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Author Topic: Is Bitcoin going to change its inflation algorithm?  (Read 4345 times)
Aristotle
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July 19, 2011, 03:03:40 AM
 #1

I was bored and reading through this Bitcoin wiki page: https://en.bitcoin.it/wiki/Deflationary_spiral

And the last paragraph really caught my attention:

Quote
There is a simple solution to this problem. For Bitcoins to avoid being supplanted by an alternative electronic currency in the future, the supply of Bitcoins must grow in proportion to the total value of transactions undertaken using the system. This will lead to price stability and will eliminate the benefit that accrues to existing holders of the currency. This is fundamentally necessary to protect the existing value of Bitcoins. If this does not occur then an alternative system that does recognize the risk of deflation and price instability will present itself which will achieve a greater level of acceptance, destroying Bitcoin in the process.

After seeing all the gold Bitcoin-bugs on this forum, and seeing that the Bitcoin exchanges heavily reflect that people are buying Bitcoins right now mostly as a bet that there will be price deflation, the change described in the above paragraph may be a hard sell Smiley

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theymos
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July 19, 2011, 03:11:25 AM
 #2

No chance.

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July 19, 2011, 03:36:21 AM
 #3

For Bitcoins to avoid being supplanted by an alternative electronic currency in the future, the supply of Bitcoins must grow in proportion to the total value of transactions undertaken using the system.

^ that statement is false, but it goes back to the fierce debate over whether a "deflationary" currency can really work. I think it can, and would prove superior to an inflationary currency. The number of units of a money in a society matters not, so long as A) there are enough units to permit small purchases easily (eight decimals more than qualifies) and B) the number of units of a money doesn't change suddenly or significantly (Bitcoin's predetermined minting rate solves this issue). Prices adjust to money supply, and so long as money supply is predictable and smooth, then the actual amount of the money matters little.

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July 19, 2011, 03:41:11 AM
 #4

I chose to use Bitcoin because its algorithm.  I would not adopt an inflationary currency unless I had to.  Any source that talks about a "deflationary spiral" is automatically discredited.

Want to buy a 2004 Ford Taurus with bitcoin?  I live in Maryland.  Send me a private message if interested.
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July 19, 2011, 03:42:35 AM
 #5

For Bitcoins to avoid being supplanted by an alternative electronic currency in the future, the supply of Bitcoins must grow in proportion to the total value of transactions undertaken using the system.

^ that statement is false, but it goes back to the fierce debate over whether a "deflationary" currency can really work. I think it can, and would prove superior to an inflationary currency. The number of units of a money in a society matters not, so long as A) there are enough units to permit small purchases easily (eight decimals more than qualifies) and B) the number of units of a money doesn't change suddenly or significantly (Bitcoin's predetermined minting rate solves this issue). Prices adjust to money supply, and so long as money supply is predictable and smooth, then the actual amount of the money matters little.

Apart from being false, it promises something it can not deliver. Nobody can know the amount of real transactions in the Bitcoin network or wealth being transfered for bitcoins, so its imposible to calculate a rate of monetary inflation to mantain stable prices. And what happens when prices are signaling that you need to contract the money supply? Its just stupid.
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July 19, 2011, 04:18:20 AM
 #6

Someone needs to fix the wiki, if that is still in there.

Deflationary currencies worked for all of human history. It's inflationary currencies which haven't worked; every time they have been introduced, the result has been economic chaos.

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Aristotle
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July 19, 2011, 05:01:00 AM
 #7

Someone needs to fix the wiki, if that is still in there.

Deflationary currencies worked for all of human history. It's inflationary currencies which haven't worked; every time they have been introduced, the result has been economic chaos.

One could argue that deflationary currencies didn't work for most of human history, resulted in plutocracies, and when inflationary currencies were introduced they resulted in great economic booms, globalization, and a great reduction in world-wide poverty  Tongue

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hugolp
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July 19, 2011, 05:02:45 AM
 #8

Someone needs to fix the wiki, if that is still in there.

Deflationary currencies worked for all of human history. It's inflationary currencies which haven't worked; every time they have been introduced, the result has been economic chaos.

One could argue that deflationary currencies didn't work for most of human history, resulted in plutocracies, and when inflationary currencies were introduced they resulted in great economic booms, globalization, and a great reduction in world-wide poverty  Tongue

Do you realize that inflationary currencies are very old? All human history is plagued by inflationary currencies.
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July 19, 2011, 05:04:36 AM
 #9

Someone needs to fix the wiki, if that is still in there.

Deflationary currencies worked for all of human history. It's inflationary currencies which haven't worked; every time they have been introduced, the result has been economic chaos.

One could argue that deflationary currencies didn't work for most of human history, resulted in plutocracies, and when inflationary currencies were introduced they resulted in great economic booms, globalization, and a great reduction in world-wide poverty  Tongue

One could argue such, but one could not come up with any supporting evidence.

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patvarilly
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July 19, 2011, 05:14:21 AM
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One could argue such, but one could not come up with any supporting evidence.

Yeah, the second half of the twentieth century just, like, didn't exist.
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July 19, 2011, 05:14:45 AM
 #11

I like when i pull money from my pocket there is more than what i put in; so i really hope Bitcoin remains deflationary.

(I dont always get new reply notifications, pls send a pm when you think it has happened)

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July 19, 2011, 05:16:53 AM
 #12

One could argue such, but one could not come up with any supporting evidence.

Yeah, the second half of the twentieth century just, like, didn't exist.

