Bitcoin and Inflation

[dnprock]

I wrote a thread on Twitter about Bitcoin and Inflation.

Original Thread: https://twitter.com/bitflate/status/1189401591226355719

1/8. Some thoughts on inflation and Bitcoin. Zero inflation will need high fee to incentivize miners.

2/8. High fee requires high coin price. People are not paying high fee if bitcoins are not worth a lot.

3/8. Price drop and fee drop will drop hashrate. That'll make 51% attack cheaper.

4/8. Bitcoin is going for digital gold use case. So high fee is expected. That'll make Bitcoin money for rich people. Normal people can't afford transaction in Bitcoin.

5/8. A little inflation, like 1%, can reduce fee. The cost of running Bitcoin network spreads to HODLers through inflation. It'll make Bitcoin more accessible to more people.

6/8. 1% inflation is lower than gold. Bitcoin can still be digital gold.

7/8. If you truly believe in digital money for people, you should consider support for small inflation of Bitcoin supply.

8/8. Higher inflation (but not too high) will make Bitcoin even more accessible to people. But it'll diminish Store of Value use case. Bitcoin won't support this. But no worry, there's @bitflate with 7% inflation.

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[joniboini]

Where do you get the Gold supply inflation rate? I tried to search the internet but didn't found any satisfying data.

One issue with this inflation solution is how unpredictable the market will react. Even if it's only 0.1% inflation, then the 'no inflation ever money' argument, which makes some use Bitcoin in the first place, is no longer valid. When that happens, regardless of how logical it is, some people will ditch it. We don't know how to measure such a possibility imo.

Another solution for this incentive problem is to use other coins to reward miners (like RSK).

[mk4]

I don't think higher fees is necessarily the only way to incentivise miners. They could also be incentivised with higher trade volumes hence more fees for the miners to collect in total, though it's debatable which is better for them financially.

Also, high fees aren't necessarily "expected". For on-chain transactions sure, pretty much for the bigger transactions. But there's a reason why second-layer solutions like the lightning network are being developed, for the sort of "coffee transactions".

As for the low inflation solution, the same has been proposed by Peter Todd in the past, and he pretty much received a good backlash for it.

But no worry, there's @bitflate with 7% inflation.

I'd say goodluck with your altcoin, but 7% is A LOT.

[figmentofmyass]

Zero inflation will need high fee to incentivize miners.

agreed.

High fee requires high coin price.

not necessarily. the difficulty algorithm was designed to adjust to mining profitability. so as long as miner revenue (denominated in BTC) doesn't drastically decline along with the inflation rate, the system should work as designed.

in practice, transaction fees and price will probably both rise to an extent.

A little inflation, like 1%, can reduce fee. The cost of running Bitcoin network spreads to HODLers through inflation. It'll make Bitcoin more accessible to more people.

1% inflation is lower than gold. Bitcoin can still be digital gold.

If you truly believe in digital money for people, you should consider support for small inflation of Bitcoin supply.

a permanent 1% inflation rate may have been an optimal security measure, had it been implemented early on. it would have allowed us more leeway in allowing block size increases, knowing that transaction fees weren't the sole provider of future mining revenue.

it's too late now. the idea is far too controversial to gain traction.

[CryptoBry]

Where do you get the Gold supply inflation rate? I tried to search the internet but didn't found any satisfying data. One issue with this inflation solution is how unpredictable the market will react. Even if it's only 0.1% inflation, then the 'no inflation ever money' argument, which makes some use Bitcoin in the first place, is no longer valid. When that happens, regardless of how logical it is, some people will ditch it. We don't know how to measure such a possibility imo. Another solution for this incentive problem is to use other coins to reward miners (like RSK).

That can be a very good idea but that can be implemented years from now when the Bitcoin mining rewards may not anymore be feasible to do the mining which can threaten many operators to just abandon their business. Rewarding them with an altcoin created for the sole purpose of mining can be one big good idea worth exploring rather than make the transaction fees more expensive as it is. This will surely be cropping years from now when rewards available are not going to be viable anymore and continuing the mining business can already be either just a break-even or worse a losing proposition.

