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Author Topic: Why was bitcoin designed with no inflation?  (Read 3118 times)
bji
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June 17, 2011, 05:10:39 PM
 #1

Just curious about the reason that bitcoin was designed without inflation.

Given that blocks are produced on a regular schedule it should have been easy to put a fixed inflation rate into bitcoin, by simply building a payout schedule that didn't reduce to 0 but instead reduced at a rate that matched the total number of bitcoins that would have been produced by that point.  I'm not going to do the math right now but it seems like it should have been possible.  Probably something like payout(block N) = sum(payout(block 0), payout(block 1) ... payout(block(N - 1)) * (0.02 / (365 * 24 * 6)), the idea being to make each block's payout be an amount that would be 10 minutes' worth of 2% yearly inflation of the entire existing bitcoin supply.

So why wasn't this done?

I have a theory: because it would not enrich the creator and very early adopters as well as the defined schedule does.  The first year+ of bitcoin's existence was simply early adopters minting themselves bitcoins.  Look at the block chain, it's obvious; real-looking transactions didn't become common until 4 months ago or so.

With the existing bitcoin creation schedule, a significant fraction of the entire bitcoin supply that will ever exist was already allocated to the early adopters, and in only a year's time.  If bitcoin really takes off, these early adopters will control a significant fraction of the total market, and can sit on their share indefinitely without any inflation rate urging them to put their bitcoins back into the system.  With inflation they'd have to choose smart ways to re-circulate their bitcoins to maximize their value, which would be beneficial to everyone (the coins would circulate, spreading wealth around).  Without inflation, they can simply sit on bitcoins forever without any impetus to spend them other than picking the best moment to cash out a bit for their new yacht or whatever.  These holders of huge quantities of bitcoins would simply be lords of the market, able to dip in whenever they feel like it to extract value out, without the requirement of circulating their coins to maintain value as would be the case if there were inflation.

So why wasn't bitcoin set up with a fixed, definite, constant, and knowable inflation?  Is there a good reason other than maximally enriching early adopters?

I really like the concept of bitcoin and when I read the white paper and supporting documentation on the bitcoin wiki I was just blown away by the genius of it all.  I bought 3 bitcoins for ~$100 on eBay not to speculate but just because I am excited to be a part of it and I felt that this amount of money was not unreasonable to spend to test out the software and see how it works, and to have the satisfaction of seeing some bitcoins in my wallet.  But since thinking about bitcoin more, I feel like I am participating in a system that unfairly rewards the early adopters (nobody getting in now is an early adopter, early adopters were those who could mine bitcoins easily a year ago, or could buy hundreds for the dollar).  Early adopters should get a significant reward, no doubt, but - 20% of the total value of the system for under a year's work?  That seems ridiculously excessive to me.  And the fact that inflation is not built into bitcoin just smells to me like a way to ensure that these early adopters stay rich no matter what they do.

This factor is reducing my interest in bitcoin.  I actually think that bitcoin has a significant technical limitation - one that has been pointed out numerous times in the past - of a lack of scalability in its current form; every client cannot be expected to download hundreds of megabytes (or by years' end, likely close to a gigabyte) of data just to participate.  So I have written up a proposal for extending the bitcoin protocol to support a different mode of block distribution that I think should solve this problem.  But I am starting to feel hesitant to continue to participate because the upside for me is so miniscule compared to the upside for the very early adopters.  I feel like it's a system in which I personally have already been set up to lose because of the lack of inflation built into bitcoin and the fact that early adopters were given such a huge piece of the pie already.
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June 17, 2011, 07:25:39 PM
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Why make somthing that looses value over time when you can make somthing that becomes more valuable over time?



I joined much later than i wish i had, yet i'm ecstatic watching the few coins i got earning me money just by sitting there. I hold no hard feelings towards the people that got in before me, i'm happy for them, but i guess i'm significantly less selfish than your average guy (or at least try to be). I don't get envious of people that have things better than me, i mean, not in the bad sense; i would like to be as lucky, sure, but i wouldn't dare want to rob them of their happiness to have my own, nor do i wish they hadn't been as lucky.

