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Author Topic: Rationale for bitcoin creation tapering off  (Read 1399 times)
robkroese
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December 21, 2011, 09:48:29 PM
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Hi,

I'm working on a near-future sci-fi novel where a virtual currency similar to Bitcoin is used, so I've been doing some research on how Bitcoin works. One question I can't find addressed is this:

What is the rationale for the rate of decline in the creation of Bitcoins? That is, what would be wrong with allowing the supply of Bitcoins to increase by, say, 5% per year indefinitely, rather than maxing out at 21 million? It seems like continually creating more Bitcoins would create a greater incentive for users to remain on the network to process transactions as well as removing some of the incentive to hoard.

Apologies if I'm missing something; trying to get a handle on the concepts. Thanks in advance for any feedback.
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kokjo
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December 21, 2011, 09:51:02 PM
 #2

Hi,

I'm working on a near-future sci-fi novel where a virtual currency similar to Bitcoin is used, so I've been doing some research on how Bitcoin works. One question I can't find addressed is this:

What is the rationale for the rate of decline in the creation of Bitcoins? That is, what would be wrong with allowing the supply of Bitcoins to increase by, say, 5% per year indefinitely, rather than maxing out at 21 million? It seems like continually creating more Bitcoins would create a greater incentive for users to remain on the network to process transactions as well as removing some of the incentive to hoard.

Apologies if I'm missing something; trying to get a handle on the concepts. Thanks in advance for any feedback.
subjects to research: fees, deflation

"The whole problem with the world is that fools and fanatics are always so certain of themselves and wiser people so full of doubts." -Bertrand Russell
DeathAndTaxes
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December 21, 2011, 10:05:41 PM
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There is no reason for money supply to keep growing infinitely. 

Mining serves two purposes
a) fair distribution of money supply
c) protecting the network

Once there are sufficient coins "in the wild" the reason a goes away but reason b remains.

Miners are paid by fees.  The block reward is simply a subisdy.  Fees today are too low to support a robust network so the protocol provides a 50 BTC subsidy.  The declining subsidy over years provides sufficient time for network to move to be supported completely by fees.
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December 21, 2011, 10:22:29 PM
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Hi,

I'm working on a near-future sci-fi novel where a virtual currency similar to Bitcoin is used, so I've been doing some research on how Bitcoin works. One question I can't find addressed is this:

What is the rationale for the rate of decline in the creation of Bitcoins? That is, what would be wrong with allowing the supply of Bitcoins to increase by, say, 5% per year indefinitely, rather than maxing out at 21 million? It seems like continually creating more Bitcoins would create a greater incentive for users to remain on the network to process transactions as well as removing some of the incentive to hoard.

Apologies if I'm missing something; trying to get a handle on the concepts. Thanks in advance for any feedback.

I think that no one really knows what works and what doesn't. Bitcoin was created this way so it will stay this way. Other bitcoin-based cryptocurrency could easily be created with a constant increase of supply.
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December 21, 2011, 10:27:46 PM
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Quote
a) fair distribution of money supply
c) protecting the network

Once there are sufficient coins "in the wild" the reason a goes away but reason b remains.
reason b? im only seeing a and c. confused!

"The whole problem with the world is that fools and fanatics are always so certain of themselves and wiser people so full of doubts." -Bertrand Russell
reg
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December 21, 2011, 11:01:10 PM
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perhaps the subdivision of BTC into currently 8 decimal places will initially overcome the supply problem which if i understand correctly is built in deflation. fiat currencies fear deflation because it erodes profit margins and particularly compound interest charges. large organisations can effectively control anyone indebted to them by this central control. however in p2p there is no central control and the value of the exchange is agreed between just the parties involved and may not by market forces include an interest charge or large fee which by definition is parasitic. I have read that the os may change to accomadate further expansion. someone more knowledgable may comment further.  reg
robkroese
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December 22, 2011, 02:39:58 AM
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There is no reason for money supply to keep growing infinitely. 

Thanks for response, DeathAndTaxes.

I understand that there's no reason for the supply to grow indefinitely, but obviously there is a reason for the money supply to grow initially, and that need has to be balanced against inflationary concerns. In other words, enough money has to be created (and dispersed) for the system to be viable, but too much of an increase would devalue the currency, undermining the system.

So my question comes down to this: How was it decided that this particular algorithm was the best way to balance those two competing factors? Was some economic principle applied, or was it just a matter of Nakamoto arbitrarily picking an algorithm that would eventually cause the creation of new bitcoins to peter out?

Thanks again.
theymos
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December 22, 2011, 05:21:39 AM
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Satoshi wanted BTC to be like gold: initially easy to create but then increasingly more difficult. I don't think he put a ton of thought into it. This algorithm will work fine, though.

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December 22, 2011, 05:26:41 AM
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A question I have is.. once all 21 million are released, that would eliminate mining altogether?  So how would the bitcoin transactions become confirmed? 

theymos
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December 22, 2011, 05:30:56 AM
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A question I have is.. once all 21 million are released, that would eliminate mining altogether?  So how would the bitcoin transactions become confirmed? 

Miners will still "mine" transaction fees.

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December 22, 2011, 05:35:11 AM
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A question I have is.. once all 21 million are released, that would eliminate mining altogether?  So how would the bitcoin transactions become confirmed? 

Miners will still "mine" transaction fees.
Oh ok, still some gas in the tank at the end of the road.  Awesome Cheesy

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December 22, 2011, 06:42:52 AM
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The Earth has a limited one-time gift of gold, and it gets harder and harder to mine; this is probably the model that is emulated in Bitcoin mining.

