Topic: What is the ideal inflation rate in an inflationary PoW currency? (Read 1789 times)

I really like the NVC inflation design. Due to the nature of the mint rate design it’s not possible to predict a final limit as it depends heavily on market participation, as well as the influences between proof-of-stake minting and fee destruction. What we do know is that the proof-of-work minting would slow down exponentially according to Moore’s Law, and proof-of-stake minting introduces 1% annual inflation in the future (~23% now).

There is more to it. The chain is only secure because it is moving forward. Thus to rewrite the chain someone needs to keep up with the rest of the miners. If miners stop then you can take as long as you want to solve a block (for example one hour per block with 1/6 hash rate), you don't have to do it within 10 minutes to keep up. Thus you could rewrite the chain with only a fraction of the original hash power used to create it.

Well in the extreme, if they stop mining no TXs can go through and so the currency is worthless.

One also has to bear in mind that the security of a transaction against double spending is defined by the difficulty to control hashpower, which is to first order the real cost of the total block reward.  If the total block reward, fees and all, is just a few millies..   then you know you shouldn't trust much more than a few millies in a single confirmed TX with untrusted parties.   

This is all an elaborate way of saying that both these statements are true:  A) I'm not going to mine the coin if it's worthless  B) If miners aren't trying hard to mine it I'm not going to value it highly. 

Sorry, I don't understand.  Why do miners matter to the currency value?  If they all stop mining, why should it have an adverse effect on the bitcoins in existence?

You have a good point.  But let me ask you this: what is your evidence for the claim that the USD money supply increased by 500% since 2008? 

Monetary inflation rate measure the money supply increase, but it does not measure the real money in circulation, so it is useless

For example, FED increased the money supply by 500% since 2008 during various QE program, but the real money in circulation barely increased, so there was no significant inflation

Even in a limited total supply money like bitcoin, if Satoshi decided to spend his one million coins, there will be immediately strong inflation in the market to drag the coin value down

I think what he was saying was protocol vs. blockreward.... he/she writes:


inflation in the base layer, I think, means adding coins to everyones account.... inflation via block-reward is something else. So here, it seems, we are getting confused with our terminology of "protocol level."

Those attempting to transact ought to pay the miners; those just sitting there shouldn't.

 
 
Everyone who came to decry the idea of protocol level inflation is failing to understand is that a cryptocurrency network only exists due to miners.  If miners stop mining (due to the block reward getting too small and transaction fees not keeping up), the network rapidly loses strength (leading to loss of value).  The problem with this collapse is it compounds on itself as less valuable tokens translate to even less incentive for mining. 
 
So in order for bitcoin to work long-term, transaction fees have to be valuable enough to sustain half an exahash of mining (and more in the future).  For this to happen, competition to get into a block has to go way up.  This means that many users have to want to transact in bitcoin and there has to both be a large demand to move many bitcoins frequently (totally against any philosophy of hodl'ing) and also a scarcity of ability to get into a block leading to higher fees.  Otherwise, as the blocksize slowly shrinks it will eventually reach a critical point where mining another currency will simply be more profitable and the miners will quit en masse. 
 
When this happens you no longer own a token on the strongest and most secure network on Earth - you own an old and abandoned token.  I predict that either bitcoin will eventually collapse, move to PoS, or implement a trailing block reward.  I simply do not see a mathematical way for bitcoin to hold a value of "$1 million per bitcoin" when no one is transacting with it and everyone is simply holding it and hoping to be rich. 
 
Monero helps solve this by having a perpetual 0.3 XMR block reward so there will always be new Monero to mine. 
 
Aeon solves it even further by allowing 8/9% new Aeon a year so there will always be a reason for miners to keep mining the Aeon network. 
 
You are welcome to try to prove me wrong, but make sure you include the simple fact of keeping the miners happy in your rebuttal - with no miners you have no network and no value.

You can, because they are the same thing. 

Can I choose both please?

The first question is. Why is inflation needed in our current system?
It's an indirect tax and it's a tool supposed to speed up the money flow. The faster the money circulates, the more value will be created.

The second question is. Is bitcoins' value guaranteed?
No, bitcoin has to compete and can lose "value" in the process.

Third question. How will states finance themselves in a future world?
Look at some implementations of regional currencies.  (e.g. http://community-currency.info/en/currencies/brixton-pound/)

Two implementations (a combination is possible):

• Demurrage (e.g. if holding a coin for more than 3 month the customer as well as the business owner loses 0.25% every month)
• Transaction (sales) tax (e.g. if a business owner is paid with local currency (e.g. Brixton Pound) he has to pay 2.5% if he wants to receive bitcoins instead.

The last sub-question is. Why would a business owner use this?
Because after all, we are all social beeings living in a neigbourhood. Profit maximizing only works, where people don't know each other very well. If I can see my money working for the greater good, I have nothing against opt-in taxes.

Both implementations are easily enforceable/auditeable due to their digital nature. It already works in small communities despite beeing based on inflationary fiat currencies.
The "generated" money will go to one or many causes, the customer pre-defined. (e.g. a hospital, a school, a municipal administration,...)

P.S. Sorry for capturing your thread. I don't think inflation on the base layer of a digital currency is a good idea. If it is needed, to secure the network well that's another case - I would go with the block-reward instead. If you really want an inflationary currency build it upon layer 2.

BTW -  I am also open for suggestions.

