Waves Monetary Policy

Waves mechanics is deflationary by default. Leasing allows to effectively lock a solid chunk of the total stake in mining. If the network grows mining profits grow as well, which creates an incentive to lock more stake, and, correspondingly, more stake locked. This mechanics is essentially deflationary, since effectively less Waves tokens stay in circulation.

The question arises why this mechanic does not work that well in Waves now. The answer is quite simple — staking profits are not large enough, so the incentive to stake coins is not sufficient for many holders. With sufficient increase of staking profits we could see an increase of Waves leased, which creates deflation.

The next question would be how to achieve the growth of staking profits. There are two major avenues for this: making more profits from fees, or allowing new native token issuance as a block bounty for miners. Raising transaction fees is not a very good option, since no public blockchain, including Waves, is loaded to full capacity now. With increased fees we definitely won’t get more transactions, and the total profits from fees can even go down.

Let’s consider another option — adding a small bounty in Waves to each block. New native tokens are generated to the tune of several thousand per day, which can easily increase current staking profits at least tenfold. Very small inflation makes staking obviously worthwhile.

What is the downside of this? The word “inflation” scares a lot of people, so let’s take a closer look at what actually happens in this case. And what really happens is just the opposite to inflation. Our deflationary leasing mechanism starts to really work! A small additional coin issuance tips the scales to leasing profitability, staking grows, and it leads in reality to DEFLATION, not to inflation. Deflation is so deeply wired into Waves that you just need to activate it, and this is just the right way to do it at the current stage of Waves network development.

What we actually do is not really an inflation or deflation, it’s an introduction of Monetary Policy to Waves, probably the first attempt to do it in the blockchain history. Monetary policy is meant to provide for the sustainability of the economy, be it the blockchain economy or the state economy. It is flexible, and applied based on the current conditions. In Waves case we turn it on when we see that the network economics should be tweaked to activate deflationary mechanisms.

So even inflation in Waves leads to deflation! But this is not all, since we have at least two new deflationary mechanisms coming to Waves chain in the near future.

First of them is algorithmic stable coins, backed by Waves token. It’s a combination of two ideas — fiat stable coin with actual fiat backing and algorithmic coins, stability of those is supported through smart contracts algorithms. Deposited Waves tokens are locked in a smart contract, and corresponding fiat tokens are issued to the depositors. Waves locked in a contract are leased out to miners, and profits back more fiat coins, that can be paid out to stable coin holders as dividend.

Thus we create a fiat economics backed by crypto economics! You can stay in fiat at all times if you want, and receive fiat interest. Fiat token issuance entails more Waves locked in the stable coin smart contract, and leads to less “free” Waves and deflation. There’s even a Waves price stability mechanism ingrained in the architecture, please wait for the whitepaper for more details.

But that’s not all, since we have sidechains! Sidechain mechanics is the cornerstone of Waves 2.0; it’s our approach to scaling. It will be realized partially even before Waves 2.0 mainnet is launched. Sidechain mechanics also entails Waves to be locked as a security deposit that guarantees a consistent sidechain state, if mining is allowed within the sidechain it needs Waves as well, which creates additional demand for Waves.

Therefore we have at least 3 major deflationary mechanics to be activated in the near future. Through different means we emphasize the token scarcity, the essence of Waves economics as a Proof-of-Stake system.

All aspects of token economics, profitability of the network up-keep for miners, staking profits, even the token price, should be regulated on the blockchain level. The monetary policy we implement is the first decisive step in this direction.