Block Reward changing to 25 BTC in November-December 2012

[FreeMoney]

Just to clear up a few things.

The 21 million coin limit isn't in the source code anywhere.  What is in the code is a subsidy that is cut in half every 210,000 blocks.  Actually, it is an integer right-shift instead of a division, so some of the shifts take slightly more than half of the subsidy away.  The sum of the sequence as the subsidy shifts to zero is what gives the limit just under 21 million coins.  So, changing the coin generation system would require more than just commenting out the subsidy calculation.

And a few miners can't just decide to keep cranking out 50 BTC blocks and expect the rest of the network to just accept them.  Not at 51% of the hashing power, not at 70%, and not at 100%.  They would need to create a whole new network of nodes that accept them as valid.  The miners have a lot of power, but they can't force the network to accept invalid blocks as valid.

Also, we aren't approaching the end of the Mayan calendar any more than we were approaching the end of the Julian calendar in 999 AD.  They just didn't bother adding another digit on to their system, and didn't survive long enough to need to.

This. Plus even if you manually add in a 21M cap, you'll get: 50, 50, 50, 50, 50, 50, 0

Seems like trouble.

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[paraipan]

Just to clear up a few things.

The 21 million coin limit isn't in the source code anywhere.  What is in the code is a subsidy that is cut in half every 210,000 blocks.  Actually, it is an integer right-shift instead of a division, so some of the shifts take slightly more than half of the subsidy away.  The sum of the sequence as the subsidy shifts to zero is what gives the limit just under 21 million coins.  So, changing the coin generation system would require more than just commenting out the subsidy calculation.

And a few miners can't just decide to keep cranking out 50 BTC blocks and expect the rest of the network to just accept them.  Not at 51% of the hashing power, not at 70%, and not at 100%.  They would need to create a whole new network of nodes that accept them as valid.  The miners have a lot of power, but they can't force the network to accept invalid blocks as valid.

Also, we aren't approaching the end of the Mayan calendar any more than we were approaching the end of the Julian calendar in 999 AD.  They just didn't bother adding another digit on to their system, and didn't survive long enough to need to.

This. Plus even if you manually add in a 21M cap, you'll get: 50, 50, 50, 50, 50, 50, 0

Seems like trouble.

more like 50, 50, 0, 0, 0, 0 ... allot of angry "late" adopters in the process, if you ask me

[phelix]

is going to be 25  btc per block if you want miners can keep mining at the 50 btc per block chain and if many miners do that we never decrease the reward

This will fork the chain. Miners that think they will earn more by keeping the 50 bitcoin block reward will soon find out how terrible of an idea that was when no one gives them fiat for their coins.

if they are 70% of the hash power they will win

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

[Piper67]

is going to be 25  btc per block if you want miners can keep mining at the 50 btc per block chain and if many miners do that we never decrease the reward

This will fork the chain. Miners that think they will earn more by keeping the 50 bitcoin block reward will soon find out how terrible of an idea that was when no one gives them fiat for their coins.

if they are 70% of the hash power they will win

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

Feel free to go and make one, then.

It will lack the elegance of Bitcoin, which is what drew me in in the first place.

[mp420]

I think the halving of block reward will push price upwards. Not because of anything related to the money supply size and so on, but because there are many non-technically-oriented traders around, who are unsure if Bitcoin is fundamentally a scam, and I think it will boost their confidence in Bitcoin when they see the halving of the reward with their own eyes.

[phelix]

is going to be 25  btc per block if you want miners can keep mining at the 50 btc per block chain and if many miners do that we never decrease the reward

This will fork the chain. Miners that think they will earn more by keeping the 50 bitcoin block reward will soon find out how terrible of an idea that was when no one gives them fiat for their coins.

if they are 70% of the hash power they will win

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

Feel free to go and make one, then.

It will lack the elegance of Bitcoin, which is what drew me in in the first place.

lolcust did it already. geistgeld? tenebrix? both?

my point was that even if the miners would really pull off a trick like that (and I don't think they will) it would not destroy bitcoin.

