Topic: Targeted Deflation Rate - page 2. (Read 2666 times)

I've been thinking about these kinds of issues too, in the context of setting up a new block chain where the money supply is more flexible.  Here's a system that I think might be workable, and would like to submit it to criticism from others.

Right now, there is a fixed monetary inflation schedule that we all "agree" on by dint of network effects, and there is no way to realistically change it.  It would be better if we could dynamically agree on how the money supply should grow or shrink.  The block chain is a fantastic tool for building consensus without trusting your peers.  So we could set up something like a voting scheme for what the monetary inflation/deflation rate should be.  Each miner that produces a block would add to it in a new field of the block header what they think the rate of monetary inflation/deflation should be (right now, it's fixed at 50 BTCs per block).  The actual inflation rate would then be the median of the voted inflation rates of the previous, say, 100 blocks (this bears resemblance to how "difficulty" is agreed upon nowadays).  If a block's coinbase transaction created anything but what the "consensus" inflation rate dictates, the block would be declared invalid.  Monetary deflation could then be implemented by forcing the miner to forfeit a portion of the transaction fees (if they don't, the block they produce is declared invalid by the network).  This is how a "transaction tax" might be implemented in a way that doesn't allow free-riders to ignore it.

The reasons I think this might work are the following:

a) In current monetary systems, a central bank rather opaquely decides how much money to create/withdraw, and any money created is hard to distribute without political influence.  While I happen to personally think that this system works reasonably well most of the time, I can empathize with the queasiness that lack of transparency produces.  Having a more transparent decision mechanism is certainly better (although shooting ourselves in the foot with the current transparent system that's transparently dysfunctional is much worse, IMHO).  I have a feeling that this queasiness is an important emotional factor in Bitcoin adoption today.  Voting on decisions about the money supply continuously would allow a decentralized consensus to emerge (dare I say, "letting the market decide").  Additionally, the money created goes to miners, instead of politically connected banks and treasuries, and the miners really are providing a valuable service (securing the blockchain). Additionally, in principle anyone can arrange to receive a part of the money created by joining a mining pool.

b) Using the median of the votes from a large number of blocks prevents all sorts of problems from free riding.  If, say, we were to allow any miner to decide how much to inflate/deflate without needing consensus, then the individual incentive is to inflate as much as possible, which, when unregulated, screws everyone over (cf. the tragedy of the unregulated commons).  By voting and forcing a consensus, you lose the immediate incentive to inflate everyone else away, and can vote on deflating or keeping the money supply steady.  If everyone else disagrees with you, at least you get to partake in the money creation.

c) The incentives are set up to keep investment in mining at a reasonable level.  If the consensus is to keep the supply steady or deflate, then miners that just want to get-rich-quick will be discouraged.  This would make it easier for miners that really want to increase the money supply to be the ones that find successful blocks, but they are forced to put their money where their mouth is and temporarily mine at a loss in order to register their votes for an increase.  This might occur when lots of new users join the network and/or there is pent-up demand for additional money due to increased desire for trade: the money supply should grow to accommodate the additional economic activity they'll bring online.  If, on the other hand, the consensus is to inflate, miners that want to deflate have to put their money where their mouth is and increase their mining activity to register enough down votes: in the time it takes to do this, they are participating in the inflation, which would subsidize the additional investment.  It also forces early-adopters to invest their hoards, lest their value be inflated away, which would mitigate the initial distribution problem.  In all cases, there is no threat that mining will be so discouraged that the security of the block chain is in jeopardy.

What are people's thoughts on these ideas?  Virtues?  Flaws?

What problem are you trying to solve?

Limiting deflation is easy-simply issue more coins. Limiting inflation is harder because it requires destroying coins. One possible solution is to tax transactions. Suppose that all sends are taxed at a rate of 0.1%. Inflation could be controlled by making rules for distribution of tax revenue. If inflation exceeds the target rate most of the tax revenue can be destroyed with some residual distributed to miners. If deflation occurs the entire tax can be distributed to miners with no destruction.
This system would make the currency more costly to use, but would offer better protection against inflation risk. Essentially people who want to spend coins now would be taxed to support the miners and long term holders of the currency.

Thoughts?