The Case for a Constant Proof of Work ‘Inflation’ Rate

[Beave162]

This post is a repost from foruim.yacoin.org (https://forum.yacoin.org/index.php?topic=746.0) and is in the context of implementing it with YACoin...


The Proposal
The idea is for a PoW ONLY system that simply bases the next block reward as a function of the total supply to achieve an annualized ‘inflation’ (coin-generation) rate of 2%.

(total supply) X (annualized inflation rate) / (blocks per hour X hours per day X days per year)

To demonstrate an example, the next block reward under this new construct would be

81536148 X (0.02) / (60 X 24 X 365.25) = 3.1 YACoins per block and so forth…

Strength through Simplification

With each coin, one has to ask what the block rewards currently are and what they will be in the future. It is weakness of many coins but also arguably a weakness with Bitcoin… 21 million coins total (arbitrary and will never actually be reached) with block rewards decreasing every 4 years (A seemingly drastic event every time it happens which causes uncertainty).

With a constant inflation rate, it is simple to understand. One does not have to think about the next time block rewards will be cut in half. It is easy to explain because inflation is a concept built into our current money supply of government fiat:  http://www.federalreserve.gov/faqs/economy_14400.htm

Rewards Early Adoption; Rewards Future Investment

In recent history, when a cryptocurrency goes through a change in the block rewards payout structure, it is usually in an attempt to benefit an ingroup at the detriment of an outgroup. That ingroup almost always consists of the ones who consider themselves the “Early Adopters” who want to keep the value of their coins high while decreasing the rewards to ‘miners’. What is misunderstood is the function of miners in securing the network from attack.

The Constant PoW proposal benefits everyone. If implemented tomorrow, the PoW block rewards will decrease from 100 YACoins to 3.1 YACoins. The total supply would have to equal over 2.6 billion before we would ever see rewards like that again, which would be in over 170 years.

The competition for those increasing PoW rewards will spur investment in technology and energy that will come with the need for capital costs as well as operating costs to mine, ie specialized chips and efficient, independent energy systems. It certainly will not be without risk to newcomers, but the increasing rewards will incite new players—big, small, innovative, driven, influential. Also, it is not accurate to say that the 2% increase in total supply will steal value from the existing supply. In fact, the value of a single YACoin could increase in the long-run (certainly in the short-run). Transaction fees will still be destroyed as is the case now, so the supply could theoretically decrease over time. Ideally, each YACoin will be at a stable value in the long run, as you would hope to expect for a functioning currency.

PoW vs PoW/PoS

The PoW/PoS Hybrid concept was created experimentally--first with PeerCoin (https://peercoin.net/whitepaper). The idea was to offer a system less prone to a 51% attack by integrating another “Proof Of” mechanism, and it is also is supposed to reduce energy consumption. Issues have arisen in the chain trust mechanism where long chains of PoW-PoS can be ignored by a long PoW chain. Even with preventative measures, a PoS-PoW combination attack is not impossible. In terms of energy consumption, there are plenty of pure PoS coins that are obviously better than PoW-PoS in that arena.

Proof Of Work is tested and proven. The main chain protocol determines the main chain simply by the total work done by the chain. There is no evidence that PoS-PoW prevents an attack, although it may make such an attack more complicated.

Further, PoS rewards people for simply keeping their wallet open. Those who want to keep their coins safely secure in cold storage, miss out on rewards. It is not definite or clear when exactly your wallet will stake. There is a tool to help predict when each input will stake, but it still does not bode well for the cause of mass adoption.

Economically Sound

The Federal Reserve in the United States targets a 2% inflation rate, and according to them, “Over time, a higher inflation rate would reduce the public's ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling--a phenomenon associated with very weak economic conditions.” http://www.federalreserve.gov/faqs/economy_14400.htm

No matter one’s opinion on the fed, it has been around much longer than cryptocurrencies. The long-term inflation rate of Bitcoin is actually negative because of the amount of coins lost in ‘dust’ or in lost private keys or in coins sent to an empty address, etc. At this moment, however, the ‘inflation’ rate is around 10%. There is a lot to be concerned about with Bitcoin when it approaches the inflation rate below that which is considered dangerous for a currency. There seems to be no focus on price stability, so a coin that has that in mind will have a perceived advantage over the others.

Destruction of Fees, Construction of the Perfect Economic Model

Even though I reference 2% as an ideal target inflation, it would actually be a MAX inflation value. Theoretically, YACoin could be price deflationary AND supply deflationary due to a canny feature already in place: destruction of fees.