Going back to the main topic, I think allowing inflation in whatever form, type, size or percentage to come in to the Bitcoin ecosystem can surely be subjected to heavy debates and I don't think this can be taken well by the many "hodlers" and enthusiasts of Bitcoin as this seemingly harmless idea goes against the very basic principle that holds Bitcoin as it is. That is like allowing the cat to bark or the dog to meow...very unacceptable and maybe even so unlikely to happen.

[bitmover]

Zero inflation will need high fee to incentivize miners.

[/quote]

I do not agree.
You can have more transactions.

When incentive/ inflation is near zero, there will be two scenarios for Bitcoin: or everyone will be using, or nobody will be.
In the first case we will have much more transactions per block (some solution for scaling will show up)

About bitcoin being a digital gold only for rich people... It is not now, there is no reason to think it will be in the future. Do you think only rich people use bitcoin?

Op you just didn't think or made enough research about the subject, and you are using wrong premises to create conclusions which are wrong as well..

[squatter]

Zero inflation will need high fee to incentivize miners.

I do not agree.
You can have more transactions.

Can you elaborate on how that's supposed to work?

You can only fit more transactions by increasing block size. Of course, increasing block size reduces fee pressure and allows everyone to pay lower fees.

When incentive/ inflation is near zero, there will be two scenarios for Bitcoin: or everyone will be using, or nobody will be.
In the first case we will have much more transactions per block (some solution for scaling will show up)

There's no magical solution that will allow people to transact for cheap on the mainchain. Users are supposed to pay higher fees as the subsidy disappears -- that's the design. If you're not willing to pay the real cost of transactions, you won't benefit from Bitcoin's security.

Right now, miners are subsidizing user fees based on speculation and inflation. Not many people around here are planning for what comes after.

[ChrisPop]

There is no need at all for inflation. That's what makes Bitcoin valuable and a viable store of value asset - because it is a deflationary currency. It has a limited supply that needs to be distributed around the world. Don't tell me that Bitcoin is not accessible to people. That is exactly why Satoshi put the decimals in the equation, so one does not need to buy an entire Bitcoin and we have denominations like mBTC, uBTC and Satoshis. Why would you need inflation for?

If miners don't get enough block rewards they won't sell BTC at lower prices or stop mining thus the hash rate drop and results in more block rewards per miner who keeps mining/verifying blocks. Less miners make the network more vulnerable, but at that point I'm sure the adoption will be so much higher for BTC. The big holders and believers are working on that. We're already seeing increased adoption of Bitcoin and I'm sure we'll see major changes especially in crypto friendly countries in the next years.

[kryptqnick]

Zero inflation will need high fee to incentivize miners.

agreed.

I am having problems even with this first point. Inflation means that the coin's value is decreasing. One needs more of the coins to buy the same stuff as in the past. Alternatively, it can be described as an increase in the price of goods and services. To make it more evident, let's say that in 2019 the price was 0.01 BTC, and in 2020 it's 0.015. This is inflation. Now, if this devaluation does not occur, why the fees to incentivize miners have to be high? And high in comparison with which fees? Higher than if there was inflation? I fail to see how these two are related. And I can see that it's not just me struggling to see why it is so. So could the op or you elaborate on that?

[Harlot]

I see no direct correlation when it comes to inflation on the effects it will have in the industry. Inflation is simply the rate of the prices of basic good went up and if we simply have 0% inflation then it translates to a low demand for those basic needs thus increasing anyone's buying power with their money. With that being said I don't think that miners should be incentivize more because they actually have a higher or at least a retained buying power with the money they are currently earning now. You might be thinking about higher rates of inflation and you see the effects completely in a different way on how it can affect the industry.

[Kyraishi]

Why do you think Bitcoin requires an inflation model as well? Are you sure the coin needs something like constant interest for it to work?