[kjlimo]

is going to be 25  btc per block if you want miners can keep mining at the 50 btc per block chain and if many miners do that we never decrease the reward

This will fork the chain. Miners that think they will earn more by keeping the 50 bitcoin block reward will soon find out how terrible of an idea that was when no one gives them fiat for their coins.

if they are 70% of the hash power they will win

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

Feel free to go and make one, then.

It will lack the elegance of Bitcoin, which is what drew me in in the first place.

lolcust did it already. geistgeld? tenebrix? both?

my point was that even if the miners would really pull off a trick like that (and I don't think they will) it would not destroy bitcoin.

Yes, go read the alternate cryptocurrrency forums.  Many forks have already been made... not many people are "adopting" them.  I own many alt currencies myself, but the market still hasn't rushed to switch to them.

We'll just need to wait 10 months to see what the block reward does to the world of bitcoin.

[runeks]

If the fork I choose fades and dies, I'll be done with the Bitcoin project for good. The rules about the supply are one of the reasons I'm here. I suspect many others feel the same way.

I'm not entirely sure a deflationary currency is the correct endgame - I'm worried about hoarding, and the money supply's ability to sanely match pace with the goods and services whose value it must represent.

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

You are obviously correct that an inflationary currency is useful. We all use one every day. The question is though, if a Bitcoin-like, distributed digital currency can ever be "inflationary". I think any Bitcoin-like currency cannot be necessarily inflationary without being too prone to manipulation. If we want bitcoins to decline in value, we need to peg the bitcoin supply to our economies. How would you do that?

To some it may sound good in theory, but I don't think it's possible in practice. A distributed digital currency like Bitcoin needs to have a pre-determined, finite supply, or it will not work.
So my point is not that bitcoins need to be deflationary for economic reasons, but more so that it needs to be so for technical reasons.

Without a central authority to control the supply of a currency, how can we ever ensure that a currency stays inflationary? We can't. And since Bitcoin by definition excludes a central authority, bitcoins can't be an "inflationary currency".

Pricing stuff in bitcoins is easy: <price in BTC> = <price in USD> / <USD per BTC exchange rate>

[SgtSpike]

If the fork I choose fades and dies, I'll be done with the Bitcoin project for good. The rules about the supply are one of the reasons I'm here. I suspect many others feel the same way.

I'm not entirely sure a deflationary currency is the correct endgame - I'm worried about hoarding, and the money supply's ability to sanely match pace with the goods and services whose value it must represent.

a system with ever steadily rising amount of coins could also work well and will practically slowy cease to inflate, too.

You are obviously correct that an inflationary currency is useful. We all use one every day. The question is though, if a Bitcoin-like, distributed digital currency can ever be "inflationary". I think any Bitcoin-like currency cannot be necessarily inflationary without being too prone to manipulation. If we want bitcoins to decline in value, we need to peg the bitcoin supply to our economies. How would you do that?

To some it may sound good in theory, but I don't think it's possible in practice. A distributed digital currency like Bitcoin needs to have a pre-determined, finite supply, or it will not work.
So my point is not that bitcoins need to be deflationary for economic reasons, but more so that it needs to be so for technical reasons.

Without a central authority to control the supply of a currency, how can we ever ensure that a currency stays inflationary? We can't. And since Bitcoin by definition excludes a central authority, bitcoins can't be an "inflationary currency".

Pricing stuff in bitcoins is easy: <price in BTC> = <price in USD> / <USD per BTC exchange rate>

I disagree.  If you have a supply with constant rate, that constant rate will eventually meet the rate of lost coins + worldwide GDP growth.  At that point, the currency would be neither inflationary or deflationary.  It would be stagnate, which is really what the "perfect" currency would look like.

BUT, the problem with that idea is that it does not offer enough incentive to early adopters.  And a lack of early adopters means a lack of adopters, period, as we've seen with Tenebrix and other attempted alternate cryptocurrencies.

[miscreanity]

Bitcoin's decimal expansion is effectively inflationary. That inflation is limited by the number of decimals it can be expanded to, which is currently 8. The system itself does not determine the extent of decimal expansion; that results from market forces. As Bitcoin gains wider adoption its value will rise, prices will fall, and the decimal will periodically be moved to the next point.