What part of "supporting evidence" didn't you understand?

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patvarilly
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July 19, 2011, 05:18:53 AM
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One could argue such, but one could not come up with any supporting evidence.

Yeah, the second half of the twentieth century just, like, didn't exist.

What part of "supporting evidence" didn't you understand?

This part: http://www.youtube.com/watch?v=jbkSRLYSojo
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July 19, 2011, 05:27:29 AM
 #14

One could argue such, but one could not come up with any supporting evidence.

Yeah, the second half of the twentieth century just, like, didn't exist.

What part of "supporting evidence" didn't you understand?

This part: http://www.youtube.com/watch?v=jbkSRLYSojo

I saw nothing in that video addressing the issue of inflation, or even mentioning it. Didn't see anything in the video description either. If that's your "supporting evidence," it's quite weak.

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wumpus
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July 19, 2011, 05:30:56 AM
 #15

Before it could be changed you'd need to define exactly mathematically what you want. Note that it can not rely on any external information and all nodes must return the same answer to be able to verify.

"the supply of Bitcoins must grow in proportion to the total value of transactions undertaken using the system" is a handwaving description and personally I think it's impossible to determine that in a rational objective way.

Bitcoin Core developer [PGP] Warning: For most, coin loss is a larger risk than coin theft. A disk can die any time. Regularly back up your wallet through FileBackup Wallet to an external storage or the (encrypted!) cloud. Use a separate offline wallet for storing larger amounts.
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July 19, 2011, 05:48:51 AM
 #16

Before it could be changed you'd need to define exactly mathematically what you want. Note that it can not rely on any external information and all nodes must return the same answer to be able to verify.

"the supply of Bitcoins must grow in proportion to the total value of transactions undertaken using the system" is a handwaving description and personally I think it's impossible to determine that in a rational objective way.
Hand waving not necessary.

Institute a txn fee equal to 0.1% of all sends. The total volume of sends per unit time (velocity) would then be proportional to fee collection. Peg difficulty to achieve a coin generation rate equal to a fraction of total txn fee collection. Keep coin generation going forever. In the event of a fall in difficulty relative to a target trend (e.g. difficulty is set by a central planner to grow at a target of 50% year-on-year forever), destroy all coins collected using the txn fee. This causes a net reduction in money supply and serves as a credible commitment to fight price inflation. If difficulty rises faster than a target trend, distribute the txn fees to miners. In this case there is no need to fight price inflation.

This system uses very limited mining incentives compared to bitcoin. How can it keep miners honest? Require all miners to hold coins in escrow until they fulfill a mining contract with the blockchain. Cap mining returns (txn fees + coin generations) at a fixed fraction of coins held in escrow (say 1%). Release the coins from escrow six months after the miners have used up their entire mining allowance (in other words fulfilled their contract). Anyone wanting to monkey around with major hashing power would have to first establish a huge, long-term financial stake in the success of the system.

For initial distribution just grandfather in everyone currently holding bitcoins. Allow them to download a new client and require them to transfer money to new accounts within a set time limit. If they fail to do this before the deadline, then delete their money.

PS: It is true that having strong tools to fight both deflation and inflation simultaneously is difficult. Here I am just focused on the risk of price inflation which I think is the real problem.

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Aristotle
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July 19, 2011, 05:59:00 AM
 #17

Before it could be changed you'd need to define exactly mathematically what you want. Note that it can not rely on any external information and all nodes must return the same answer to be able to verify.

"the supply of Bitcoins must grow in proportion to the total value of transactions undertaken using the system" is a handwaving description and personally I think it's impossible to determine that in a rational objective way.

What do you mean, exactly?  If I understand correctly, every client has the complete transaction history, right?  So, for example, if the total value of all transactions two weeks ago increased 100% last week, then the difference could be injected into the network somehow (lower mining difficulty?).  If it decreased, then the difference could be taken out somehow (raise transaction tax which goes into a void?).  Hopefully, the latter would be a rare occurrence.  It'd probably ok to assume that the proportion of "accounting transactions" would increase with "real transactions."

I can't really see anything too wrong with this, and it seems possible. Whether it would be better or worse, I don't know.

Edit: Nevermind, the guy above me seems to thought it out better than I have Smiley

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July 19, 2011, 06:00:35 AM
 #18

It's wrong because it's the degradation of everybody's property. You're disgusting.
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July 19, 2011, 06:03:44 AM
 #19

So, basically, you guys want to optimize total transaction volume to a certain value?

If there's too little volume... lower the fees, create more coins

If there's too much volume... raise the fees, destroy coins

Am I right?

Hmm I don't think the number of transactions or the volume of them is a useful metric at all. It can be gamed very easily by miners (refuse to include transactions, or include extra "to self" transactions).

Bitcoin Core developer [PGP] Warning: For most, coin loss is a larger risk than coin theft. A disk can die any time. Regularly back up your wallet through FileBackup Wallet to an external storage or the (encrypted!) cloud. Use a separate offline wallet for storing larger amounts.
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July 19, 2011, 06:05:41 AM
 #20

It's wrong because it's the degradation of everybody's property. You're disgusting.

Why does it make a difference to you whether security is paid for through seignorage or txn fees? They are both taxes.

The current system looks a lot like the US gov't budget, except several orders of magnitude worse. Plenty of security expenditure today (paid for with seignorage), a promise that seignorage will decrease in the future, no credible explanation of how either where new funds will come from if this promise is kept, or, alternatively, how security expenditures will be cut.


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