Economic Incentives for Inflating Cryptocurrency

[dnprock]

Hi everyone,

I'm working on a cryptocurrency with constant supply inflation. I wrote an article about its economic incentives.

Original Post: https://bitflate.org/post/2019/11/01/economic-incentives-for-inflating-cryptocurrency.html

Bitflate is a cryptocurrency with a constant inflation of 7% per year.

Skeptic: Your Bitflate coin supply inflates. It’ll devalue people’s bag of money. Nobody will want to hold it.
Me: Inflation creates more coins. More people will adopt it. That’s how it will retain value.
Skeptic: That’s a ridiculous idea. It won’t work.
Me: Yeah, it is kinda weird. But it may work.

Everyone got into crypto because they don’t like fiat inflation. Bitcoin is the pioneer. It has limited supply, really limited, eventually zero supply. This is more limited than gold which has about 1% inflation. Inflation has become a touchy subject in crypto. Most people reject it.

I think this rejection of inflation hinders crypto adoption. This is the reason why I decided to create Bitflate, a cryptocurrency with 7% per year inflation. Crypto enthusiasts question me about the incentives for people to adopt Bitflate. I thought a lot about these. Candidates are the technology, the marketing, the community, the belief, the hope, the opposite of Austrian economics, the solution to cryptocurrency adoption. But I think none of these are the incentives. Inflation is about economics. The answers are economic.

For Bitflate cryptocurrency, I see two incentives: Bitflate Reward System and Bitflate Adoption Rate.

Bitflate Reward System

Although Bitflate chain has inflation, I design a reward system to give more coins to early adopters. The idea is to encourage people to hold on to their coins and create some restriction of supply. I think this create incentives to hold Bitflate coins early on. This way people with coins don’t dump them. The reward system is as follows:

0: 50 (supply: 10 million)
1: 25 (supply: 15 million)
2: 12.5
3: 6.25 (end of halving)
4: 6.56 (start of inflation 7%)
5: 7.02
6: 7.51
7: 8.04
8: 8.60
9: 9.20
10: 9.85 (supply: 31 million)

For the first 3 halvings, Biflate follows the same reward schedule as Bitcoin. But it will switch to inflation after 4 halvings. I think the reward schedule create incentives to hold Bitflate coins early on before Bitflate reaches critical mass. Even with inflation, it will take 10 years for supply to reach 31 million coins.

Bitflate Adoption Rate

After the chain passes its 4th halving, reward will start to increase. There is no supply restriction. Bitflate survival is dependent on adoption rate. There are now 3 possible scenarios:

- If adoption rate is around 7%, the coin will retain its value.
- If adoption rate is greater than 7%, the coin may gain more value.
- If adoption rate is less than 7%, the coin will decline and die.

Long-term Transaction Coin

If Bitflate manages to survive for many years, its adoption will eventually plateau. This is inevitable. At that point, I’m not sure what will happen. People don’t have incentive to hold it. Does it implode and collapse? I think we may be able to develop interest banking to prevent value loss. Because it is digital, it could be easier to manage than inflationary fiat currencies. It may become a transaction coin. Businesses may accept it.

Bitflate is experimental

Despite the two incentives, Bitflate can fail. If Bitflate fails to reach critical mass, it may implode. Price and hashrate will crash. Users may need more than just these two incentives. Historically, authorities force people to use whatever inflationary currencies they issue. On the other hand, people like deflationary assets like real estate, gold, Bitcoin. Bitflate is a new digital alternative. It is better than inflationary fiat. But it may not provide enough incentives.

[Wexnident]

This would literally turn your coin useless in the future you know that? Inflation isn't really frowned upon since a good inflation could bring out positive benefits to the economy of a country. Too much, and it affects the purchasing power of the currency instead.
This impacts those of the lower working class since a rise in Inflation doesn't mean a rise in Income of workers.
What ever could you mean that you could prevent value loss? Proof? Could you prevent prices from going higher? Could you prevent the value of your coin from decreasing with each increase in supply that you say?
The plan you made up basically just follows what BTC did, hopes that it increases in value, and by the end where BTC would've stopped, you would insteas continue, hoping that it could help the coin grow.
My opinion on it? Nope it wont. Just the fact that the coin would inflate would stop it from being appealing to most investors. They wouldn't even take a second look at it.

