Topic: What is the ideal inflation rate in an inflationary PoW currency? (Read 1813 times)

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?

 
 
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. 
 

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

 
  
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.

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.

Can I choose both please?

You are in bitcoin to change the world for the better, right?  Or are you just here to get rich?

Why do we have to tolerate *any* debasement?

The sooner we all begin thinking long term the better.

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. 

Although I think this is very interesting to think about, in practice I think it is a non starter.

Even if we all agree that a coin with non zero inflation is better for everyone, it benefits us as individuals to hold the coin with zero inflation- bitcoin. It would never be in our individual interest to own a coin with inflation, therefore no one will, even if society at large would benefit it we did.

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. 

Although I think this is very interesting to think about, in practice I think it is a non starter.

Even if we all agree that a coin with non zero inflation is better for everyone, it benefits us as individuals to hold the coin with zero inflation- bitcoin.

Although I think this is very interesting to think about, in practice I think it is a non starter.

Even if we all agree that a coin with non zero inflation is better for everyone, it benefits us as individuals to hold the coin with zero inflation- bitcoin. It would never be in our individual interest to own a coin with inflation, therefore no one will, even if society at large would benefit it we did.

Maybe something more intelligent and without fixed inflation rates, but that could be determined beforehand so no one would be caught off guard. The rate would have something to do with the number of coins possibly with private keys lost, the mining difficulty and the usage, among other factors.

But I don't know exactly how it would be implemented

There was some good discussion regarding debasement on the Economic Devastation thread:

https://bitcointalksearch.org/topic/m.11923878

I have started up some discussion on the possibility of moving an experimental Cryptonote to an inflationary tail emission model.  This idea stems from trying to stick to the "0, 1, or infinity principle" (https://en.wikipedia.org/wiki/Zero_one_infinity_rule).
  
It would seem that we already have a 'zero' tail-emission coin: Bitcoin.  We also already have a '1' tail-emission coin: Monero.  (has a perpetual tail emission so that there will always be Monero to mine after the initial distribution, but since it's a fixed block reward that will decrease percentage-wise over time).  I have suggested we consider making Aeon the first coin to embody the 'infinity' principle by instituting inflationary tail emission.  
  

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My core question to the economics section is this:  If there were blockchain designed to focus on spendability and consumer friendliness, it might make sense to create a perpetual inflationary emission after the initial distribution had ended.  What is the ideal inflation rate for a currency?  
  
The online research I have done has suggested that most economists agree it is likely somewhere between 0.7% and 2.4%.  I know we have some very bright minds here, so I want to know: what is your opinion on this? (if possible, please back this up with references)

Thus raising the debasement rate redistributes capital from lower efficiency investment (and thus production) to higher efficiency investment and production. Thus benefiting everyone in society.

Thus the debasement rate should be set as high as such that a super majority of society can receive an increase in their personal purchasing power (personal priorities) that exceeds the debasement rate. This will not stop members of society from competing for higher return-on-investment, because to be in that super majority you must compete.

Whereas, if it were true that everyone had the same priorities and we could set the debasement to one monolithic purchasing power metric, then no one would have an incentive to compete. This is yet another example of why uniform distribution is lifeless. I mentioned this abstract concept in my two blogs, The Universe and Information is Alive!.

The problem is how to measure that in order to set an ideal debasement rate? The debasement rate must increase and decrease with some feedback loop which is the efficiency of production relative to a super majority of the society.

Referring back to my explanation about the Quantity Theory of Money:


We see that Δ real growth is somewhat related to Δ transactions × price. Thus such a feedback loop could modulate the Δ debasement rate by the Δ transactions × price.

The variables could be:

1. Debasement is a percentage of the transactions x price.
2. Relationship of this debasement to the transaction fee, if any.

Let's assume transaction fees are set by the market and are a better proxy for the real value to society of the transactions than transactions x price, because transaction fees modulate priority. Also market determined transaction fees are society's appraisal of the (equilibrium of tolerable or neglible) cost of unit-of-exchange which is a primary function of money w.r.t. commerce that demands supply of production, thus medium of flow in the power-law wealth distribution circulating pump.

Perhaps:

debasement = factor × transaction fees

Given annual velocity of money has historically been around ≈2.0, then if factor = 1, annual debasement ≈ 2 x weighted average transaction fee percentage. In other words with a factor = 1, an annual velocity of money = 2, and a weighted average transaction fee percentage of 1%, the annual debasement rate would be 2%.

I don't really know how to measure real usage given that sham usage can be created. I guess observed usage is always a bound on actual usage but not at all a tight bound.

yes! This! If money velocity is high (i.e., there are a lot of transactions in a block), that means money is valuable and people are using it, and therefore minimal (to zero) inflation is necessary. If money velocity is low (there are few to little transactions in a block), that means money is \too valuable so people aren't spending it. Of course we're diving headforward into economic theory.... of course here there'd be a maximum inflation rate and a minimum, being 0. Of course the magic number question is then what is the proper velocity of money.