I would disagree, Bitcoin is made in a way where inflation can be easily avoided and with miner fees and block rewards being given out there actually not much of a need for inflation with this system.

Also, fees aren't that bad currently, it's fairly decent fees to send out a couple transactions and it's nowhere as bad as wire transfers.

[Upgate]

Is the bitcoin affected by inflation, I have read in articles that bitcoin in not impeded by inflation or deflation however it's not a currency yet so how would the inflation be based

[figmentofmyass]

Zero inflation will need high fee to incentivize miners.

agreed.

I am having problems even with this first point. Inflation means that the coin's value is decreasing. One needs more of the coins to buy the same stuff as in the past. Alternatively, it can be described as an increase in the price of goods and services.

there are 2 forms of inflation:
1. price inflation, a sustained increase in prices. https://en.wikipedia.org/wiki/Inflation
2. monetary inflation, a sustained increase in the money supply. https://en.wikipedia.org/wiki/Monetary_inflation

we are discussing the second form. the OP is referring to bitcoin's fixed money supply. right now, the inflation rate is actually quite high, 3-4% annual but eventually it will be 0%.

so the issue at hand is, how do we keep miners incentivized to secure the chain? inflation is keeping them incentivized for now. later on, high fees will need to do it instead.

[bitmover]

Zero inflation will need high fee to incentivize miners.

I do not agree.
You can have more transactions.

Can you elaborate on how that's supposed to work?

You can only fit more transactions by increasing block size. Of course, increasing block size reduces fee pressure and allows everyone to pay lower fees.

You can reduce transaction size, like segwit. Who knows if in future something that reduced even more transaction size appears. Increasing block size is not the only option.

You can scale offchain as well. You can use both solutions. Neither of those change block size.

When incentive/ inflation is near zero, there will be two scenarios for Bitcoin: or everyone will be using, or nobody will be.
In the first case we will have much more transactions per block (some solution for scaling will show up)

There's no magical solution that will allow people to transact for cheap on the mainchain. Users are supposed to pay higher fees as the subsidy disappears -- that's the design. If you're not willing to pay the real cost of transactions, you won't benefit from Bitcoin's security.

Right now, miners are subsidizing user fees based on speculation and inflation. Not many people around here are planning for what comes after.

I don't agree and I don't think that this is the design (that users should pay more fees). This is not written in the whitepaper and it is not what is happening.

It does not require  a magical solution, but a rational solution. We are in 2019 with thousands of transactions per day and you can still confirm transactions with 1 sat/byte using legacy addresses.

Actually, it is the opposite that is written there. That there is an incentive now that will last a few years. When the incentive is over, they will survive just in fees. This is what is written there. And at that point the reward would be so small that it would be only a small fraction of the fees.

Right.  Otherwise we couldn't have a finite limit of 21 million coins, because there would always need to be some minimum reward for generating.  In a few decades when the reward gets too small, the transaction fee will become the main compensation for nodes.  I'm sure that in 20 years there will either be very large transaction volume or no volume.

Satoshi expected a very large transaction volume not a small transaction volume with higher fees.

[squatter]

Can you elaborate on how that's supposed to work?

You can only fit more transactions by increasing block size. Of course, increasing block size reduces fee pressure and allows everyone to pay lower fees.

You can reduce transaction size, like segwit. Who knows if in future something that reduced even more transaction size appears. Increasing block size is not the only option.

You can scale offchain as well. You can use both solutions. Neither of those change block size.

Offchain solutions can't provide equivalent security to the blockchain.

Transaction optimization is important but fairly limited. They are linear scaling improvements. Segwit technically didn't optimize transaction size either; it just moved data outside the base block with a block size increase.

It does not require  a magical solution, but a rational solution. We are in 2019 with thousands of transactions per day and you can still confirm transactions with 1 sat/byte using legacy addresses.

Actually, it is the opposite that is written there. That there is an incentive now that will last a few years. When the incentive is over, they will survive just in fees. This is what is written there. And at that point the reward would be so small that it would be only a small fraction of the fees.

