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Author Topic: Why is bitcoin generation based on a geometric scale?  (Read 774 times)
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June 07, 2011, 05:59:49 AM

I've been reading a lot about bit coins recently and the one thing that I don't grasp is why is bitcoin generation based on a geometric growth?

One major selling point of bitcoins is that the inflation of the currency is done in a predictable manner, which could be implemented in any way: linear, geometric, exponential (lol). So can someone explain to me why halving the growth every four years was chosen? Is there some sort of philosophical ideal or mathematical purpose behind this?

From my limited experience a constant linear increase makes sense, so if someone more experienced could tell me why the reasons I'm going to give are not appropriate that would be great.

A linear growth is still accomplishing the goal of decreasing the effective growth of the currency over time. At this rate, the amount of currency in circulation is going to increase by 2,628,000 in a year, effectively increasing the amount of currency is circulation by a factor of ~1.4. In 5 years however, maintaining a linear scale, adding 2,628,000 bitcoins to a currency of 17 million will increase the total amount by ~1.15. As time goes on the total amount of currency in circulation is not being affected very much.

Miners would always be rewarded for keeping the network secure, as opposed to block generations getting less and less valuable as time goes on. If transaction fees are really going to be that valuable to miners once the base block generation reward gets low, doesn't that eliminate the point of bitcoins being a way to exchange currency with little to no fee?

Couldn't there be a potential issue of lost bitcoins? Once the cap has been practically reached, any time bitcoins are lost due to hardware failures or just people leaving their accounts the total amount of currency in circulation has been decreased and won't come back. I guess that would just mean the remaining coins are more valuable...

To me the geometric scale seems to reward early adopters in a very extreme way while also promoting hoarding and making it very difficult for the bitcoin to have a stable value (at least until the halving of the generation rates gets minuscule, aka. many years in the future).

Really I'm just looking for the reasons a geometric scale was picked over a linear scale.

Edit: I was just thinking about a linear scale but I guess fundamentally it's an issue of how fast the total amount in circulation increases. The geometric scale means the total amount is increasing at a decreasing rate, as is the linear scale. What about making it so the total amount increases at a fixed rate of 1.01% per year, kind of like how savings accounts increase at a relatively low APR. Why is the geometric scale superior to those range of options?
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June 07, 2011, 06:27:21 AM

I'm sure, from a certain perspective, it is better to get more Bitcoins out in the market so that people can begin trading with them instead of trying to create new ones.  That is the purpose, after all.

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June 07, 2011, 08:16:45 AM

I imagine the intent was to hurry out the initial batch of BTC to encourage critical mass growth and community around trading them, then easing in the rest of the supply.   This pretty accurately reflects how the highest rate of BTC generation is up until 50% of the total BTC supply, then tapers off from there.

Naturally, there will be market reactions at the edge of the geometric change points, but overall I think it was a good design.
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