The Case for Miner Controlled Emissions

One of the most controversial features of Bitcoin and Cryptocurrencies in general is their deflationary nature. This feature is unique in that it’s more ubiquitous than proof of work, yet is in no way necessary to the protocol or security of the network and is completely arbitrary and arguably illusionary (as it can always be forked out at a later date). While among Crypto evangelists and many early enthusiasts it is considered one of the core tenets of cryptocurrencies, I would argue that it’s the asset’s biggest flaw.

While capping the supply of a coin may make it seem appealing as a store of value, ultimately it has detrimental and possibly debilitating effects on both adoption and use of the coin as a means of transacting. In addition even the basic function of a store of value is threatened by the fact that restricted supply limits do not properly incentivize mining, and as a result have allowed many existing coins to become incredibly vulnerable to attack. Grin’s position as both an extremely scalable and privacy focused coin make security, adoption, and utility much more central to its success than acting as a store of value. Thus I would like to propose that Grin adopt a protocol that allows miners to control the emissions rate up or down by some percentage every block.

In my experience, the problem people have with inflation isn’t the mechanism itself but rather who benefits from it. The way that inflation is implemented, in fiat currencies, tends to benefit key institutions and individuals with the benefits which only slowly trickling down. While cryptocurrencies were supposed to fix this; by allowing those who secure the network to benefit from inflation, with the assumption that they would have to sell the coins to pay for electricity and hardware; however evidence indicates this has caused even more centralization than we see in fiat.

Since I am proposing something that may be quite controversial and is certainly not well discussed in this community I accept that the burden of proof falls upon me. To this end I will spend a considerable amount of time explaining the factors that influence this proposal laying out the negative effects of deflation on adoption and utility, discussing and reviewing the security implications of deflation, both theoretically and on existing coins, and finally detailing what I propose.

In addition I would like to highlight the following articles in support of my arguments and as further evidence of how the current system tends to encourage hording, by miners and early adopters, as well as exacerbate the negative effects of deflation.

Problems with Deflation

Whether a hard cap, like Bitcoin, or soft cap, like Ethereum, these caped inflation rates turn coins into extremely deflationary asset where eventually more coin will be lost per year than are created thus shrinking the total supply and exacerbate all the intrinsic problems with deflation exponentially, this will eventually leave such coins essentially illiquid, or perpetually unable to meet market demands for liquidity. In addition to the basic liquidity issues caused, deflation leads to a host of other problems including; making the first-in the best-off , as well as the rich richer, and disincetivizing use, while some of these issues have not been massively detrimental thus far and may have even helped increase early adoption, they are not necessary to the protocols and will disincetivizes further adoption compared to identical inflationary coins.

First off, the supply caps on crypto assets, whether soft or hard, coupled with the nature of crypto assets (the fact that wallets will be lost and/or coins burnt) mean that eventually these coins will have negative inflation rates. So what does this mean for the value of these coins? Well, while many people like to compare Bitcoin to gold, gold actually has a very consistent positive inflation rate on a percentage bases, averaging 1.55% over the last 12 years and gold production has grown relatively consistently over the last century. So if Bitcoin’s inflation rate isn’t comparable to gold, then what is a good comparison? Well there aren’t many deflationary assets for good reason, they become illiquid over time and thus can’t be used practically or transacted in freely. The closest (though problematic) comparison I can come up with would be a particular vintage of wine, which do tend to increase in price over time, as the total supply decreases, never the less the market for any particular vintage also shrinks until it eventually becomes completely illiquid in the hands of a small number of collectors. While many Bitcoin enthusiasts argue that this will not happen to Bitcoin since they can be broken down into infinitely small fractions, allowing the market to sustain liquidity, the problem with this argument is that it’s only true if we measure that liquidity using an inflationary asset such as dollars, the liquidity measured in Bitcoin will obviously be decreasing. So inevitable you are left with an ever greater number of people competing for an ever shrinking quantity of Bitcoin until it becomes unsustainable and something has to give, since the quantity of Bitcoin can’t increase the number of people interested in competing for it will have to give.

