The “fiscal” and “monetary” policy tools of smart contract blockchain platforms may work even better than the economic policy tools of governments.
In reality, though, such counter-cyclical fiscal policies are rarely executed well, due to limited time horizons and judgment errors of decisionmakers. In boom times, fiscal tightening is hard because the government has higher revenues available to spend. When the cookie jar is overflowing, few have the discipline or political fortitude to not eat more cookies.
The monetary policy of blockchain economies, on the other hand, does not depend on human judgment and the impact is more direct. On Ethereum, the base fee collected for each transaction is “burned,” reducing money supply. This means that during an economic boom where there are more transactions, more ETH tokens are taken out of circulation, pushing up the value of ETH relative to on-chain products and services and helping to cool the economy.
In the long term, this increases the stickiness of a chain’s citizenship, boosts price stability of everything denominated in the layer 1 token, and lowers the transaction cost associated with excess price volatility for everyone. As discussed, the blockchain platforms’ revenues come from two sources: 1) fiscal revenues from transaction fees, and 2) monetary revenues from token issuance seigniorage, i.e. the monetary profit a token issuer gets that stems from the difference between market value of the token and its issuance cost. Part of these revenues are paid as staking yields to citizens, allowing everyone that participates in the platform to share the output of its economy as non-labor earnings.
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