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June 17, 2011, 08:13:16 PM
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Why make somthing that looses value over time when you can make somthing that becomes more valuable over time?



I joined much later than i wish i had, yet i'm ecstatic watching the few coins i got earning me money just by sitting there. I hold no hard feelings towards the people that got in before me, i'm happy for them, but i guess i'm significantly less selfish than your average guy (or at least try to be). I don't get envious of people that have things better than me, i mean, not in the bad sense; i would like to be as lucky, sure, but i wouldn't dare want to rob them of their happiness to have my own, nor do i wish they hadn't been as lucky.

There are no guarantees that bitcoin will hold its present value or even increase over time.

What the op wrote makes a lot of sense.  I also think the coins given out for the early adopters were too much too fast, and now its very difficult with only 1/3 of the total coins mined.

There should have been a slower coin distribution and a larger supply of coins, then the growth and value would have been slow and steady, not this huge peaks and valley like we have been seeing.  This methodology still benefits early adopters since they will have more coins, but it also allows late miners into the game.  Considering the technology is P2P, more miners=more computation power, which is better for the community as a whole.

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June 17, 2011, 08:34:16 PM
 #4

Was it not for real altruistic reasons?

Inflation is not good for anyone except holders of debt. In fact, inflation and deflation are both bad. Better to have a currency immune to all of those things. It also enhances its value as a safe haven.
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June 17, 2011, 08:43:33 PM
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Was it not for real altruistic reasons?

Inflation is not good for anyone except holders of debt. In fact, inflation and deflation are both bad. Better to have a currency immune to all of those things. It also enhances its value as a safe haven.

Inflation is good for holders of debt, but it also tends to (in small amounts), help make sure that the economy is vibrant - since if the money you hold today will be worth less in time, there's an incentive to spend it.  Deflation give the reverse incentive.

Now whether either of these situations is better is a different question - and my guess is that Satoshi feels that the problems with inflation are greater than those with deflation, and that's why it's that way.   It's a philosophical decision - that's all.
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June 17, 2011, 08:56:19 PM
 #6

I think the bitcoin system required somewhat of a deflationary system to get established. Imagine if bitcoins were inflationary, why would you switch to it? There's already a ton of inflationary currencies out there, and chances are you wouldn't trust an online one.

The deflationary system is what makes bitcoins valuable.
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June 17, 2011, 09:08:08 PM
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Bitoin IS inflationary...until new blocks no longer reward miners. Then it is mildly deflationary, the only reduction in bitcoins will happen when coins are permanently lost (a wallet is corrupted or misplaced).

So Bitcoin is both inflationary (in stage 1) and then slightly deflationary (in stage 2).

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June 17, 2011, 09:16:42 PM
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Once i get enough BTC or a steady source of income (bigger than just the natural valuation(sp?) of Bitcoin), i'll start spending my BTC; right now i don't got enough of either, if i start spending my coins more than the sporadic donations here and there i'll run out of coins too quickly. On the other hand, if BTC was getting less and less valuable i would be in a hurry to unload mine and be hesitant to acquire more later on. With Bitcoin increasing value over time, it makes it a good investiment, if it was loosing value people wouldn't wanna buy it in the first place.




I read someone explaining here in the forum the other day that there is two types of things that are called inflation/deflation, i forgot the details, but basicly you only say Bitcoin is going one way and eventually will tip the other way if you mix the two things together; I think it was the total number of bitcoins avaiable versus the value of individual bitcoins when compared to other currencies (i could be remembering it a tad inaccuratly though)

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June 17, 2011, 09:28:12 PM
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Bitcoin was designed with no inflation because that's a economically wise decision.
bji
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June 17, 2011, 09:38:30 PM
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Once i get enough BTC or a steady source of income (bigger than just the natural valuation(sp?) of Bitcoin), i'll start spending my BTC; right now i don't got enough of either, if i start spending my coins more than the sporadic donations here and there i'll run out of coins too quickly. On the other hand, if BTC was getting less and less valuable i would be in a hurry to unload mine and be hesitant to acquire more later on. With Bitcoin increasing value over time, it makes it a good investiment, if it was loosing value people wouldn't wanna buy it in the first place.




