Monero Economy

[cAPSLOCK]

Has a subsidized draw been considered?  A minimum block reward paid when the fees cannot meet that minimum?  This could be a flexible way to allow the health of the economy and value of the currency have at least partial determination over the inflation.  Perhaps this is exactly what has been discussed and if so forgive me as I am getting up to speed.

This is similar to adaptive block sizing, which applies a penalty for generating blocks over the median size. The cost of the penalty is supposed to be mitigated by the value of the fees. My opinion is that this will not work well.

Such a mechanism doesn't work for this reason: miners generate their own blocks and include whatever tx they choose too, however the smaller the block, the less likely it is to ever be orphaned. If there was an overlay PoS network (like for MC2) you could try and enforce tx being included into blocks even at some level of reward penalty, but naturally miners will just include as many high fee transactions as possible without destroying any of their reward. Such a method of securing a blockchain is highly experimental and may not work for other incentives reasons (that's for the MC2 thread). As PoW stands now, miners are free to manipulate the transaction volume/fees volume in the network as they desire, and so subsidy penalties will not really work.

I suppose this could also cause voluntary transaction fee payment to dry up a little as well.  If the network will pay the "fees" through inflation then miners might nnot be so choosy.

I think I mostly like the idea of a convertible subsidy which can even disappear if the network no longer needs it, but one that reappears when it is needed.

I appreciate the fact you guys are struggling through this decision.  I think it could be one of the most important fundamental choices to be made.

[smooth]

Has a subsidized draw been considered?  A minimum block reward paid when the fees cannot meet that minimum?  This could be a flexible way to allow the health of the economy and value of the currency have at least partial determination over the inflation.  Perhaps this is exactly what has been discussed and if so forgive me as I am getting up to speed.

This is similar to adaptive block sizing, which applies a penalty for generating blocks over the median size. The cost of the penalty is supposed to be mitigated by the value of the fees. My opinion is that this will not work well.

Such a mechanism doesn't work for this reason: miners generate their own blocks and include whatever tx they choose too, however the smaller the block, the less likely it is to ever be orphaned. If there was an overlay PoS network (like for MC2) you could try and enforce tx being included into blocks even at some level of reward penalty, but naturally miners will just include as many high fee transactions as possible without destroying any of their reward. Such a method of securing a blockchain is highly experimental and may not work for other incentives reasons (that's for the MC2 thread). As PoW stands now, miners are free to manipulate the transaction volume/fees volume in the network as they desire, and so subsidy penalties will not really work.

I disagree with my friend tacotime about the adaptive block sizes not working. I think they can work if the parameters are right. Certainly it won't work to expect miners to incur a large penalty, but a penalty function that is non-zero though still small relative to transaction fees can work; if users include a larger than normal fee, their transaction may get added to an otherwise full block (because the fee is higher than the penalty a miner would incur by adding it), providing faster service at a premium price. This in turn signals to the network that there is high demand and the block size should possibly be increased.

The original implementation in cryptonote coins was clearly broken in at least few ways though (in fact not even fully implemented). On that we all agree.

However, I agree with his argument for why the draw idea won't work. Miners are better off just not including transactions at all if they stand to get a reward instead of the fee.

[Johnny Mnemonic]

In regards to the second question, the other way to do so is FreiCoin's system, which over time destroys the balance of all accounts equally through demurrage. The FreiCoin devs insist that this is totally different from inflation, but I haven't been able to follow that argument (and it diverges into a lot of economics I'm not well versed in).

This is the main idea I was trying to get across earlier in the thread. Demurrage differs from inflation because inflation in PoW crypto is more complicated in that each coin has other value properties in addition to being simply a percentage of total value. If the total supply increases by 1%, that doesn't mean the value of each coin decreases by 1%. FreiCoin's demurrage does mean that because a percentage of coins are actually disappearing. This means a 1% demurrage is much more costly than a 1% inflation (in PoW crypto, that is).

[Johnny Mnemonic]

I actually think that transaction fees will be enough to support the miners without subsidy, because the miners will only process transactions with the highest fees. This will turn transactions into bidding wars, and it will become extremely expensive to get a transaction included in a block.

This is why I don't think a fixed block reward system will be sustainable long term, because as inflation trends to zero, miners will be less satisfied with the reward and become more picky with tx fees. We need a proportional (percentage based) inflation. However, I'm not sure how much would be suitable.

With the same concerns in mind, there should be a reasonable cap on transaction fees (perhaps as a percentage of block reward). Transactors shouldn't be able to pay a higher fee, as this encourages the issue.

[smooth]

I actually think that transaction fees will be enough to support the miners without subsidy, because the miners will only process transactions with the highest fees.

This only works if mining is monopolized, with miners unable to compete with each other.

Otherwise, if Miner A will only accept a transaction if it carries an extremely high fee, then miner B will accept the transaction with a slightly lower but still high fee, and in turn miner C will process the transaction with an even lower (perhaps only moderately high) fee, and so on. The resulting bidding war will drive transactions fees back down to near marginal cost.

If you accept that mining is monopolized, then you don't have a decentralized system at all. But in that case, yes, you can indeed just charge transaction fees.

