Topic: The deflationary problem - page 13. (Read 32479 times)

Well... it's already lasted for 2 years... so I don't think it's going to just collapse out of the blue. Price might drop, but every market does that from time to time.

Bitcoin is not deflating.  Bitcoin is inflating at roughly 40% APR, and will not actually be deflating until at least 2129.  This is a non-issue in my lifetime.

hah, this all implies that bitcoins will last as a currency for more than a few months before collapsing spectacularly

Listen please explain to me how mining is benefited in an deflationary currency.

Gold mining is inflationary, we mine much more gold now then we did before, but the price keeps increasing.

Why? Because it requires significant input energy to mine it.  The same follows for bitcoins.

Why would you not accept bitcoins that were mined later since they used significant energy to mine it.  It makes absolutely no sense.  Bitcoin is not fiat, and inflation does not affect it in the same way.

Lets please recognize this point.  Otherwise people cry inflation.  You people who do do not understand that it requires a lot of money to inflat bitcoin unlike fiat.  Same as gold, which requires abundent energy.

Well, it doesn't really have to be coercive.  Bad money will chase good money out of the market, because while the vendor would prefer to receive his funds in the good money, if the customer is only offering the bad money, then the vendor will take that with a risk premium added on.  This is why dimes made of real silver still exist, but never circulate.  That and inflation has made the silver content worth over $3 apiece.

In a truly free marketplace, Bitcoin would never have been more than a transfer mechanism with websites like eGold operating unmolested.  Of course, if eGold was still around, Bitcoin would likely never have been created.  It's the lack of a free market in money that drives the demand for Bitcoin to begin with.  If the governments of the world really want to destroy Bitcoin, all they have to do is (credibily) return to the Gold standard.  I don't forsee that happening, however.

There is a lot of reason to favor deflation. Let's disregard the wild exchange rate fluctuations for the moment, since we're assuming deflation exists. If I offer you payment in BTC and you expect it will deflate, and I also offer to pay you in some inflationary currency, which would you rather take, absent anyone forcing you to use one currency over the other?

I'm not at all convinced an inflationary currency can be competitive without some sort of (coercive probably) immediate incentive for people to use it.

Well avoid the 2040 analogy for a second.  What i'm trying to say is that it's a threat for adoption.  Bitcoins will become a target if they keep growing.  There is no question about it, no one should really assume otherwise.  Everything should be created with the assumption that people will attempt to destroy the currency whenever possible.  If you base every design decision on that assumption, you create the soundest currency possible.  My conclusion is that a deflating currency limits the security of the currency and opens it up to attacks.

Technology advances ever year, if there's no investment in the infrastructure, the system will be prone to attack.  If mining is less profitable, there's little reason to invest in infrastructure.  If hash remains constant, ie. no new infrastructure is created to support a growing hash.  In 2 years, hardware efficiency doubles, in 4 years, it quadruples, in 6 years it's 8x more efficient.  That means hash has to grow in response to technological advancements.  If it doesn't, the barrier to control the market becomes very small.

You can make arguments, come up with theoretical possibilities - how to defend a deflating currency.  People may mine at very large loses to protect their coins.  Sure.  If there's no profit motive, what is the point of increasing hash?  Only to protect your own money.

So, in any way - my original argument is that deflation is bad for the system.

Inflation creates a reason to mine, which reinforces the system.  Once you remove inflation the argument trends into waters of possibility.  It may be possible to defend the system, but it's much more difficult and the arguments revolve around unclear means.  

There's absolutely no reason to favor deflation, there is reason to favor inflation.

Sweft: So, assuming centralization really becomes that extreme, Wal-Mart could abuse their hashpower to double-spend their BTC. They could print their own USD right now and "profit", but the risk is too high. They're in business, and screwing over their customers like that is usually a bad idea for such a big target.

The ONLY way transaction fees will increase is through the velocity of money.  Bitcoin is designed to favor a deflationary model.  The problem with depending on transaction fees for hash growth is that velocity of money will decrease, which decreases transaction fees.  The value of bitcoins is dependent on hash.  If miners are not profiting, there's no point to increase hash, the network is less stable and secure.

If mining is unprofitable and we begin to rely on institutions to exert complete control over the system, without any individual miners, the hash becomes centralized to a few authorities - you also decrease the security of the system.  The most healthy and vibrant system is where miners are small and abundant.  When centralized authorities control large percentages of the mining pool (say if banks or walmart invested quantities of money), the network will be LESS safe.

In effect, removing reward of mining still destroys the system.