There's a good chart that I often use to explain the process. Comparing this mechanism to gold, it's like using ounces, half-ounces, quarter-ounces, tenth-ounces and then grams. Being physical, gold is limited to how far it can be divided and remain functional; we can't exchange individual atoms. Being completely abstract, Bitcoin is only limited by the necessary protocol changes that would allow further decimal expansion.

It's possible that market forces will make the change gradual, otherwise a full decimal shift could cause a sudden drop in prices of up to 90% depending on overall economic growth. An inflationary currency definitely affords a smooth level of expansion to match real growth, but may not be necessary. I think we'll have to get much closer to the 21mm unit limit before anything empirical can be determined.

[runeks]

I disagree.  If you have a supply with constant rate, that constant rate will eventually meet the rate of lost coins + worldwide GDP growth.  At that point, the currency would be neither inflationary or deflationary.  It would be stagnate, which is really what the "perfect" currency would look like.

I don't understand. What would ensure that some pre-defined rate of growth of a currency will match the rate of lost coins plus world GDP growth?

[SgtSpike]

I disagree.  If you have a supply with constant rate, that constant rate will eventually meet the rate of lost coins + worldwide GDP growth.  At that point, the currency would be neither inflationary or deflationary.  It would be stagnate, which is really what the "perfect" currency would look like.

I don't understand. What would ensure that some pre-defined rate of growth of a currency will match the rate of lost coins plus world GDP growth?

It will EVENTUALLY match that.

Say you had a 50 coin block reward, lost coins averaged .5% per year, and GDP averaged 3% per year.

The first year, you will have generated 2,628,000 coins, and, on average, 13k of those would be lost.
The second year, you would have generated another 2,628,000 coins, and, on average, 26k of those would be lost.
Etc, etc, etc.

It would take quite a number of years, but eventually, you would reach a point where the number of coins generated would equal the number of coins lost (on average).  That point would be when 525,600,000 coins are in circulation.

Add in GDP, and you'd actually be deflating if you had that many coins in circulation.  So, the GDP-corrected coin count would be 75,085,714 coins in circulation.  Although there'd be more coins than that joining the economy, the effective money supply would remain the same, since the velocity would be faster.  Hard to explain.  But the effective value of currency per GDP would remain the same.

It's not perfect by any means, but it would average out to be stagnate, which would mean an ideal amount of investment and debt vs savings.  A deflationary currency encourages too much saving, and an inflationary currency encourages too much debt/spending.

[runeks]

I don't understand. If 50 BTC are produced every 10 minutes, and world GDP growth is 3% per year, bitcoins would, eventually, become deflationary. The first years they'd be inflationary, up until the point where the number of coin generated in a year equals 3% of the current supply. At this point it'd be stagnant because it matches GDP growth. After this, the supply would grow at less than 3% per year (the rate decreasing year by year) and it'd be deflationary. Right?

I mean, you could just design the protocol so that supply increases by 3% each year. But that would require that we can predict the average GDP growth far into the future. That's obviously not possible.

It seems to me that everyone is free to implement an inflationary currency on top of Bitcoin. You simply buy 1M bitcoins, and the derived currency (let's call it IBTC for Inflationary Bitcoin) would decrease in value by x% each year. Whenever someone wants to perform a transaction, you exchange the IBTC for bitcoins. The first year you'd get 1 BTC for every IBTC you have. The next year you'd get 0.98 BTC for every IBTC, the next year 0.96 BTC for every IBTC, and so on and so forth at an ever decreasing exchange rate, in order to ensure inflation. It's easily doable. I doubt that people would be interested in this currency though. I sure wouldn't. But it seems like a good test to determine the usability of an inflationary currency vs. a deflationary one.

[hazek]

Bitcoin's decimal expansion is effectively inflationary. That inflation is limited by the number of decimals it can be expanded to, which is currently 8. The system itself does not determine the extent of decimal expansion; that results from market forces. As Bitcoin gains wider adoption its value will rise, prices will fall, and the decimal will periodically be moved to the next point.

