No, the problem is not deflation, it's more of game theoretic nature. I think the standard inflation policy is not pareto efficient, but I'm no expert in this.
I would agree with that. Inflation is wealth redistribution which, if you believe that the market allocates capital most efficiently, is definitely pareto inefficient.
Do you think this is true for the current Bitcoin economy?
I don't understand. The Pareto efficiency theory is not specific to any monetary system, as far as I can tell. So, yes?
While the Bitcoin economy and number of users grows exponentially in the beginning, the money growth is linear/geometric. Thus the price of BTC/USD can only grow. A good strategy is to get in early and hold on to your Bitcoins until you think the economy will no longer be able to grow significantly. The first early adopter who then checks out will crash the market and make the most profit. Late adopters cannot rationally invest into Bitcoin, because of this. Symptoms include: most Bitcoins are never spend and huge cumulative mining costs.
If bitcoin reaches market saturation then who cares about late adopters. There's already maximum adoption!
Once again, if bitcoins are never spent and there are no new investments, then where does the exponential growth, which makes hording so lucrative, come from? This is a self contradicting argument. Don't you see the negative feedback loop?
If we now have 10k users, once there are 20k who like the idea of Bitcoin and realize this problem, they have an incentive to start their own blockchain, which would face the same problem eventually if it uses the same rules.
This may be an incentive to start a new blockchain. It doesn't mean it's a good idea. Best of luck to them.
Under free competition, only the currency with the most merit will survive. Bitcoins main problem is that proof of work is not a marketable good and its inherent value is zero, but this cannot be changed.
Bitcoin has value in that it is probably the best form of money in existence. This is the only reason people are using it now. Proof of work is the cost of maintaining the money system. Taxes and bank fees are not marketable goods either.
What can be changed is the inflation policy. The problem is how to get the best long term growth potential?
In my above system, miners should have an interest to choose the best known policy dynamically, but it would be nice if that can be proved.
I don't quite understand how your system is supposed to work, but some important problems come to mind:
- How do you agorithmicaly match inflation with economic growth? (I don't think you can just using the blockchain as input)
- Allowing miners to set inflation policy is a big fat conflict of interest.
I don't think you understand the benefits of a fixed money supply system. Look at the arguments that gold standard advocates make. Bitcoin is great as it is.