Not everyone in the world can have gold, the total amount mined in human history is estimated at 165,000 tonnes, and yearly mining is now about 2500 tonnes per year - 83 million troy oz / year for 2 billion adults in the industrial world. Note that your portion of gold is also in all those electronic devices you buy, autos you drive, etc.

The interesting part is that 1/3 of all bitcoins have already been mined, but are held by a very small percentage of the billion people on earth that might someday use Bitcoin. We are still early adopters. This economic reality is what pushed the first bubble.

Transaction fees may help fund mining more after coin generation is reduced, but it doesn't seem like they will be anywhere near 25BTC per block in a year, to replace the drop in earnings - they currently average .2 BTC per block.

robkroese
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December 22, 2011, 05:00:37 PM
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Satoshi wanted BTC to be like gold: initially easy to create but then increasingly more difficult. I don't think he put a ton of thought into it. This algorithm will work fine, though.

It's kind of odd, though, that he would just arbitrarily pick a tapering-off point, after all the work he put into the rest of the system, isn't it? It's almost like he didn't care about the economics of it, and just wanted to test the soundness of the algorithm for handling transactions.
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December 22, 2011, 05:12:56 PM
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Satoshi wanted BTC to be like gold: initially easy to create but then increasingly more difficult. I don't think he put a ton of thought into it. This algorithm will work fine, though.

It's kind of odd, though, that he would just arbitrarily pick a tapering-off point, after all the work he put into the rest of the system, isn't it? It's almost like he didn't care about the economics of it, and just wanted to test the soundness of the algorithm for handling transactions.
Well there is still economics after the tapering point, in fact it might be that point where bitcoins absolutely skyrocket in value.

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December 22, 2011, 05:20:18 PM
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Satoshi wanted BTC to be like gold: initially easy to create but then increasingly more difficult. I don't think he put a ton of thought into it. This algorithm will work fine, though.

It's kind of odd, though, that he would just arbitrarily pick a tapering-off point, after all the work he put into the rest of the system, isn't it? It's almost like he didn't care about the economics of it, and just wanted to test the soundness of the algorithm for handling transactions.

There is no perfect curve.  Technically to keep stable value the money supply should grow at the same variable rate as economic activity.  That is simply impossible to predict ahead of time.  In a centralized currency this is the job of central bank.  If you have 5% economic growth and central bank using monetary policy causes a 5% growth in money supply economic theory tells us the value of the currency should be stable.  If money supply growth it higher the currency would lose value, if it is lower it will gain value.

Lacking a central bank of bitcoin to manage generation rate any curve will be imperfect.

The curve chosen isn't perfect but it does have some advantages.  It rewards early adopters (note that term is relative.  You are an early adopter compared to someone who starts in 2018), it results in continually decaying inflation, and it allows Bitcoin some time to gain critical mass and organize a sustainable fee structure before the block subsidies begin to decline.
robkroese
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December 22, 2011, 07:05:36 PM
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Thanks again, DeathAndTaxes. That actually makes a lot of sense.
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December 24, 2011, 10:31:16 PM
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most countries agree that deflation is bad, as it limits trade by encouraging saving.
if a new car costs 1000btc today but 990 tommorow, why should I buy it today?

where as inflation usually encourages market growth by encouraging sales and borrowing compared to saving (however this could equally be bad... lets look at just a few years ago...).

it may be possible that sometime down the line if there is a serious need for new currency and at least 51% of all users agree, the network will allow the "printing" of new currency once again (if things start to go bad...).
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December 24, 2011, 11:14:54 PM
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most countries agree that deflation is bad, as it limits trade by encouraging saving.
if a new car costs 1000btc today but 990 tommorow, why should I buy it today?

where as inflation usually encourages market growth by encouraging sales and borrowing compared to saving (however this could equally be bad... lets look at just a few years ago...).

it may be possible that sometime down the line if there is a serious need for new currency and at least 51% of all users agree, the network will allow the "printing" of new currency once again (if things start to go bad...).

HDTV, computer systems, digital cameras, video game systems, solar panels, and essentially all electronics and many consumer goods are continually cheaper every year yet it hasn't hurt sales.

If a car costs 1000 btc this year and 990 next year why should you buy it?   Maybe because you need a car?  Maybe because you are tired of your old car constantly breaking down?  Maybe you are just looking to buy something new?  No doubt deflation may have a downward pressure on impulse purchases but maybe that isn't such a bad thing.  Maybe an economy built of solid economic growth and no inflationary bubbles will be more lasting.
altuin
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December 24, 2011, 11:54:18 PM
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Quite right. People will be compelled to buy something eventually, and in fact this will only reduce hoarding of goods as you will simply be losing money, which stimulates economic growth.
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December 25, 2011, 02:37:54 AM
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most countries agree that deflation is bad, as it limits trade by encouraging saving.
if a new car costs 1000btc today but 990 tommorow, why should I buy it today?

where as inflation usually encourages market growth by encouraging sales and borrowing compared to saving (however this could equally be bad... lets look at just a few years ago...).

it may be possible that sometime down the line if there is a serious need for new currency and at least 51% of all users agree, the network will allow the "printing" of new currency once again (if things start to go bad...).

HDTV, computer systems, digital cameras, video game systems, solar panels, and essentially all electronics and many consumer goods are continually cheaper every year yet it hasn't hurt sales.

If a car costs 1000 btc this year and 990 next year why should you buy it?   Maybe because you need a car?  Maybe because you are tired of your old car constantly breaking down?  Maybe you are just looking to buy something new?  No doubt deflation may have a downward pressure on impulse purchases but maybe that isn't such a bad thing.  Maybe an economy built of solid economic growth and no inflationary bubbles will be more lasting.

Could this actually motivate the seller of goods to price things without a huge margin so as to keep product moving? I may be looking at this wrong but he will lose money if he doesn't sell quickly won't he?

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