In reference to the equation of exchange (https://en.wikipedia.org/wiki/Equation_of_exchange), the velocity of money is something to keep in mind when considering block rewards. Rewards due to PoS, tend to have a low velocity (hoarders continue to hoard), whereas we can assume rewards due to PoW will result in higher velocity. In other terms, PoS rewards do not require any 'work' (resources, energy, maintenance); contrastingly, we know 'miners' do not tend to sit on their PoW rewards so much since mining comes with unavoidable costs to pay to continue operations (large-scale mining especially). With YACoin under the proposed system, higher velocity will equate to more transactions, which will lead to an increase transaction fees, which will lead to a decrease the money supply, which will lead to a decrease block rewards, which will lead to an increase the value of each YACoin (barring speculation). Thus, if a miner isn't rewarded through more YACs, he will be rewarded by the increase in value of YACs. Similarly, people holding on to YAC because they believe in it as a store of value, will be rewarded with price deflation as the YAC economy grows. People keeping YAC in cold storage, as a secure method of protecting their assets, will not be punished in lost opportunity cost for not participating in PoS. In regards to the economics, it will be a brilliant scenario, a revolutionary scenario.


Bitcoin's Failure = YACoin's Success

As we witness the scalability debacle play out with Bitcoin, it is apparent that rewarding miners on only transaction fees in the future is a broken system. Bitcoin faces a paradigm that makes a more efficient system for processing transactions (larger ledger) result in punishing the ones securing that system. It is a catch-22 that will require Bitcoin to fork to survive. It is inevitable.

YACoin can capitalize on the valuable lesson trying to be taught. It is important that YACoin strives to be in competition with Bitcoin and not just try to reach the top 10 in market capitalization.

Spotlight of Innovation (Continuing the YACoin Legacy)

Ever since inception, YACoin has a reputation of being one of the most innovative coin out there. It was the first to have block rewards connected to difficulty—it hasn’t worked out so well, but the model was cloned many times. YAC was one of the first to implement the coin control feature. It was the first scrypt-chacha coin, which requires memory intensive hardware as opposed to raw computing power.

There are plenty of coins that have a constant inflation due to PoS, but a PoW model with a constant inflation rate will be unique. It will spark interest and discussion over the new model and make YACoin a magnet for innovators and entrepreneurs even more so than it is now. It will mean a lot to be the first to implement such a model as it will surely be copied.

With thousands of cryptocurrencies out there, exchanges and other services often ask what makes a coin innovative before they consider making it part of their service. It is important to stand out among the crowd. YACoin will do just that and beyond. At around a $40,000 marketcap currently, YAC is at a point where such a change is a great opportunity with very little to lose. It is established enough to prevent the label of ‘premine’ for those of us who obtained YAC through the old (current) block reward model. At the same time, there is a lot to be gained--limitless, almost.

Any comments, concerns, questions will be very much appreciated. This proposal should be considered a topic of discussion and not a plan to be implemented... not yet.

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[odolvlobo]

Rewards Early Adoption; Rewards Future Investment

In recent history, when a cryptocurrency goes through a change in the block rewards payout structure, it is usually in an attempt to benefit an ingroup at the detriment of an outgroup. That ingroup almost always consists of the ones who consider themselves the “Early Adopters” who want to keep the value of their coins high while decreasing the rewards to ‘miners’.

You have it backwards. Decreasing or not, the block reward subsidy hurts the earlier adopters the most.

Imagine an early adopter that bought bitcoins at the first halving. By the time all bitcoins are mined, there will be twice as many bitcoins, so the value of his bitcoins will be cut in half.

Now, consider an early adopter that buys bitcoins at the second halving. By the time all bitcoins are mined, there will be 30% more bitcoins, so the value of his bitcoins will be cut by only 25%.

As a result of the the block reward subsidy, the earlier adopter loses 50% while the newer adopter loses only 25% in this example.

[Beave162]

Rewards Early Adoption; Rewards Future Investment

In recent history, when a cryptocurrency goes through a change in the block rewards payout structure, it is usually in an attempt to benefit an ingroup at the detriment of an outgroup. That ingroup almost always consists of the ones who consider themselves the “Early Adopters” who want to keep the value of their coins high while decreasing the rewards to ‘miners’.

You have it backwards. Decreasing or not, the block reward subsidy hurts the earlier adopters the most.

Imagine an early adopter that bought bitcoins at the first halving. By the time all bitcoins are mined, there will be twice as many bitcoins, so the value of his bitcoins will be cut in half.

Now, consider an early adopter that buys bitcoins at the second halving. By the time all bitcoins are mined, there will be 30% more bitcoins, so the value of his bitcoins will be cut by only 25%.

As a result of the the block reward subsidy, the earlier adopter loses 50% while the newer adopter loses only 25% in this example.

It is simple but not as simple as you put it.

Bitcoin's model is easier to understand... If I buy bitcoin now, you cannot assume that I will lose (21M-15M)/21M or 28.57% of the value as more bitcoins are mined over time. Why? The amount of coins that will ever be in existence is ALREADY known (or at least the maximum number). The future supply of bitcoins is already factored into the market value of bitcoin now...