One thing that deflation does that has, thus far, been helpful to crypt is that it makes the first-in best-off, which has incentivized lots of people to buy in, with the hopes that they will be bought out at a later date, and has increased early adoption. However long term this is not sustainable as it would require that every new wave of adoption buy in at a higher price, and rely on the wave of adoption that comes after them for the value of their coins. Effectively this making the coin very similar to a pyramid scheme where finding the new actors to buy-in and bringing in the new stakeholders needed to increase the overall level of adoption becomes exponentially harder, since new stakeholders benefit exponentially less, thus making scaling the coin increasingly difficult.

This leads me to the first important benefit of inflation, which is to prevent the rich-get-richer effect where, without inflation, people who have money will automatically gain wealth by not investing it, while people who spend money will loose wealth even when they use their money to buy useful products. So whoever can go the longest spending the smallest percent of their wealth ends up the richest, and since the wealthiest by definition have the most wealth and thus need to spend the smallest percent of that wealth to sustain themselves the rich-get-richer. This obviously encourages people to stop; spending, making risky investments, or using their coins at all.

Thus lack of inflation disincentivizes adoption of the coin for its intended use, as the longer you can go without spending the coin the more it will be worth and the less you will have to spend giving rise to the HODL state we see in many coins. To illustrate this, let’s say someone has half their money in dollars and half in a coin and they have to pay for something, since there is a cost to acquiring the coin (conversion fees, time and effort, etc) they are better off saving the coin they have, since it will likely be worth more tomorrow, and using their dollars, which will likely be worth less tomorrow, to make payments. This means that the expected appreciation of the value of the coin, relative to dollars, is actually an additional cost that the user must pay to realize the benefits of the coin (such as privacy). However, were the coin to be inflationary at the same rate as the dollar then the user would have an incentive to always opt to use the coin, since they would achieve the benefits that the coin offered for free, and these benefits could even offset the costs of exchange encouraging the user to exchanging dollars into coins and then use the coin, when possible, instead of dollars. What this means is that while deflation may make the coin appreciate in value, relative to the dollar, this appreciation becomes a cost to transacting in the coin and is detrimental to the overall value of the system as well as adoption and use of the coin as anything other than a store of value.

Spiral of Insecurity

Disincentivizing transactions has alarming implication on the security of the coin’s network, since this security is paid for largely by these transactions, this can and I believe will lead to 51% attacks becoming increasingly common on ever larger networks.

Let me start by explaining the logic underlying PoW coins in general and what makes them secure:

The security of the network is relative to the value of the network IE: If the market cap of a coin is $100 and there is $200 worth of mining occurring on the network, then you know it would be very difficult to profit from performing a 51% attack on the network. Now let’s say the market cap is $1,000,000 and there is only $200 worth of mining occurring on the network, now it would be easy to profit from performing a 51% attack on the network, for instance you could short the coin, then publicizing a 51% attack on the network allowing the value to tank, and/or spend it and then 51% the transaction to keep the coin, or do both. Either way the attacker should easily be able to recover more than the cost of the attack; so you can see that as the value of a coin increases the potential return from attacking it also increases. So, in order to keep the network secure, it must pay for people to mine on the network.

So how does the network pay for its security?

The security of the network is paid for in two ways; by emissions and transaction fees. As the emissions rate of a coin decreases, in order to keep the incentive to secure the network constant, the portion of the networks security paid for by transaction fees must increase. Meaning that as the emissions rate of the coin decreases, users must either choose between increasingly low relative levels of security or increasingly larger transaction fees, either from increased volume or from increased fees, to sustain the same relative security.

So what does this mean?

Driven by an increased expected future value of the coin and a decreased desire to transact in the coin, both caused by deflation, users will continue to prefer lower transaction fees over higher security, thus making the network increasingly insecure until there is a failure. This is to say that while gross transaction volumes will likely increase, absent technological barriers, never-the-less the increase in total transaction fees will not be proportional to the increased value of the coin.

In this way we can see that emissions/inflation allows for the security of the network to be paid for through the coin’s value. While any coin that doesn’t have an increasing emissions rates ultimately has capped its security relative to its value and the number of transactions on the network.