[mu_enrico]

I'd suggest OP to move this thread to altcoin discussion, except you want to talk about the inflation specifically (not about bitflate).

IMO "inflation-based" cryptocurrency wouldn't work, why? Because it's competing directly with fiat currency. Furthermore, fiat has the ability to change its inflation rate depends on the economic condition freely. As you can tell, a 7% inflation rate also way too high, except you compare it with the Zimbabwe dollar.

Last, if your system only a fork of another system, with a little tweak here and there, I'm pretty sure it will fail.

[tsaroz]

A good analysis for inflation and crypto. For any crypto to stay alive, it needs to have an inflation as well as rewarding mechanism. Ethereum with its new update could be moving to a longer future. For bitcoin, the days are short. After 2020 halving, the issuance would be low while the currency keeps on getting lost by different mechanisms. The coin would never have a circulating of 21 million coins while more than 18 millions are already mined.

[alyssa85]

There are lots of existing coins that have inflation built in - dogecoin, steem and so on. All the reasons you give for your coin are already taken care off with existing inflationary coins.

Why do you feel that the crypto world needs a new coin? New coins struggle to get traction especially if they bring nothing new to the table.

[dnprock]

I'd suggest OP to move this thread to altcoin discussion, except you want to talk about the inflation specifically (not about bitflate).

IMO "inflation-based" cryptocurrency wouldn't work, why? Because it's competing directly with fiat currency. Furthermore, fiat has the ability to change its inflation rate depends on the economic condition freely. As you can tell, a 7% inflation rate also way too high, except you compare it with the Zimbabwe dollar.

Last, if your system only a fork of another system, with a little tweak here and there, I'm pretty sure it will fail.

I want to discuss about the economic incentives of inflation. Having a reference implementation of Bitflate makes the conversation easier. But most people don't get into the details but reject inflation outright.

I agree an inflating coin would compete directly with fiat currency. That is the idea. We want a better currency. Rejecting inflation is hindering adoption of cryptocurrency. Fiat has the ability to change inflation but it needs a central authority. With cryptocurrency, we can make a coin that inflates without a central authority.

A 7% inflation rate is moderately high. It's designed to accommodate for growth and move away from Store of Value use case. A coin with 7% inflation is better than the Zimbabwe dollar.

I use a fork of Bitcoin because it is good for money use case. I want to bring attention back to inflation. It's the main point. I think other designs are too fancy and unnecessary.

There is a tragedy of common scenario. We will end up with only Bitcoin and fiat currencies. People are too self-fish to pick an inflating coin that they understand the rule. They end up with whatever authorities issue and deflationary Bitcoin.

There are lots of existing coins that have inflation built in - dogecoin, steem and so on. All the reasons you give for your coin are already taken care off with existing inflationary coins.

Why do you feel that the crypto world needs a new coin? New coins struggle to get traction especially if they bring nothing new to the table.

Coins, like Dogecoin and Ethereum, have tail emission. It's a constant amount. This constant amount is designed to support mining. It'll diminish relative to supply over time. See a reference for Dogecoin here:

https://bitcoin.stackexchange.com/questions/19867/reward-schedule-and-maximum-number-of-dogecoins

These coins use tail emission as a mechanism to keep mining alive. Their goal is still Store of Value. I think an inflating coin needs a new design. It really needs to inflate at a percentage rate. We want to answer some questions:

- Will the economics of inflation work for cryptocurrency?
- What are the incentives for user to adopt a chain with inflating supply?

For Bitflate, in particular, I want to test out a design and validate the incentives.

- A reward system tilted to early adopters.
- Moderately high inflation rate of 7%.
- Adoption rate of inflating coin.

Bitflate is experimental. It may not have enough incentives. If someone can think of a better design, I think cryptocurrency would be more successful.

[dothebeats]

Odd, but then again a fix rate of inflation comes with huge risks, and rewards too if certain factors are met. Inflation is always thought of as an incarnate of the devil when we’re talking about economics, while all it does is expand money supply and urge people to spend since there are tons of money lying around. If inflation is controlled and on par with the economic state, it’s progress, and if not, we all know what happens.

It’s an interesting experiment, though I already know what will happen with a fixed and aggressive 7% inflation rate per annum.

[Febo]

There are lots of existing coins that have inflation built in - dogecoin, steem and so on. All the reasons you give for your coin are already taken care off with existing inflationary coins.