I have pointed this theme out in other threads as the "Wal-Mart" perspective.  When the day comes that either Wal-MArt or one of it's major competitors starts accepting bitcoins, Wal-mart (and competitors) will have an outsized interest in timely processing of free transactions (for themselves not their competitors) so Wal-Mart might fund a mining cluster (they already have partially funded a datacenter) while smaller competitors such as Target would likely contract out to a major mining company to process their customers' transactions for free, so that they don't have to wait for free transactions to process on the open network nor ask their customers to pay a transaction fee.  Wal-Mart doesn't need a 'financial institution', they are the financial institution.

I read through this whole thread just to make sure it really was just on the 5th page that someone brought up the point that if Bitcoin is still around in 2040 in any form that it makes sense to attack, there will be so many parties with vested interests in keeping the system stable that they'll mine their asses off even if it isn't directly profitable. (OK, someone on the third page kind of said that too, but not so directly).

Seriously. Poor show, guys.

Now, to digress a little bit... If you assume direct rewards from mining eventually decrease to the point where it's no longer seen as a profit vector, but rather a necessary cost of doing business in Bitcoin - is that a form of inflation built into the system itself? If holding Bitcoin means having to spend money to secure the system, what does that mean for spending incentives? I'll admit it's a pretty contrived comparison, but there it is.

I pointed this out in another thread (or maybe this one, can't remember), and it doesn't just apply to bankers.  It also applies to financial investment firms, because they can choose to accept their OWN transactions into the block without a fee, thus significantly reducing their cost overhead for investing in stocks and other such things that I don't have a head for.

You are incorrectly treating "fees" as a constant.


There is strong evidence to suggest that fees will increase significantly over time.


I think I am finally beginning to understand your misunderstanding. You seem to think that:

• Incentives only work if they are "new" coins
• Therefore, inflation is necessary to provide an incentive
• Therefore, anyone disagreeing you must be afraid of inflation

Your premise (first point) is wrong.

Your second point is wrong due to relying on the first point.

Your obsession with point three is baffling.

I agree there is no problem here, at least not a clear cut one.  But, has anyone considered having Bitcoins increase in number to match GDP of the planet?  This can be roughly estimated, and implemented such that each block is always worth at lest 1BTC.  We have a few decades before we need to consider this, anyway.

Keep on truckin'.

I found the offending article...

"According to the Bitcoin FAQ, new coins are generated by a network node which spends its time trying to find solutions to a certain mathematical problem. Each time one of its nodes finds an answer — and can demonstrate proof of work — it creates a new block of the currency. The reward for ‘solving a block’ is automatically adjusted so that in the first four years of the Bitcoin network, 10.5m bitcoins will be created. The amount is then halved every four years, and the total number of bitcoins created is meant to be limited to 21m by 2040. In fact, Bitcoin’s curators seem more concerned about creating a deflationary spiral than inflation. In that sense, it’s kind of the opposite mindset to the Federal Reserve."

http://ftalphaville.ft.com/blog/2011/06/06/585756/virtual-money-from-real-central-bank-mistrust/

Yes!  Finally someone who gets it!  I've been trying to highlight this for months.  Many of the intelligent forum members don't equate mining to a strong bank vault or other security measures.

Swift,

Here's another aspect:

Lets imagine that there are no transaction fees in 2040.   At that time, there should be strong Bitcoin banks and other financial institutions.  These institution will have every reason to run miner to keep the integrity of their own transactions and to make sure that deposits are safe from attack.  If I'm not mistaken, miners can pick and choose which transactions to include in a block.  I believe Mt Gox runs miners to speed verification of transaction.  Mining helps bitcoin financial institutions even without transaction fees or rewards from new blocks; The incentive already exists. 

Today, banks must pay fees for things like checks (yes, I'm American).  They spend huge bucks on robust, secure equipment, and yet they don't earn "transaction fees" on transactions.  Often times they are the ones paying them.  Why do they do this?  To offer a secure service to their customers, thus making them more appealing.  Would you save money in a bank that had bad coverage after a hacker tampered with accounts?  If these financial instituions suspect that billion of dollars where at risk, wouldn't they invest even more into computers?  Why wouldn't this translate over to a bitcoin economy?

And some adive:
I'm sorry for the harsh responses that you have been receiving, but there is reason for it.  You come across arrogant and condescending in your original post when you say things like, "The stupid part about is.." or "This may not seem like a problem, it IS."  A change of tone will help to build friends on this forum.  Most of the people here are very intelligent and well studied on the topic.  For a newbie to ram an opinion down our throats seems out of place. 

Good luck to you. 

if you honestly thing a deflationary currency is a bad idea... go somewhere else were not going to change your mind with facts after all. So why are you still here, trolling these fine people in to arguing with your brickwall faith in fiat? It can't really be THAT fun can it?

I don't know, I'm known for keeping my computer way past it's prime.  I might still have a 32 bit cpu in 2038.

A real change - not a problem