Vulnerability to Attack

The security of Proof of Work coins is derived from the amount of work that is done securing the network. If a coin that has a market cap of $1,000,000 is only secured by $1,000 worth of equipment, then one could 51% attack it for $1,100. Meaning that if someone could obtain $1,100/$1,000,000=1.1% of the coin and spend it on mining equipment, they could 51% attack the network and theoretically get their coin back. So long as we look at this valued in coin, they would have risked nothing and acquired the mining equipment for free. Obviously this would not be true if we value it in dollars, but assuming they could sell the mining equipment at break even (possibly by pre-selling or mining with it before they perform the attack) then any value that the coin retains after their attack would have been made at zero risk. This means that anyone who can acquire 1.1% of the total supply has an economic incentive to attack the network. Obviously the higher this % the harder it would be for a single actor to acquire that amount of coin without incurring added costs (due to moving the price of the coin), thus the more secure the network, at 100% every dollar of value on the network is secured by a dollar of mining equipment meaning it will always cost more than one could make to attack the network.

(As of early August 2018)
So what does this look like for Bitcoin? Well Bitcoin’s current network hashrate is roughly 45,500,000 TH, and the cost of an Antminer S9 from Bitmain is $655 which produces 14TH. (note that I am going to use this number to measure the cost of attacking the network, in reality it would most likely be much cheaper as a attacker could most likely produce equivalent miners for a much lower cost.) So we have 45,500,000/14*$655=$2,128,750,000 of equipment on the network. Current market cap of Bitcoin is $141,182,470,188 so $2,128,750,000 / $141,182,470,188 =1.51%. This means that if someone could obtain 1.51% of all Bitcoin (less than half the typical daily volume) and spend it on mining equipment, they could 51% attack the network and get their coin back. This seems like it should be alarming to people who believe in PoW.

The Trust Problem with Capped Inflation

The traditional capped or limited inflation rates require a tone of trust, which has clearly been entirely misplaced. In fact I think that trust, or rather trustlessness, was not even considered during the creation of the traditional capped inflation rate. The capped system gives Whales (mostly large miners and early adapters) complete control over the price of the coin and incentivizes these Whales to abuse this power as much as possible. We have already seen this lead to total increasing centralization of holdings resulting in massive trust issue within existing systems. Not knowing when Whales will dump or pump puts a risk premium on the coins and this is why so few merchants want to use existing coins and those that do charge a premium for using coins (vs credit cards) even though the coins are more efficient and should be cheaper than credit cards. You have to realize that merchants don’t want to hold the coins but rather want to use them to purchase more goods, so price stability is paramount to them.

How can anyone call an asset trustless when its value could fall 90%+ at any time, solely based on the whims of a small group of individuals. Hell, as pointed out in the article I posted above, Whales don’t even need to sell off their assets and can bring prices down substantially simply by moving their assets to exchanges. The problem isn’t powerful or wealthy individuals investing in crypto, the problem is that the system is designed to inflate their power and reward them for abusing it.

If we adopt MCEs inflation will encourage miners to sell off their coins as soon as they get them, allowing these coins to enter the market and be actively priced in. This means that the inflation will actually be felt by the market (this is very important and is not the case for existing coins who’s prices do not correlate with changes in their respective inflation rates). This means that anyone looking to hoard coins will loose value due to inflation and will incur a direct cost to manipulating the price. While the price of the coin in dollars will be based on actual demand for its use making prices much less volatile vs the competition.

Introducing Miner Controlled Emissions (MCEs)

Miner Controlled Emissions (MCEs) is a relatively simple solution. The idea is to have an initial emissions rate per block and to include a field in each blocks that adjusts the emissions rate future blocks. This field could and probably should be limited to a very narrow range, depending on the block propagation rate, with the range being further restricted if blocks are produced faster. For example lets take a chain that starts with an emissions rate of 1 coins per block producing 1 block every min, and allows miners to change the emissions rate by between +0.0001% and -0.000101% per block. This would mean that in order to increase or decrease the emissions rate by 1% it would take 10,000 consecutive blocks voting the same way. This would allow miners to gradually shift the emissions rate to respond to market demands.


MCEs would have the following beneficial effects:

  1. Increase returns on mining, vs other coins, thus more miners would mine the coin making the network more secure.
  2. Encourage miners to sell their coins, due to increased expected inflation, thus forcing coins to actually hit exchanges allowing the inflation to spread efficiently and consistently
  3. Create some level of price stability, by creating stable inflation
  4. Encourage people to use the coin rather than hold them
  5. Allow supply of the coin to meet demand such that Es (Price elasticity of supply) should tend towards 1 over the long term

Due to Grin’s position as a scaleable privacy coin I would like to propose that it adopt miner controlled emissions.