Obviously, you would want to be the early adopter who bought bitcoins for 10 cents a piece. If you could go back in time, I'd hope you would do that instead of saying, "I'll wait until most of the bitcoins are mined, so that I don't lose any value."

With a constant inflation model, there isn't a set maximum, but the concept still applies. You buy now knowing full well how many coins will be in existence 10, 100, or 1000 years down the road.

A negative with YACoin in the beginning is that the inflation model was so unknown and all over the place. Now, YAC has reached the set maximum of 100 YAC per PoW block, so it is easier to predict future supply. It also helps to have nifty models like this one: http://explore.grokonet.com/?inflation=1

[odolvlobo]

If you assume that the current price reflects the future money supply, then the issue isn't early adopters vs. miners, it is holders vs. miners, since there is no advantage in being an early adopter. That's a reasonable assumption, though I don't think it matches reality.

In essence, holders pay for mining with inflation while users pay for mining with transaction fees. The question then seems to be who should be paying for the security, holders or users.

[Beave162]

If you assume that the current price reflects the future money supply, then the issue isn't early adopters vs. miners, it is holders vs. miners, since there is no advantage in being an early adopter. That's a reasonable assumption, though I don't think it matches reality.

I'm confused. I thought your point defined an early adopter to mean one who bought in early? Is there a different definition?

In essence, holders pay for mining with inflation while users pay for mining with transaction fees. The question then seems to be who should be paying for the security, holders or users.

What do you mean by 'security'? The network is secured through miners--incentivized by rewards.

In YACoin, as I pointed out, the transaction fees are destroyed. You could say the users pay the holders by destroying the supply and making inflation lower. But it isn't that simple, causal, as mentioned.

[odolvlobo]

If you assume that the current price reflects the future money supply, then the issue isn't early adopters vs. miners, it is holders vs. miners, since there is no advantage in being an early adopter. That's a reasonable assumption, though I don't think it matches reality.

I'm confused. I thought your point defined an early adopter to mean one who bought in early? Is there a different definition?

If the future supply is factored into the current price, then the difference in prices for adopters and early adopters is only due to a discount rate, which basically means there is no difference except for risk, which I assume is also factored in.

In essence, holders pay for mining with inflation while users pay for mining with transaction fees. The question then seems to be who should be paying for the security, holders or users.

What do you mean by 'security'? The network is secured through miners--incentivized by rewards.
In YACoin, as I pointed out, the transaction fees are destroyed. You could say the users pay the holders by destroying the supply and making inflation lower. But it isn't that simple, causal, as mentioned.

As you expect, I meant the security provided by mining. I didn't realize YACoin destroyed the transaction fees. If that is the case, then it is more complicated because the value of the security is 2% of the market cap per year, but the market cap can change. I wonder if there is an equilibrium that would push the transaction fees to that 2% value.

[Beave162]

As you expect, I meant the security provided by mining. I didn't realize YACoin destroyed the transaction fees. If that is the case, then it is more complicated because the value of the security is 2% of the market cap per year, but the market cap can change. I wonder if there is an equilibrium that would push the transaction fees to that 2% value.

That is an interesting way to put it. I guess you could look at bitcoin similarly in the future: the value of the security is dependent on the value of the transaction fees, which could fluctuate.

There are a couple different aspects in my mind:

1) Simply, the bitcoin network doesn't support enough transactions. There HAS to be an increase in the blocksize in order for bitcoin to be sustainable as a payment system. It suppresses the value to not have it increased. If bitcoin was at the level of other fiat currencies, one would be paying more than 1% in a transaction fees. In the battle between decentralized vs cheap, people will choose cheap.

At the same time, increasing the blocksize sets a precedent... if fees get too high, increase the size of the ledger. But that idea ruins the transaction fee model that is supposed to sustain the network in the future. Large-scale miners will have to essentially limit the number of transactions (limit the efficiency) in order to profit, or the network will crash and then be vulnerable to attack.

2) An inflation rate is based on economic theory. It is very much a theory. The concept behind the 2% number is that it matches what is expected in economic growth; therefore, keeps prices stable as the economy grows.

There is an argument to say deflation isn't necessarily bad. The bottomline is that some questions won't be answered until they are 'put to the test'.


There is a third concept that I think applies. Arbitrary numbers and values should be avoided. Theory or not, it is better to be less arbitrary because eventually the arbitrary values will be called into question and scrutinized and possibly improved upon in a new coin. If bitcoin went to a 2% supply inflation model at this very moment, nearly 6 bitcoins would be rewarded per block. Transaction fees are at less than a tenth of that, so under those assumptions and constants, there would not be an equilibrium to keep the money supply stable. A 0.2% inflation rate could be entertained if there was an argument for it that wasn't completely arbitrary. I mean, if the amount of transaction fees destroyed is equal to the block reward, then you would basically have the same thing that bitcoin is supposed to eventually go to...