Towards Decentralized Adaptive Control of Cryptocurrency Liquidity via Auction

Abstract

Sustainable cryptocurrency systems need to address the challenge of continuous inflation. Systematically maintaining stability during market turbulence can be challenging when token minting rates are predetermined and do not account for actual liquidity demand. Mindful of the critical role played by monetary policy, we propose a decentralized, truthful auction approach for tuning the currency system toward self-stabilization in volatile markets. Concretely, when severe inflation or market overheating occurs, the system enforces a contractionary monetary policy to restrain the market liquidity and avoid potential economic disasters. Should severe deflation and market stagnancy occur, more tokens will be minted than burnt to stimulate the market. Through this approach, our studies aim to provide a tool to help sustain the long-term existence of decentralized commodities.