Topic: Block Reward changing to 25 BTC in November-December 2012 - page 4. (Read 14851 times)

I don't understand. If 50 BTC are produced every 10 minutes, and world GDP growth is 3% per year, bitcoins would, eventually, become deflationary. The first years they'd be inflationary, up until the point where the number of coin generated in a year equals 3% of the current supply. At this point it'd be stagnant because it matches GDP growth. After this, the supply would grow at less than 3% per year (the rate decreasing year by year) and it'd be deflationary. Right?

I mean, you could just design the protocol so that supply increases by 3% each year. But that would require that we can predict the average GDP growth far into the future. That's obviously not possible.

It seems to me that everyone is free to implement an inflationary currency on top of Bitcoin. You simply buy 1M bitcoins, and the derived currency (let's call it IBTC for Inflationary Bitcoin) would decrease in value by x% each year. Whenever someone wants to perform a transaction, you exchange the IBTC for bitcoins. The first year you'd get 1 BTC for every IBTC you have. The next year you'd get 0.98 BTC for every IBTC, the next year 0.96 BTC for every IBTC, and so on and so forth at an ever decreasing exchange rate, in order to ensure inflation. It's easily doable. I doubt that people would be interested in this currency though. I sure wouldn't. But it seems like a good test to determine the usability of an inflationary currency vs. a deflationary one.

It will EVENTUALLY match that.

Say you had a 50 coin block reward, lost coins averaged .5% per year, and GDP averaged 3% per year.

The first year, you will have generated 2,628,000 coins, and, on average, 13k of those would be lost.
The second year, you would have generated another 2,628,000 coins, and, on average, 26k of those would be lost.
Etc, etc, etc.

It would take quite a number of years, but eventually, you would reach a point where the number of coins generated would equal the number of coins lost (on average).  That point would be when 525,600,000 coins are in circulation.

Add in GDP, and you'd actually be deflating if you had that many coins in circulation.  So, the GDP-corrected coin count would be 75,085,714 coins in circulation.  Although there'd be more coins than that joining the economy, the effective money supply would remain the same, since the velocity would be faster.  Hard to explain.  But the effective value of currency per GDP would remain the same.

It's not perfect by any means, but it would average out to be stagnate, which would mean an ideal amount of investment and debt vs savings.  A deflationary currency encourages too much saving, and an inflationary currency encourages too much debt/spending.

I don't understand. What would ensure that some pre-defined rate of growth of a currency will match the rate of lost coins plus world GDP growth?

Bitcoin's decimal expansion is effectively inflationary. That inflation is limited by the number of decimals it can be expanded to, which is currently 8. The system itself does not determine the extent of decimal expansion; that results from market forces. As Bitcoin gains wider adoption its value will rise, prices will fall, and the decimal will periodically be moved to the next point.

There's a good chart that I often use to explain the process. Comparing this mechanism to gold, it's like using ounces, half-ounces, quarter-ounces, tenth-ounces and then grams. Being physical, gold is limited to how far it can be divided and remain functional; we can't exchange individual atoms. Being completely abstract, Bitcoin is only limited by the necessary protocol changes that would allow further decimal expansion.

It's possible that market forces will make the change gradual, otherwise a full decimal shift could cause a sudden drop in prices of up to 90% depending on overall economic growth. An inflationary currency definitely affords a smooth level of expansion to match real growth, but may not be necessary. I think we'll have to get much closer to the 21mm unit limit before anything empirical can be determined.

I disagree.  If you have a supply with constant rate, that constant rate will eventually meet the rate of lost coins + worldwide GDP growth.  At that point, the currency would be neither inflationary or deflationary.  It would be stagnate, which is really what the "perfect" currency would look like.

BUT, the problem with that idea is that it does not offer enough incentive to early adopters.  And a lack of early adopters means a lack of adopters, period, as we've seen with Tenebrix and other attempted alternate cryptocurrencies.