I personally will spend some and save some.  Anyone that doesn't save some is taking a very big risk of not having some when they need or want it in the future.  Why should we tolerate having our savings erode over any period of time?  Why should I be obliged to keep my savings in an investment?  A bank savings account is investment with risks.  A bank CD is too.  A government issued bond or treasury note is too.

The portion I spend contributes to velocity and fluidity.  The part I save doesn't hurt either.

The mistake made is to think savings reduces fluidity.  The divisibility of Bitcoin avoids that.  The lack of useful divisibility of gold led to big problems and our response was to let the dollar float away.

I can chose to invest some of my savings but then it is put at risk.  Investments help projects and businesses fund their activities; in return I am paid, dividends, interest, and/or capital gains distributions.  Later I might exit that investment with a capital gain or loss.

I want Bitcoin to succeed.  I own some Bitcoin.  I promote Bitcoin to my friends and family.  I participate in this forum, contributing ideas.  I run a full node without direct compensation.  Geesh, what more do you want?  If I spend all of my Bitcoin then I will want more.

 
 
Because the purpose of money is to act as a language and fluid through an economy.  Like blood being pumped through a body, money serves its purpose when it moves through civilization quickly and creates lots of transactions. 
 
Money sitting stagnant does nothing and helps no one.  What does the body do when it goes into shock?  The same thing an economy does when it goes into shock. 
 
I can tell you I have a Pegasus Coin worth a billion dollars right now, but unless others believe it to be true then it's worthless.  Why would anyone want a Pegasus coin?  Only because it is being exchanged all over the world for goods and services.  Volume and liquidity are more important than price, and if Bitcoin becomes a big stagnant pool of never moving money, then it will certainly not become the currency of the world. 
 
Mild debasement is good for civilization.  If you do nothing with your money for an entire human lifetime then it should lose roughly half its value (about 1%).  This value death allows civilization to renew and revitalize itself throughout the ages, or else we would all still be slaves to the man who first invented steel. 
 
You are in bitcoin to change the world for the better, right?  Or are you just here to get rich?

How long does it take for a currency to be worth ½ of the present value?  At 0.7% annual inflation it only takes ~100 years.  At 0.1% it is ~700 years.

How much are folks willing to lose value to inflation?  Soon enough there will be no inflation in Bitcoin then no one will lose value forever.

Why do we have to tolerate *any* inflation?  Why do we have to tolerate *any* debasement?

The sooner we all begin thinking long term the better.

You make a good point. However, this would make Aeon no more than a hedge- something to wait on the wings just on the off chance transaction fees are not sufficient to cover bitcoin's mining costs a long time in the future. Is this the role you envisage for this coin?

If yes, then how about you throw in something else which I have been worrying about: broken cryptography. If ECC was broken bitcoin's value would go to zero within hours. I've always thought an ideal coin would require multiple different and independent cryptographic methods, such that if one was suddenly broken the coin would still be secure, and the community would have time to replace the broken method with something new.

This is similar to how some patients are given three antibiotics at once just in case the bacteria becomes resistant to one, it doesn't matter because it has to become resistant to all three at the same time for it to be a problem.

Perhaps, but I think there is a delicate balance to create between the interest of the individual and the interest of society, and I think this balance is ultimately what every economy is seeking. One cannot do this in a system in which the primary means of value transfer is of a static quantity, because there is little to no incentive for hodlers to relinquish themselves of these value transfer units, because if they continue to hodl them, they will go up in value. Sure, this is overly simplistic.

And this type of balance is difficult to achieve in a system where the primary means of value transfer is overdynamic - there is no incentive for an individual to hodl in the first place, hence they don't contribute to this society because the society's value transfer system is flawed and lacks value.

So ultimately the goal is to create a value transfer unit that encourages investing in the society in which the value transfer unit is used.

I think that, ultimately, the inflation rate in a currency should be so subtle and on such massive timescales that changes in the function of the currency as a value transfer unit are imperceptible. And I think another focus of the discussion should be the time window in which the inflation is executed. Probably a 10 year smoothing would be a good start.

And indeed, the internal data that such a system would need to use (money velocity) could be gamed, but if the smoothing window is large enough, the transaction fees to game the system will be exorbitant. And even so, if some Large Actor (such as the state) implemented a plan to game this system, what would be the end game? A redistribution of wealth due to the transaction fees going to the miners (if the system remains decentralized).

And ultimately these types of metrics needed rely on a singular blockchain (so sorry small blockists), unless meta-data is also transferred from sidechains

That is correct. But in the long run inflation will go to zero- it won't just tend to zero, it will actually be exactly zero. I think that is what OP meant when he referred to zero inflation coins.

Since I see some of you revived this topic, it bears mentioning that Aeon has decided on an inflationary rate of 8/9%, or 0.888~%.    
  
This barely debases the currency but always gives new Aeon to mine.

 
  
What will you do if miners abandon bitcoin because transaction fees aren't covering their costs and there's not enough significant bitcoin to mine anymore?  Then the network will collapse and the token you hold will rapidly become worthless.  Miners are the most important part of the equation because without miners, there is no currency.  Inflation gives miners something to mine, forever, at a very nominal cost to you. 

Bitcoin currently inflates at 25 new coins every 10 minutes, roughly at 10% annual inflation.  Dude there's a reason the chart is stickied at the top of the economics section.