Precisely, except under this type of an inflationary system ALL the savers benefit, while under a fiat currency central bank's inflation those who get the new money first(government, government contractors, big banks and big crops) benefit and the small savers get punished. This is THE problem humanity has today.

[hazek]

A deflationary currency encourages too much saving, and an inflationary currency encourages too much debt/spending.

I'm fascinated how people so easily make bullshit bogus statements like this probably merely repeating something they heard or read somewhere from someone else. How the fk do you know what a deflationary currency encourages? Did you do an experiment to confirm your hypothesis? And if not, why the pretense this is a fact of reality. Pisses me off.

In the history of this planet we haven't had a deflationary currency. And I'm referring to the currency supply deflation not the aftereffect of price deflation. Even fking gold is inflationary. And you little fart want to pretend and make statements of how the reality really works and what kind of currency would be best??!

[miscreanity]

In the history of this planet we haven't had a deflationary currency. And I'm referring to the currency supply deflation not the aftereffect of price deflation. Even fking gold is inflationary. And you little fart want to pretend and make statements of how the reality really works and what kind of currency would be best??!

A true deflationary currency would be one in which the money supply contracts, so it would have to start at an arbitrary amount and then basically self-destruct (inflation self-destructs by dilution/overabundance). As an example, food would fit this definition because it perishes over time.

Yes, gold is inflationary, as is Bitcoin. The distinction is that Bitcoin approaches an absolute limit whereas discovery of a large supply or mining gold on the moon could continue expansion of its unit base indefinitely.

I think I see what you're trying to get at: gold and Bitcoin inflate less than overall economic expansion grows. So it isn't the currency deflating, there is simply a divergence between the growth rates. In effect, that simulates a deflationary environment - the presentation is the same, but the reasons are different.

This chart illustrates that sequence of events:

Think of Altcoin as the translation layer between a consistent measure of value (Bitcoin or gold), and the fluctuating quantity and quality of goods and services in an entire economy. It doesn't matter whether there are 10,000 potatos or 1,000,000 - the price for them will still be the same in Altcoins. The more potatos there are, the cheaper they become in Bitcoins. Assume that potatoes are the only goods in our example economy, a maximum for Bitcoin of 1,000 Satoshis and an initial 10:1 Altcoin/Bitcoin to potato ratio:

Annual Potato Yield	>Total Altcoins	>Value in Altcoins	>Total Bitcoins	>Value in Bitcoins
100	1,000	10	1,000	10
1,000	10,000	10	1,000	1
10,000,000	100,000,000	10	1,000	0.0001

Can you imagine if potato crop yields fell significantly one year and people saw the US dollar-denominated price of potatoes go from $1/ea to $10,000?

Now under a fixed 2% annual rate rise for Altcoins, with the same starting assumptions as above:

Annual Potato Yield	>Total Altcoins	>Value in Altcoins	>Total Bitcoins	>Value in Bitcoins
100	1,000	10	1,000	10
1,000	1,020	1.02	1,000	1
10,000,000	1,040	0.000104	1,000	0.0001

The same problem arises as that with Bitcoin. A fixed absolute value increase would obviously be even more divergent. You can see from these tables that it is impossible for Bitcoin to serve both purposes alone. A second, more flexible Bitcoin system is necessary in the vein of Altcoin.

A significant change occurs when market forces shift the Bitcoin decimal. Let's take another look:

Annual Potato Yield	>Total Bitcoins	>Value in Bitcoins	>Decimal Shift	Value of 1 Bitcoin
100	1,000	10.000	none to hold 10.0	1.0
1,000	1,000	1.0000	>1 to hold 10.0	1.0
10,000,000	1,000	0.0001	>5 to hold 10.0	1.0

The end result is that anyone holding 1 Bitcoin at the beginning would still have 1 Bitcoin, only now smaller fractions of a Bitcoin are needed to conduct everyday transactions. The currency remains functional in regard to price stability while existing units are not devalued, meaning that savers neither harm the system nor are harmed by it.