I read someone explaining here in the forum the other day that there is two types of things that are called inflation/deflation, i forgot the details, but basicly you only say Bitcoin is going one way and eventually will tip the other way if you mix the two things together; I think it was the total number of bitcoins avaiable versus the value of individual bitcoins when compared to other currencies (i could be remembering it a tad inaccuratly though)

Eventually, and I know this is in a long time, there will be no more bitcoins created.  On shorter time scales, the number of bitcoins that are being created is reducing at a fixed rate.  So the early adopters who got significant fractions of the total bitcoin supply will still have a significant fraction of the bitstream supply no matter what they do - except spend them, of course.

Inflation would give them an incentive to circulate their coins, which would be better for the market as a whole (I think).  I am not sure exactly what anyone's beef with inflation would be if it were predictable, constant, and not controlled by anyone (but instead simply decreasing the value of everyone's bitcoins by a small and steady rate, encouraging people to spend them instead of hoard them).

I think that the ideal for bitcoin would have been the current bitcoin production curve, except that mathematically constructed to be steeper at the beginning and to 'level off' to a constant inflation rate after a specific (and well-thought-out) period of time, maybe 10 years.  Also that the rate from the beginning be slower, so that in the first year it wasn't 20% of the total or whatever it is.  More like 5%.

So early adopters would have an easier time creating bitcoins but wouldn't have owned 20% of the total supply after not even 2 years.

I guess I think it would have been better for high inflation at the beginning, reducing over a few years to a steady slow rate.  Instead, the curve is very high inflation at the beginning, reducing over years to a lower and lower rate until it is 0 (and then negative, really, since eventually all bitcoins will be destroyed as there is a nonzero chance for each bitcoin to be lost and after a sufficient amount of time, they will all be gone).

What I think would have been really cool is if bitcoin mining was instead like a bitcoin 'lottery', where most blocks do not award any mined coins, but occasionally some property of a block hash will line up correctly with some bitcoin address within the block (say for example the sum of the block has modulus 1000000 is the same as the transaction hash modulus 1000000 or some other thing rarely likely to be true) randomly awarding an extra coin (or fraction thereof based on some kind of inflation schedule) to that bitcoin address.

Block solvers would do it for the transaction fees, and the overall number of bitcoins would increase at a controlled inflation rate but would be spread out to everyone, so nobody in particular would be enriched by this scheme, it would just on average increase everyone's number of bitcoins identically.

Of course, the problem would be that the more transactions one would run, the more likely one would be to win the bitcoin lottery, which would tend to reward people doing lots of transactions more, but then again, those people would also be paying a larger share of the overall transaction costs of the system by running more transactions so maybe it would still be 'fair'.
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June 17, 2011, 10:07:41 PM
 #11

It was designed have 100 years of reducing inflation of the money supply or something wasn't it? Price currently goes up because demand(esp speculation) far outstrips supply.

In any case, inflation helps anyone that creates money, and only them, since all fiat currencies in the world are a form of debt (promises to pay). In the real world inflation model, if the total money supply is say $1million and people set their prices based on that, and then the govt backed money printers print another $1million, the people who spend that second $1million can essentially buy everything at half price, as the rest of the market takes time to realize that there's a whole lot more money out there than when they set their prices, and have already surrendered their goods. This applies to both the Fed Reserve as well as Credit from Banks. Inflation will always lead to the separation of wealth between the money producers and everyone else (ie the poor).

I think this is the major reason why Bitcoins went the fixed / slight deflation route: the only people winning with inflation were the minority that were producing it.

In a fixed or slight deflationary model, savings are important, but so is investment. A person can certainly choose to hoard their bitcoins, but apparently the world can run off one bitcoin if it needs to, so it doesn't matter. Which will make a person richer: Letting all the coins slowly whittle away out of existence so theirs are more valuable (to what end? life is a limit), or investing in a profitable activity that stimulates employment? There is nothing stopping a company being stupendously rich in either a inflationary or deflationary model, but since currency is the grease of an economy, adding more grease doesn't make it run faster, if there's already enough. Bitcoins are infinitely more responsive to a changing supply of bitcoins than regular currency is - its not that easy to take in all the dollars and reprint cents (if RL was deflationary).