Why do you feel that the crypto world needs a new coin? New coins struggle to get traction especially if they bring nothing new to the table.

But rare have 7%.  Gold mining inflation is 1.5%.  Most countries including EU, China and USA in last 10 years anually on average increased their M! (money supply) for 10% a year.   My speculation is that 7% is a bit to much and should be way closer to gold % then fiat %.

[dnprock]

Odd, but then again a fix rate of inflation comes with huge risks, and rewards too if certain factors are met. Inflation is always thought of as an incarnate of the devil when we’re talking about economics, while all it does is expand money supply and urge people to spend since there are tons of money lying around. If inflation is controlled and on par with the economic state, it’s progress, and if not, we all know what happens.

It’s an interesting experiment, though I already know what will happen with a fixed and aggressive 7% inflation rate per annum.

I'm happy to see someone is getting into the details. Most economists would agree a little bit of inflation is good for the economy. The current US Fed target is 2%. Other fiat currencies have worse inflation. We're in a strange world now that even USD inflates less than this target. At this moment, deflationary Bitcoin is really competing with USD. They both have low inflation. Gold also inflates at 1.5%.

When I started thinking about cryptocurrency inflation, I think it should be a moderately high rate, maybe, 10%. But I dialed back a little bit to 7%. It has a nice feature. Supply will double every 10 years (Rule 72). I thought about dynamically adjusted rate. But I think we'll end up with some version of centralized rate manipulation. I don't know what the right rate is. Maybe, 3-4%. If you think 7% is too crazy, try to come up with a rate that you think would work.

My speculation is that 7% is a bit to much and should be way closer to gold % then fiat %.

If it's 1.5% like gold, it will turn into deflationary asset, Store of Value. It'll behave like gold or Bitcoin. Central banks are doing QE to their economies. So fiat supplies are increasing much faster than inflation.

[dothebeats]

-snip-

I also have thought of a dynamic inflation rate, but what decides it ultimately, I don’t know. It could be subject to a multitude of questions from the community and might end up being a centralized thing since the ones who control the code basically controls everything. As for a fixed rate, I don’t think 3-4% would do, as then again this would entirely be dependent on how well would the economy of your token/coin work. Anyhow, I guess we’ll see once you get live. Until then, there’s a lot of reading and analyzing on inflation as it’s a never-ending as to whether it’s actually better to have it or not.

[dnprock]

I also have thought of a dynamic inflation rate, but what decides it ultimately, I don’t know. It could be subject to a multitude of questions from the community and might end up being a centralized thing since the ones who control the code basically controls everything. As for a fixed rate, I don’t think 3-4% would do, as then again this would entirely be dependent on how well would the economy of your token/coin work. Anyhow, I guess we’ll see once you get live. Until then, there’s a lot of reading and analyzing on inflation as it’s a never-ending as to whether it’s actually better to have it or not.

It's good to see other people thinking about the same problem I arrived to a conclusion: a moderately high rate would work. Something between 5-10%. I ended up with 7% because of Rule 72.

When people think about inflation, they think about inflating from the existing fiat base. If USD inflates 7%, that would be bad. But people are missing the crypto context. With a new crypto, you start from 0 supply. So 7% may be a bit low. I did start a chain for Bitflate. Supply is at 2.7 million coins. I won't hit inflation until 19.3 million coins. I launched the chain a few months ago.

https://bitflate.org/

I also have an altcoin thread for it on bitcointalk. I update Bitflate progress there.

https://bitcointalk.org/index.php?topic=5110495.0

[mu_enrico]

If you think 7% is too crazy, try to come up with a rate that you think would work.

I arrived to a conclusion: a moderately high rate would work. Something between 5-10%. I ended up with 7% because of Rule 72.

IMO you should not determine the "inflation rate" by guessing (including educated guess), especially if the rules are predetermined like Bitcoin. In the real world, central banks didn't set the inflation rate, but they control it with monetary policy, mainly to increase/decrease interest rates. Hence, the increases/decreases in the money supply are the effect, not the cause.

