’re not alone, but you need to study more economics.
The main benefit of creating these long-duration instruments is that we could observe their tez denominated price directly on the blockchain. This is a purely endogenous signal and a potentially very interesting one at that! This signal can be used to be measure confidence in the future of the chain. The lower the confidence that the chain will be functioning in the future, the lower the willingness to hold these perpetuities. This signal could be used as a target for prediction markets and a futarchy based governance system.
For concreteness, the order of magnitude I have in mind is a half-life of one year.
Δ_tshould depend on time, not blocks. It would be simpler to align it with cycles, but that would mean making sure to change the payout of perpetuities if the cycle length or block time is amended. Perhaps it should be indexed on blocks, but with a very clear indication that it is intended as a proxy for time?
Inflation from baking rewards would affect the tez denominated price of perpetuities since it discounts the future. This is fine, but one has to remember that changes in the inflation rate will affect the perpetuity price in a way that has nothing to do with confidence. Perhaps it would be better to index the perpetuity payouts on the total supply?
There’s a potential risk that participants irrationally see this as implicitly “better” than tez and start giving it a monetary premium, letting this thing take on a life of its own. Perhaps, letting anyone mint those for
1 / (1 - γ)tez can at least put a cap on that phenomenon.
Introduces complexity that needs to be explained.
For every person who thinks this is a magical free lunch, there will be one equally mistaken person who thinks this dooms the platform becomes it attempts to conjure up a free lunch. Diffusing the ensuing argument and explaining to both parties that there is no lunch may suck up considerable time and energy.
Nota Bene :
- I thought about perpetuities a lot circa 2014 as a way to solve long range nothing at stakes issues before concluding that the problem was overrated.
- A friend mentioned to be last year that someone was thinking of using perpetuities as block rewards in Cosmos, but I don’t know who that was.
- Yield as an endogenous target for futarchy is a neat idea I heard about at Web3 last year.