In a fiat system, savers are actually the enemy because stockpiling puts strain on price stability and if the stored fiat is ever disbursed in size, it can cause sizeable price disruption. For an example, imagine that a major foreign holder of US debt (bonds and the like) decided to sell; several billion dollars flooding back into the system without an immediate, commensurate balance of trade reaction would be the same as printing that money into existence. Prices of goods and services would be affected within a year, potentially causing further chain reactions that could destabilize the entire system.

What is the universal response to an inflatable money supply that is experiencing excessive demand (i.e. a liquidity crisis)? Inflation is the only answer in the end. By inflating, the decimal point is moved to the left instead of the right. We've seen this with numerous national currencies which introduce a 'new' X fiat currency, just like the old one only several zeros have been lopped off. A 100.00 denomination becomes 1.00 for a left shift of 2 places. That dilutes existing units (savings) in order to maintain price stability.

Using a money supply that is essentially fixed, and is indefinitely divisible, completely negates that problem. Gold is the same, but can only do well to certain point because it is physical, offering practical usage down to about a gram denomination. While it is theoretically possible to use gold held in custodianship to lower the limits on practical usage, that returns to issues of trust regarding financial institutions.

Bitcoin also virtually eliminates the management concerns involved with trust (there will still be weak points, notably the developers, hashing power concentration and cryptographic security). The only real questions that remain (aside from those mentioned) are of eventual widespread adoption and whether the decimal expansion will be sufficiently smoothed by market forces. Therefore, a complementary inflationary currency might not be necessary.

It's hard for those with minimal understanding of their own financial system to grasp these distinctions, and even harder for those that have made it their livelihood and gospel in understanding the existing paradigm. All economic arguments against Bitcoin so far have been bunk. The shift in recognition will be a gradually accelerating process, much like this excellent analysis.

[miscreanity]

This is what I think will happen.

I agree with you that a decline in mining would affect the exchange rate in Bitcoin's favor, but there are other factors as well - capital flows from larger economies' currencies could very easily cause another spike in demand for Bitcoins which would result in an equally large rise in the exchange rates.

CPU->GPU->FPGA->ASIC certainly looks to be a natural progression for Bitcoin's future.

[miscreanity]

Who knows, we may even be looking at quantum processors in another three or four years. I have no doubt that advances in technology will help to explode the hashing power of the network. People that have bet against Moore's Law et al have been proven wrong time and again.

But what I have observed since early on about the way hashing power reacts to price leads me to expect a kind of herky-jerky delayed reaction to halving.

CPU->GPU->FPGA->ASIC->?

Fixed

Ah, yes - the delayed reaction. Have to agree there as well. I still see external capital inflows amplifying those processes until Bitcoin has gone mainstream, so things will probably be more pronounced and volatile than anyone would expect for quite a while no matter what. Lots of factors to consider.

"The greatest shortcoming of the human race is our inability to understand the exponential function."
Albert A. Bartlett, Ph.D
Professor of Physics at the University of Colorado at Boulder

[chsados]

In the history of this planet we haven't had a deflationary currency. And I'm referring to the currency supply deflation not the aftereffect of price deflation. Even fking gold is inflationary. And you little fart want to pretend and make statements of how the reality really works and what kind of currency would be best??!

A true deflationary currency would be one in which the money supply contracts, so it would have to start at an arbitrary amount and then basically self-destruct (inflation self-destructs by dilution/overabundance). As an example, food would fit this definition because it perishes over time.

Yes, gold is inflationary, as is Bitcoin. The distinction is that Bitcoin approaches an absolute limit whereas discovery of a large supply or mining gold on the moon could continue expansion of its unit base indefinitely.

I think I see what you're trying to get at: gold and Bitcoin inflate less than overall economic expansion grows. So it isn't the currency deflating, there is simply a divergence between the growth rates. In effect, that simulates a deflationary environment - the presentation is the same, but the reasons are different.