You should read papers about population, interest rate, and inflation.
https://www.google.com/search?q=relationship+population%2C+interest+rate%2C+inflation

Don't get me wrong though, feel free to develop your own system, to be one of the many experiments out there

[tadpole_bitfrog]

Bitflate Adoption Rate

After the chain passes its 4th halving, reward will start to increase. There is no supply restriction. Bitflate survival is dependent on adoption rate. There are now 3 possible scenarios:

- If adoption rate is around 7%, the coin will retain its value.
- If adoption rate is greater than 7%, the coin may gain more value.
- If adoption rate is less than 7%, the coin will decline and die.

what? I find this project a bit of a joke. Bitflate claims to be the coin that holds the inflation rate of 7% and is unchanged. but if it is accepted by the market below 7% it will die. what happened?
Is this a serious project? Obviously, you do not have any protection steps for coin function! But explain me clearly if I misunderstand. thanks.

[BigBoy89]

Skeptic: Your Bitflate coin supply inflates. It’ll devalue people’s bag of money. Nobody will want to hold it.
Me: Inflation creates more coins. More people will adopt it. That’s how it will retain value.
Skeptic: That’s a ridiculous idea. It won’t work.
Me: Yeah, it is kinda weird. But it may work.

IMO there is no reason not to work. BUT if I want to use inflating currencies... I will just stick to fiat.

Inflation has become a touchy subject in crypto. Most people reject it.

Yes, like me. I will not adopt any Inflating Cryptocurrency anytime soon. People are excited about ETH 2.0 and POS and at the same time you are trying to push up on inflating coin.

[dnprock]

IMO there is no reason not to work. BUT if I want to use inflating currencies... I will just stick to fiat.

Inflation rate of 7% is fairly high. But starting from 0, it'll take almost 30 years for supply to reach 100 million. Supply is somewhat limited. When such a system is widely adopted, I think we can develop banking account with interest to reduce value loss.

It is possible that the world only accepts two options: (1) centralized fiat issuance and (2) decentralized deflationary Bitcoin. People are too greedy to adopt a chain that devalues their bags overtime to open access for others in the economy. Everyone holds on to their bags. We are blocking each other. I think this is a crypto tragedy of the commons.

[odolvlobo]

Skeptic: Your Bitflate coin supply inflates. It’ll devalue people’s bag of money. Nobody will want to hold it.
Me: Inflation creates more coins. More people will adopt it. That’s how it will retain value.

Me: Increased supply does not raise demand -- it lowers price.

[binhvo1505]

Is a cryptocurrency with a constant inflation rate of 7%?
are you sure
In order to do this, your payment systems will also have to accept the price of the token and your business must guarantee the benefits of the partner. This will cost a lot of money and need a lot of partners to back your business.
so I think this idea should be rethought, this is a pipe dream.

[blckhawk]

I think the main purpose of inflation, for instance with fiat, is for people to use the currency because they know that anytime in the future, its value would decrease and thus creates this mindset that people should spend their money now than never. Which is great to progress economy, but bad when goes uncontrollable. If people won't use your currency in spending, rather just holding, then your coins may deem to be useless and no one would want to hold/use it.

[Kyraishi]

Lol, this is a different look at things, never thought that someone would want to bring inflation rates to cryptocurrencies, especially since a lot of people have holdings in crypto to prevent inflation from hitting.

It's a weird idea, but it does have a possible use case and might work - but personally, the inflation rate is too high, 7% is more than double what regulation inflation rates are in advanced economies.

It's interesting, but it'll be a very short-term coin and likely would die in the long term fairly easily.

[dnprock]

Lol, this is a different look at things, never thought that someone would want to bring inflation rates to cryptocurrencies, especially since a lot of people have holdings in crypto to prevent inflation from hitting.

It's a weird idea, but it does have a possible use case and might work - but personally, the inflation rate is too high, 7% is more than double what regulation inflation rates are in advanced economies.

It's interesting, but it'll be a very short-term coin and likely would die in the long term fairly easily.

When I first thought about it, I also thought it could be a fun joke.

If you take the current fiat base, like USD, and inflate at 7% per year, then I think 7% is high. But with a crypto chain, we start from 0.

The reward system is:

0: 50 (supply: 10 million)
1: 25 (supply: 15 million)
2: 12.5
3: 6.25 (end of halving)
4: 6.56 (start of inflation 7%)
5: 7.02
6: 7.51
7: 8.04
8: 8.60
9: 9.20
10: 9.85 (supply: 31 million)

It'll take almost 30 years to reach 100 million supply. That is not a lot. Seriously.