Optimal Wealth Distribution Leads to Maximum Growth of an EcoSystem
Through human history - countries, empires, and civilizations have started from nowhere then emerged to their peak of prosperity & influence and finally collapsed. This has been happening and will keep happening.
Human and nature dynamics (HANDY): Modeling inequality and use of resources in the collapse or sustainability of societies is an excellent resource to refer to -to understand these issues. The below image shows the stages of evolution to collapse from this study.
Nobel Laureate Abhijit V. Banerjee in his paper Inequality and Growth: What Can the Data Say? concludes that the correlations between inequality and the growth rates in cross country data, using non-parametric methods, is an inverted U-shaped function i.e. Changes in inequality (in any direction) are associated with reduced growth in the next period as shown in below picture.
Above two studies show that for any ecosystem to attain and sustain its maximum potential it should always seek for optimum distribution of wealth among its participants.
Where do existing and dominant cryptocurrency ecosystems stand on their path of evolution?
DISTRIBUTION OF WEALTH IN CRYPTOCURRENCIES is most recent study exploring wealth distribution of dominant cryptocurrencies. Below picture from this study shows that for ethereum the wealth distribution inequility is decreasing with time:
I compared above wealth distribution inequality index for ethereum with its price over the same period in below picture:
From Abobe comparison we can conclude that:
- The Price of Ethereum in general increases with decrease in wealth distribution ineqality.
- However, too quick decrease in wealth distribution inequality leads to price correction
Both these observations suggest that wealth distribution inequality has to be reduced but not too quickly and not too low.
In addition to wealth distribution inequality adoption of the blockchain is also important. Tokenomics: Dynamic Adoption and Valuation is a very good study that helps understand this.
Below picture from the study shows that userbase increases as the blockchain productivity increases and after a threshold of productivity is crossed the userbase increases following S-Shape pattern.
And the below picture shows that as userbase increases the price of the token increases and follows S-shape too.
Based on all the discussion and references above I conclude as following:
- The wealth inequality is maximum at the start of any cryptocurrency project
- The wealth inequality is reducing as more and more users are onboarding
- Too quick reduction in wealth inequality leads to reduction in value (i.e. market cap) of the ecosystem
Therefore, it is the responsibility of top token holders to keep diluting their holding in the ecosystem by rewarding those who are contributing for the system in any way e.g. developers, promoters, businesses, miners/witnesses/BPs, charity etc and if the dilution is too much then buy back tokens to maintain and increase the usefulness of the system for existing and new users.