This chart illustrates that sequence of events:

Think of Altcoin as the translation layer between a consistent measure of value (Bitcoin or gold), and the fluctuating quantity and quality of goods and services in an entire economy. It doesn't matter whether there are 10,000 potatos or 1,000,000 - the price for them will still be the same in Altcoins. The more potatos there are, the cheaper they become in Bitcoins. Assume that potatoes are the only goods in our example economy, a maximum for Bitcoin of 1,000 Satoshis and an initial 10:1 Altcoin/Bitcoin to potato ratio:

Annual Potato Yield	>Total Altcoins	>Value in Altcoins	>Total Bitcoins	>Value in Bitcoins
100	1,000	10	1,000	10
1,000	10,000	10	1,000	1
10,000,000	100,000,000	10	1,000	0.0001

Can you imagine if potato crop yields fell significantly one year and people saw the US dollar-denominated price of potatoes go from $1/ea to $10,000?

Now under a fixed 2% annual rate rise for Altcoins, with the same starting assumptions as above:

Annual Potato Yield	>Total Altcoins	>Value in Altcoins	>Total Bitcoins	>Value in Bitcoins
100	1,000	10	1,000	10
1,000	1,020	1.02	1,000	1
10,000,000	1,040	0.000104	1,000	0.0001

The same problem arises as that with Bitcoin. A fixed absolute value increase would obviously be even more divergent. You can see from these tables that it is impossible for Bitcoin to serve both purposes alone. A second, more flexible Bitcoin system is necessary in the vein of Altcoin.

A significant change occurs when market forces shift the Bitcoin decimal. Let's take another look:

Annual Potato Yield	>Total Bitcoins	>Value in Bitcoins	>Decimal Shift	Value of 1 Bitcoin
100	1,000	10.000	none to hold 10.0	1.0
1,000	1,000	1.0000	>1 to hold 10.0	1.0
10,000,000	1,000	0.0001	>5 to hold 10.0	1.0

The end result is that anyone holding 1 Bitcoin at the beginning would still have 1 Bitcoin, only now smaller fractions of a Bitcoin are needed to conduct everyday transactions. The currency remains functional in regard to price stability while existing units are not devalued, meaning that savers neither harm the system nor are harmed by it.

In a fiat system, savers are actually the enemy because stockpiling puts strain on price stability and if the stored fiat is ever disbursed in size, it can cause sizeable price disruption. For an example, imagine that a major foreign holder of US debt (bonds and the like) decided to sell; several billion dollars flooding back into the system without an immediate, commensurate balance of trade reaction would be the same as printing that money into existence. Prices of goods and services would be affected within a year, potentially causing further chain reactions that could destabilize the entire system.

What is the universal response to an inflatable money supply that is experiencing excessive demand (i.e. a liquidity crisis)? Inflation is the only answer in the end. By inflating, the decimal point is moved to the left instead of the right. We've seen this with numerous national currencies which introduce a 'new' X fiat currency, just like the old one only several zeros have been lopped off. A 100.00 denomination becomes 1.00 for a left shift of 2 places. That dilutes existing units (savings) in order to maintain price stability.

Using a money supply that is essentially fixed, and is indefinitely divisible, completely negates that problem. Gold is the same, but can only do well to certain point because it is physical, offering practical usage down to about a gram denomination. While it is theoretically possible to use gold held in custodianship to lower the limits on practical usage, that returns to issues of trust regarding financial institutions.

Bitcoin also virtually eliminates the management concerns involved with trust (there will still be weak points, notably the developers, hashing power concentration and cryptographic security). The only real questions that remain (aside from those mentioned) are of eventual widespread adoption and whether the decimal expansion will be sufficiently smoothed by market forces. Therefore, a complementary inflationary currency might not be necessary.

It's hard for those with minimal understanding of their own financial system to grasp these distinctions, and even harder for those that have made it their livelihood and gospel in understanding the existing paradigm. All economic arguments against Bitcoin so far have been bunk. The shift in recognition will be a gradually accelerating process, much like this excellent analysis.

+1 I say, good show!   

[hazek]

It's hard for those with minimal understanding of their own financial system to grasp these distinctions, and even harder for those that have made it their livelihood and gospel in understanding the existing paradigm. All economic arguments against Bitcoin so far have been bunk. The shift in recognition will be a gradually accelerating process, much like this excellent analysis.

Outstanding post, sir!