I don't believe a decentralized (non-monopolized) PoW system can be supported with transaction fees.

[rpietila]

In regards to the second question, the other way to do so is FreiCoin's system, which over time destroys the balance of all accounts equally through demurrage. The FreiCoin devs insist that this is totally different from inflation, but I haven't been able to follow that argument (and it diverges into a lot of economics I'm not well versed in).

This is the main idea I was trying to get across earlier in the thread. Demurrage differs from inflation because inflation in PoW crypto is more complicated in that each coin has other value properties in addition to being simply a percentage of total value. If the total supply increases by 1%, that doesn't mean the value of each coin decreases by 1%. FreiCoin's demurrage does mean that because a percentage of coins are actually disappearing. This means a 1% demurrage is much more costly than a 1% inflation (in PoW crypto, that is).

Sir, you are not making any sense.

[smooth]

In regards to the second question, the other way to do so is FreiCoin's system, which over time destroys the balance of all accounts equally through demurrage. The FreiCoin devs insist that this is totally different from inflation, but I haven't been able to follow that argument (and it diverges into a lot of economics I'm not well versed in).

This is the main idea I was trying to get across earlier in the thread. Demurrage differs from inflation because inflation in PoW crypto is more complicated in that each coin has other value properties in addition to being simply a percentage of total value. If the total supply increases by 1%, that doesn't mean the value of each coin decreases by 1%. FreiCoin's demurrage does mean that because a percentage of coins are actually disappearing. This means a 1% demurrage is much more costly than a 1% inflation (in PoW crypto, that is).

I largely agree with this. Proof-of-work has information value, showing that it is indeed not possible to obtain the coin (or gold or whatever) without incurring the corresponding cost doing work. Otherwise, you can never be sure what the cost would be. If gold mining were banned for a prolonged period of time, the price of gold would likely go down, because people would be unsure about how much it might cost to dig more gold out of the ground.

I'm not sure how you have a sound freicoin-style demurrage coin without also having PoW (since I don't accept alternatives such as PoS as having been shown to be sound), so I'm not sure the two can really be viewed as alternatives.

[Johnny Mnemonic]

Also, a finite money supply (this includes a fixed reward system) will only encourage banks to use the coin as lending leverage. This "fiatization" would not be difficult, as banks can simply loan out MoneroNotes(tm) at ultra low interest rates, that have the "Legal Tender" stamp of approval.

I'd rather have such debasement baked into the currency, so at least the new coins actually go back to the miners.

[Baitty]

Good thing it's anonymous, or chicks would be after me.

Oh crap, I'm doing the rich thing all wrong!

  Don't waste your money on chicks!

Also, a finite money supply (this includes a fixed reward system) will only encourage banks to use the coin as lending leverage. This "fiatization" would not be difficult, as banks can simply loan out MoneroNotes(tm) at ultra low interest rates, that have the "Legal Tender" stamp of approval.

I'd rather have such debasement baked into the currency, so at least the new coins actually go back to the miners.

Thats a great explanation which I 100% agree with.

[dreamspark]

Also, a finite money supply (this includes a fixed reward system) will only encourage banks to use the coin as lending leverage. This "fiatization" would not be difficult, as banks can simply loan out MoneroNotes(tm) at ultra low interest rates, that have the "Legal Tender" stamp of approval.

I'd rather have such debasement baked into the currency, so at least the new coins actually go back to the miners.

Would you accept MoneroNotes from a bank ?

[Johnny Mnemonic]

I'm not sure how you have a sound freicoin-style demurrage coin without also having PoW (since I don't accept alternatives such as PoS as having been shown to be sound), so I'm not sure the two can really be viewed as alternatives.

Right. I'm assuming PoW is present in both scenarios.

[Johnny Mnemonic]

Also, a finite money supply (this includes a fixed reward system) will only encourage banks to use the coin as lending leverage. This "fiatization" would not be difficult, as banks can simply loan out MoneroNotes(tm) at ultra low interest rates, that have the "Legal Tender" stamp of approval.

I'd rather have such debasement baked into the currency, so at least the new coins actually go back to the miners.

Would you accept MoneroNotes from a bank ?

If it's "legal tender for all debts, public and private", and the interest rate is low enough, who wouldn't?

[smooth]

Also, a finite money supply (this includes a fixed reward system) will only encourage banks to use the coin as lending leverage. This "fiatization" would not be difficult, as banks can simply loan out MoneroNotes(tm) at ultra low interest rates, that have the "Legal Tender" stamp of approval.

I'd rather have such debasement baked into the currency, so at least the new coins actually go back to the miners.

Would you accept MoneroNotes from a bank ?

If it's "legal tender for all debts, public and private", and the interest rate is low enough, who wouldn't?

I probably wouldn't. It is a no win scenario. At best the notes are worth the same as the underlying coin, at worst the bank goes bust and you are holding the bag. Why not just prefer the coin itself?

Gold certificates make some sense because they are more portable than gold, can be made more easily in convenient denominations, can be transferred via book entry, etc. I see no real advantage to a MoneroNote, only disadvantage.