Right.  Otherwise we couldn't have a finite limit of 21 million coins, because there would always need to be some minimum reward for generating.  In a few decades when the reward gets too small, the transaction fee will become the main compensation for nodes.  I'm sure that in 20 years there will either be very large transaction volume or no volume.

Satoshi expected a very large transaction volume not a small transaction volume with higher fees.

Satoshi was comparing the situation in early 2010 -- where there was virtually no transaction volume nor full blocks -- to the future. Nothing he said suggests that users would always be able to pay cheap fees. He's merely stating what I did, that the system is currently being subsidized by inflation.

Also, keep in mind that bitcoin-denominated fees are drastically lower now than in earlier versions of Bitcoin. In 2011 and prior, it was common for transactions to require a minimum transaction fee of 0.01 BTC.

So, what exactly do you mean when you say "higher fees?" How high is too high, in your opinion?

[dnprock]

Where do you get the Gold supply inflation rate? I tried to search the internet but didn't found any satisfying data.

I found the numbers here: https://materials-risk.com/the-gold-stock-to-flow-model/

"While the entire amount of gold ever mined totals approximately 190,000 tonnes (the stock), annual production is about 2,900 tonnes (the flow). If you divide the stock by the flow you get a stock-to-flow ratio of 66 years. Silver meanwhile has a stock-to-flow ratio of ~22."

I'd say goodluck with your altcoin, but 7% is A LOT.

Thanks. 7% is a lot and designed to behave opposite of Bitcoin.

You can have more transactions.
In the first case we will have much more transactions per block (some solution for scaling will show up).
Do you think only rich people use bitcoin?

You can't. Block size and block time is fixed.
Off-chain scaling will add more fee to transactions if you want to secure on-chain transactions. I think high fee will prevent average people from using bitcoin.

So, what exactly do you mean when you say "higher fees?" How high is too high, in your opinion?

I think 1% is near gold inflation. So if Bitcoin does not have inflation, fee needs to rise to cover similar amount. So that would be about 210000 BTC for 1% or 105000 BTC for 0.5% per year. Bitcoin is digital and more efficient than gold. But it'll come in as some percentage of supply.

In 2011 and prior, it was common for transactions to require a minimum transaction fee of 0.01 BTC.

I think this is because price has been rising much faster than hashrate. When price growth slows, I think fee will rise.

[Carlton Banks]

Offchain solutions can't provide equivalent security to the blockchain.

you meant "existing offchain solutions"


I think it's important to remember that this is a very immature tech. There are people working on other possibilities for offchain tech, check out the Scaling Bitcoin conference videos for a few examples.


There is a very long time to wait before any problems with Bitcoin's present miner incentive scheme begin to show. Literally decades. I expect that either Bitcoin will switch to a 2nd layer solution that outperforms blockchain tech, or that Bitcoin itself will be wiped out by something unknown. I also expect that either could take a long time to happen, again, perhaps decades.

In the meantime, the mining reward schedule that we're already using along with payment channels on the 2nd layer can buy a huge amount of time for people to work on a permanent solution. And there are risks in switching to a constant inflation schedule, most of the people who took an interest in Bitcoin did so because the inflation schedule was designed to go to zero, people were attracted by those economic principles.

So what are the inflation-happy people going to do if we all stop using Bitcoin and switch to another anti-inflation money? Will you keep following us every time we change to the latest non-inflating money, and start the same debate all over again? Bitcoin already is the "we-don't-want-inflation-leave-us-alone" coin


So thanks for your help, but no thanks

[bitmover]

Satoshi was comparing the situation in early 2010 -- where there was virtually no transaction volume nor full blocks -- to the future. Nothing he said suggests that users would always be able to pay cheap fees.

He does not suggest that the users would be paying higher fees, as he says later on "there will either be very large transaction volume or no volume."

He's merely stating what I did, that the system is currently being subsidized by inflation.