In fixed/deflation, you also have a lesser need to publicly support the retired via pension. They work, save, and live off what they saved until they pass on and their coins are sent to their benefactors. I find it very sad to see pensioners getting poorer by the year, because they did not buy 10 houses, or have loads of investments, but saved an amount which seemed quite a lot at the age of retirement. Inflation gives you no chance in retiring unless you tax the young (via investments/housing).

When all the coins are out and about, somebody born then (in 100 years or w/e) will certainly feel they missed out on being an early adopter, but it should not affect their ability to earn bitcoins at a market rate for their services. Ultimately currencies are a way of trading time, and if they are productive, will earn what the market can supply them. If this system is still running in 300 years time, whatever bitcoins were hoarded will probably have changed hands many times by then. It's an attempt to create a long ass term solution.
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June 17, 2011, 10:34:33 PM
 #12

It was designed have 100 years of reducing inflation of the money supply or something wasn't it? Price currently goes up because demand(esp speculation) far outstrips supply.

In any case, inflation helps anyone that creates money, and only them, since all fiat currencies in the world are a form of debt (promises to pay). In the real world inflation model, if the total money supply is say $1million and people set their prices based on that, and then the govt backed money printers print another $1million, the people who spend that second $1million can essentially buy everything at half price, as the rest of the market takes time to realize that there's a whole lot more money out there than when they set their prices, and have already surrendered their goods. This applies to both the Fed Reserve as well as Credit from Banks. Inflation will always lead to the separation of wealth between the money producers and everyone else (ie the poor).

I think this is the major reason why Bitcoins went the fixed / slight deflation route: the only people winning with inflation were the minority that were producing it.

In a fixed or slight deflationary model, savings are important, but so is investment. A person can certainly choose to hoard their bitcoins, but apparently the world can run off one bitcoin if it needs to, so it doesn't matter. Which will make a person richer: Letting all the coins slowly whittle away out of existence so theirs are more valuable (to what end? life is a limit), or investing in a profitable activity that stimulates employment? There is nothing stopping a company being stupendously rich in either a inflationary or deflationary model, but since currency is the grease of an economy, adding more grease doesn't make it run faster, if there's already enough. Bitcoins are infinitely more responsive to a changing supply of bitcoins than regular currency is - its not that easy to take in all the dollars and reprint cents (if RL was deflationary).

In fixed/deflation, you also have a lesser need to publicly support the retired via pension. They work, save, and live off what they saved until they pass on and their coins are sent to their benefactors. I find it very sad to see pensioners getting poorer by the year, because they did not buy 10 houses, or have loads of investments, but saved an amount which seemed quite a lot at the age of retirement. Inflation gives you no chance in retiring unless you tax the young (via investments/housing).

When all the coins are out and about, somebody born then (in 100 years or w/e) will certainly feel they missed out on being an early adopter, but it should not affect their ability to earn bitcoins at a market rate for their services. Ultimately currencies are a way of trading time, and if they are productive, will earn what the market can supply them. If this system is still running in 300 years time, whatever bitcoins were hoarded will probably have changed hands many times by then. It's an attempt to create a long ass term solution.

What you are writing makes sense for fiat currency, where the government gets to decrease the value of everyone's money whenever it wants to its own benefit (of course, the government, of democracies at least, is supposed to be 'the will of the people' so theoretically that should be fine, it's what people wanted to do, but in reality government doesn't always represent everyone's interests well, even in a democracy).  But bitcoin had the opportunity to create inflation at a fixed rate with an even benefit to everyone.  Even your retirement scenario is taken care of - if I have a prediction of how long I am going to live, then I can calculate how many bitcoins I would need to sock away each year to support myself until that time, spending a calculated amount each month, and can factor in the expected extra cost of goods and services over that time due to inflation because I know exactly what that inflation will be.

Bitcoins could have removed every downside of inflation, and left only the upside of "discouraging hoarding".

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June 17, 2011, 10:40:57 PM
 #13

Bitoin IS inflationary...until new blocks no longer reward miners. Then it is mildly deflationary, the only reduction in bitcoins will happen when coins are permanently lost (a wallet is corrupted or misplaced).