You are obviously correct that an inflationary currency is useful. We all use one every day. The question is though, if a Bitcoin-like, distributed digital currency can ever be "inflationary". I think any Bitcoin-like currency cannot be necessarily inflationary without being too prone to manipulation. If we want bitcoins to decline in value, we need to peg the bitcoin supply to our economies. How would you do that?

To some it may sound good in theory, but I don't think it's possible in practice. A distributed digital currency like Bitcoin needs to have a pre-determined, finite supply, or it will not work.
So my point is not that bitcoins need to be deflationary for economic reasons, but more so that it needs to be so for technical reasons.

Without a central authority to control the supply of a currency, how can we ever ensure that a currency stays inflationary? We can't. And since Bitcoin by definition excludes a central authority, bitcoins can't be an "inflationary currency".

Pricing stuff in bitcoins is easy: = /

Yes, go read the alternate cryptocurrrency forums.  Many forks have already been made... not many people are "adopting" them.  I own many alt currencies myself, but the market still hasn't rushed to switch to them.

We'll just need to wait 10 months to see what the block reward does to the world of bitcoin.

lolcust did it already. geistgeld? tenebrix? both?

my point was that even if the miners would really pull off a trick like that (and I don't think they will) it would not destroy bitcoin.

I think the halving of block reward will push price upwards. Not because of anything related to the money supply size and so on, but because there are many non-technically-oriented traders around, who are unsure if Bitcoin is fundamentally a scam, and I think it will boost their confidence in Bitcoin when they see the halving of the reward with their own eyes.

Feel free to go and make one, then.

It will lack the elegance of Bitcoin, which is what drew me in in the first place.

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

more like 50, 50, 0, 0, 0, 0 ... allot of angry "late" adopters in the process, if you ask me

This. Plus even if you manually add in a 21M cap, you'll get: 50, 50, 50, 50, 50, 50, 0

Seems like trouble.

nerds will not fork

nerds have faith in bitcoin

nerds control the intrawebs

nerds are legion

You're not accounting for the additional trades that take place with the extra coins.

If those freshly sold coins account for a greater amount of coins traded daily, the affect they have may be disproportionate.

Being that there may be millions of untraded, unused coins sitting out there...

Just to clear up a few things.

The 21 million coin limit isn't in the source code anywhere.  What is in the code is a subsidy that is cut in half every 210,000 blocks.  Actually, it is an integer right-shift instead of a division, so some of the shifts take slightly more than half of the subsidy away.  The sum of the sequence as the subsidy shifts to zero is what gives the limit just under 21 million coins.  So, changing the coin generation system would require more than just commenting out the subsidy calculation.

And a few miners can't just decide to keep cranking out 50 BTC blocks and expect the rest of the network to just accept them.  Not at 51% of the hashing power, not at 70%, and not at 100%.  They would need to create a whole new network of nodes that accept them as valid.  The miners have a lot of power, but they can't force the network to accept invalid blocks as valid.

Also, we aren't approaching the end of the Mayan calendar any more than we were approaching the end of the Julian calendar in 999 AD.  They just didn't bother adding another digit on to their system, and didn't survive long enough to need to.

To me post like these are a strong bearish sign.

The reward change is more then 10 months down the road.

And alot can happen in 10 months

I'm not entirely sure a deflationary currency is the correct endgame - I'm worried about hoarding, and the money supply's ability to sanely match pace with the goods and services whose value it must represent.

But I do think that forking the blockchain just to get your 50BTC instead of your 25BTC would set an awful precedent: that the power held by the miners to choose the "real" blockchain need not be restricted by the standards of the community, nor need deviations be motivated by a pressing need (such as might one day arise if my worries pan out). The current "new feature negotiation" drama aside, I hope the mining community at large (read: the large pools) is sensible enough to avoid going down that route.

It find it interesting that this will happen right around the end of the Mayan Calendar (Dec. 21st).
Maybe this will signal the breakthrough.

Exactly. The supply is only half of the equation. If buyers of coins are very price sensitive then when less becomes available they'll just buy less, a slightly higher price will stop them in their tracks. If they don't care much about the price their demand could push prices very high assuming we're somewhat balanced when 7200 are coming in yanking out half of the new will have a big effect.