I think He is stating the opposite: that rewards will be subsided by a high volume of transaction. He isn't stating anything about higher fees, but a higher volume.

So, what exactly do you mean when you say "higher fees?" How high is too high, in your opinion?

My bet is that will remain small, in the same USD value.
Maybe in later BIPs we will be able to set sub-satoshi/byte fees..? Who knows. Only a fork is needed to do that.

Anything higher than today's usd value in fees is "high fee" imo.

Free market is smart enough to make miners leave if they find it unprofitable to mine without incentive. I think they will just move to a location with cheaper energy.

Let's see what happens in the next halving.
They will be a crazy about the price, so fees will pump (more than the price) for some months. But things will come back to normal, and I will keep confirming my transactions with 1 sat/byte in 2 hours, like I always did =D

There is a very long time to wait before any problems with Bitcoin's present miner incentive scheme begin to show. Literally decades. I expect that either Bitcoin will switch to a 2nd layer solution that outperforms blockchain tech, or that Bitcoin itself will be wiped out by something unknown. I also expect that either could take a long time to happen, again, perhaps decades.

In the meantime, the mining reward schedule that we're already using along with payment channels on the 2nd layer can buy a huge amount of time for people to work on a permanent solution. And there are risks in switching to a constant inflation schedule, most of the people who took an interest in Bitcoin did so because the inflation schedule was designed to go to zero, people were attracted by those economic principles.

So what are the inflation-happy people going to do if we all stop using Bitcoin and switch to another anti-inflation money? Will you keep following us every time we change to the latest non-inflating money, and start the same debate all over again? Bitcoin already is the "we-don't-want-inflation-leave-us-alone" coin


So thanks for your help, but no thanks

I don't think bitcoin will be wiped out... if something unkown shows up because of scaling problems, bitcoin will become the digital gold imo. Fees may be a bit higher, but it will be a very robust system, much cheaper than gold transactions for example.

[squatter]

Satoshi was comparing the situation in early 2010 -- where there was virtually no transaction volume nor full blocks -- to the future. Nothing he said suggests that users would always be able to pay cheap fees.

He does not suggest that the users would be paying higher fees, as he says later on "there will either be very large transaction volume or no volume."

I don't see how that addresses what I said. He certainly doesn't rule out the notion of higher fees, does he?

Bottom line, that miner revenue needs to come from somewhere. I don't see the math supporting this idea that users can pay pennies (USD) for on-chain transactions forever.

He's merely stating what I did, that the system is currently being subsidized by inflation.

I think He is stating the opposite: that rewards will be subsided by a high volume of transaction.

That's not the opposite. Satoshi's point that inflation subsidizes miners in the bootstrapping phase is pretty obvious. I can't elaborate any more on that.

You're ignoring the crux of what I'm saying. I'm not denying that he expected a high volume of transactions. There already are an extremely high volume of transactions compared to when he said that. What do you expect another exponential increase in volumes to do to fees?

So, what exactly do you mean when you say "higher fees?" How high is too high, in your opinion?

My bet is that will remain small, in the same USD value.
Maybe in later BIPs we will be able to set sub-satoshi/byte fees..? Who knows. Only a fork is needed to do that.

In less than 13 years, the mining subsidy will be 0.78125 BTC. Could you give me an oversimplified back-of-the-envelope guess on where total block rewards and average mining costs might be at that time?

Anything higher than today's usd value in fees is "high fee" imo.

Why are you thinking in terms of USD value? 0.01 BTC was a perfectly normal mandatory fee in 2011.

[nelson4lov]

Is the bitcoin affected by inflation, I have read in articles that bitcoin in not impeded by inflation or deflation however it's not a currency yet so how would the inflation be based

Bitcoin does have a small inflation rate of around 3.81% annually. The inflation is due to mining block rewards that are gotten as tx fee by miners. But it's gotten to change around Q2 2020 as the block reward would be halved. Afterwards, the mining rewards will be relatively low. Contrary to popular opinions, these will hugely influence/affect the price.