So Bitcoin is both inflationary (in stage 1) and then slightly deflationary (in stage 2).


Inflation is not just a product of the quantity of goods available but also of the number of ways those goods must be split. If the network continues to grow faster than the BTC supply then the per capita scarcity of BTC will continue to increase, so really if you consider things in terms of "average # of BTC per user" instead of just "total # of BTC"  it's not really inflationary right now either. I'm sure some time before the 21 million BTC mark the network will slow down its growth enough to become inflationary again but probably not any time too soon.

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July 04, 2011, 06:41:53 PM
 #14

Inflation is not just a product of the quantity of goods available but also of the number of ways those goods must be split.

I guess I should have put in a disclaimer - I use the terms "inflation" and "deflation" strictly in accordance with Austrian Economics. Specifically, that the definition of inflation and deflation are increases and decreases in the money supply respectively.

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July 04, 2011, 06:48:07 PM
 #15

If the system allowed management, it would allow mismanagement.

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July 05, 2011, 12:41:04 AM
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I have a theory: because it would not enrich the creator and very early adopters as well as the defined schedule does.  The first year+ of bitcoin's existence was simply early adopters minting themselves bitcoins.  Look at the block chain, it's obvious; real-looking transactions didn't become common until 4 months ago or so.

This isn't much of a theory, it's more of a fact. Bitcoin was designed to make early adopters as much fiat money as possible without regard to the functioning of the currency. There will be alternatives soon enough though.

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July 05, 2011, 02:14:01 AM
 #17

I still expect to profit in a similar manner as the people that joined in more than a year ago in at most a couple of years from now, if not sooner

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July 05, 2011, 02:55:38 AM
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It's not really very hard to visualize a population and a currency with the attributes that bitcoin has.
Anyone who utters anything along the lines of "bitcoin is inflationary..." is to be roundly discounted as to their understanding of bitcoin.
Bitcoin was designed with genius specifically to be deflationary and it's hard to see how it could be made anymore so.
Of course, if nobody ever uses bitcoins and only holds them then their exchange value at any time could be wildly up or down.
That doesn't imply inflation or deflation at any point in time either.
It is being said a lot that 21 million is too little. What about the 8 decimal places? Only problem there is the fees will need to scale to be appropriate for the scale.
The bottom line is: We don't want inflation. We got that already with USD.
With more and more bitcoin users over time the demand will continue to rise and we already know that absolute total of whole bitcoins will approach 21 million.
Barring any unforeseen events I see bitcoins being worth more than $500 in 5 years.
Hoarding is fine.
There are still 8 decimals to work with and there will never be a "shortage" of bitcoin fractions.
There are flows in and out of economies all the time and there will be loads of people cashing in/ buying in and moving bitcoins to other people.
I'll take bitcoin over gold thanks.
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July 05, 2011, 03:45:38 AM
 #19

It's hard to argue against the fact that the system rewards early adopters. Truthfully, there is little reason why anyone couldn't just go out and create their own Bitcoin-like cryptocurrency. It's for exactly this reason that I would recommend against large investments in Bitcoin. If you want to have some fun, invest or mine a bit but don't sink your retirement fund into a entirely new idea like this.
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July 05, 2011, 04:30:09 AM
 #20

Inflation is good for holders of debt, but it also tends to (in small amounts), help make sure that the economy is vibrant - since if the money you hold today will be worth less in time, there's an incentive to spend it.  Deflation give the reverse incentive.

Now whether either of these situations is better is a different question - and my guess is that Satoshi feels that the problems with inflation are greater than those with deflation, and that's why it's that way.   It's a philosophical decision - that's all.
All of this, except the speculation about Satoshi, is false.

1) Inflation is good for holders of debt. Nonsense. Inflation makes interest rates higher, which is bad for holders of debt. Inflation makes it harder for people who hold debt to refinance and makes creditors want their money back sooner, which is also bad for holders of debt.

2) Inflation gives people an incentive to spend money. Nonsense. Inflation means you can get a higher interest rate if you save the money, giving you an equal incentive to save.

3) Deflation gives you an incentive to hold money. Nonsense. You can just as easily sell the right to hold  that money and get its value today rather than holding it yourself.

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