[Johnny Mnemonic]

In regards to the second question, the other way to do so is FreiCoin's system, which over time destroys the balance of all accounts equally through demurrage. The FreiCoin devs insist that this is totally different from inflation, but I haven't been able to follow that argument (and it diverges into a lot of economics I'm not well versed in).

This is the main idea I was trying to get across earlier in the thread. Demurrage differs from inflation because inflation in PoW crypto is more complicated in that each coin has other value properties in addition to being simply a percentage of total value. If the total supply increases by 1%, that doesn't mean the value of each coin decreases by 1%. FreiCoin's demurrage does mean that because a percentage of coins are actually disappearing. This means a 1% demurrage is much more costly than a 1% inflation (in PoW crypto, that is).

Sir, you are not making any sense.

Which part doesn't make sense? I'm comparing the difference between a direct tax and the increased supply of a valuable resource. The value cost is not identical in PoW crypto (though it might be in fiat as new money is created ex nihilo).

[Johnny Mnemonic]

Also, a finite money supply (this includes a fixed reward system) will only encourage banks to use the coin as lending leverage. This "fiatization" would not be difficult, as banks can simply loan out MoneroNotes(tm) at ultra low interest rates, that have the "Legal Tender" stamp of approval.

I'd rather have such debasement baked into the currency, so at least the new coins actually go back to the miners.

Would you accept MoneroNotes from a bank ?

If it's "legal tender for all debts, public and private", and the interest rate is low enough, who wouldn't?

I probably wouldn't. It is a no win scenario. At best the notes are worth the same as the underlying coin, at worst the bank goes bust and you are holding the bag. Why not just prefer the coin itself?

Gold certificates make some sense because they are more portable than gold, can be made more easily in convenient denominations, can be transferred via book entry, etc. I see no real advantage to a MoneroNote, only disadvantage.

The point is, will the general public know the difference (or care)? In an adoption race the banks will win because people and businesses need credit, and the vast majority of the barrowers are not crypto anarchists trying to uproot the system.

[smooth]

The point is, will the general public know the difference (or care)?

I don't know about the general public, but big money does know the difference. Counterparty risk is a widely-recognized concept.

Already (even before Bitcoin has entered a real financial adoption phase), there notable people in the finance world describing it as an asset without counterparty risk, and therefore interesting and potentially valuable.

I see bank notes having a hard time getting real traction when the notes have no real advantage over the coin.

[Johnny Mnemonic]

The point is, will the general public know the difference (or care)?

I don't know about the general public, but big money does know the difference. Counterparty risk is a widely-recognized concept.

Already (even before Bitcoin has entered a real financial adoption phase), there notable people in the finance world describing it as an asset without counterparty risk, and therefore interesting and potentially valuable.

I see bank notes having a hard time getting real traction when the notes have no real advantage over the coin.

My fear is they won't need an advantage if the easy credit/convenience factor is high enough. I already see this becoming a problem with visa/mastercard processing off-chain bitcoin transactions. The public will embrace the middle-men we originally sought to eliminate.

[smooth]

The point is, will the general public know the difference (or care)?

I don't know about the general public, but big money does know the difference. Counterparty risk is a widely-recognized concept.

Already (even before Bitcoin has entered a real financial adoption phase), there notable people in the finance world describing it as an asset without counterparty risk, and therefore interesting and potentially valuable.

I see bank notes having a hard time getting real traction when the notes have no real advantage over the coin.

My fear is they won't need an advantage if the easy credit/convenience factor is high enough. I already see this becoming a problem with visa/mastercard processing off-chain bitcoin transactions. The public will embrace the middle-men we originally sought to eliminate.

I don't actually see anything wrong with off-blockchain, as long as you end up holding the actual coin at the end of the day.

Obviously people will get goxed and goxed and goxed again, but eventually they will learn, and tools (hardware wallets, etc.) will improve along the way.

[AnonyMint]

You're still dodging the question of why it's necessary to save in-currency! Answer it, please. Smart people store wealth in a diversity of assets outside their currency.

Not once did I say it's "impossible" to spend. I'm saying that in any given moment, spending is discouraged due to perpetually increasing value. Just because people do spend doesn't mean they're spending fast enough.

And Bitcoin has less than 50 million transactions in its entire life, so don't even pretend like you know if it's capable of supporting any economy of scale.

Astute and echos some of my throughts.

The next post by Johnny after the above quoted one was spot on.

I had relevant economic discussion in the other Monero thread.

[drawingthesun]

My point was more intended to say that there are possible alternatives to relying on tx fees and/or eternal emission to sustain network security, but if the accepted expert opinion is that some level  of eternal emission is in fact a good thing then that's even better!

It would be great to secure the network via another means, I'm sure that a solution may present itself within the next decade because there are a lot of people trying to solve this issue.

Another point, let's assume that the network could be secured via something else and no immortal inflation was required, would it still be wise to have some type of immortal coin release? I feel we would still need new coins being minted to keep the economy from going stale. For example look at NXT, looking at it from an outsiders perspective the only way in is to buy from someone, no new money can be created. Something feels wrong with that.  (To me anyway)