EDIT: Since each miner could increase the inflation rate by a percentage there would be no cap on the max inflation rate as inflation could increase exponentially. In addition miners could decrease the inflation rate logarithmically towards the natural rate of deflation caused by lost or burnt coins.

Economically speaking miners would want to increase the inflation rate so long as the Price Elasticity of Supply is less than 1 (Es<1). If Es>1 then they would be reducing their profits, so this should cause Es to go towards 1 over the long term.


The revolution isn’t a set supply but a known supply. Knowing a currency will inflate at exactly 4% a year always is just as useful as knowing there is a hard max supply. There will be less uncertainty and can be no funny business in either system, but neither grants more certainty or less funny business than the other, as far as I have thought.

Grin satisfies this incredible innovation of explicit mechanical supply with its 1 grin/second forever. It hopefully also sidesteps the as-of-yet-hypothetical issues that will arise for bitcoin and it’s max supply by having programmed supply inflation.

Am mobile and will read rest of your documents and respond again, but my question on first run through is if you are describing a variable supply (which could still be useful if it is more transparent than historical money supply management systemn) and/or if you think there is anything wrong with grin’s current inflation policy.

Yes, I am describing a transparent variable supply management system. The problem with the 1 coin a second system is that it is deflationary the second demand exceeds 1 coin per second, and is not really any better than having a fixed cap.

This proposal would have no effect, in my humble opinion. Miners would shift the emissions rate to the maximum and leave it there. It’s human nature.

Might at well propose a fixed x% inflation rate.

Personally, I favor the current x-grin-per-second scheme. It’s a good middle ground between fixed supply (bitcoin) and exponential growth (x%).


Just want to point out that since each miner could increase the inflation rate by a percentage there would be no cap, and the inflation rate could increase exponentially or decrease logarithmically. In addition this would not be in the miners best interest as they don’t benefit from the increase directly, since the change takes effect on the next block.

Economically speaking miners would only want to increase the inflation rate so long as the Price Elasticity of Supply is less than 1 (Es<1). If Es>1 then they would be reducing their profits, so this should cause Es to go towards 1 over the long term.

Edit: I am going to make this more clear in the original

Thank you for the writeup and thank you for caring, unusual and well-argumented ideas are always a good read.

The main complication I can see is that calculating the elasticity of supply in cryptocurrency markets, that are dominated by speculation, would be extremely hard. Without having a good metric and a good understanding of it, miners are likely to just keep increasing.

1 Like

It is probably impossible to calculate the exact point at which the price elasticity of demand = 1 (as the PED would be in constant flux and is determined by the market). Nevertheless as long as making changes is slow enough miners should be able to democratically keep it fairly close to 1 by simply watching the average profitability of mining relative to other coins.

If the average profitability of mining were to go down (vs other coins) then miners would want to begin decreasing inflation. I am sure that there would be lots of over shooting, especially in the beginning, but I am sure that miners would become very good at predicting and optimizing this over time. If it ever went off too far it would become very obvious as the profitability of mining would begin decreasing at closer and closer to the same rate as the coin was inflating.

I would guess that miners would probably boundlessly expand inflation. Price elasticity of demand may not become a limiting factor until it were far too late.

Thought experiment, imagine if you and 1000 other people had the ability to create n dollars per day for yourselves. The group wouldn’t limit n until the consequences of the inflation were dire indeed.

Nice writeup but it sounds like MCE solves a problem that is not yet apparent on coins with capped supply, more so for Grin.

If I were a member of the group, I would never want n to be greater than the amount of dollars I was absolutely sure I could trade for goods and services, since increasing n above that would deflate the value of my dollars at no benefit to me. You are assuming unlimited demand for the dollars, but in reality demand is limited by goods and services produced (productivity), so allowing others to have more than they need makes it harder for you to get what you need.

This is only true if they could trust each other not to spend beyond their need.

Too late for what?

Not sure when you would consider the problem “apparent”? If the fact that Bitcoin could be 51% attacked for less than 2% of it’s value(significantly less than it’s 1 day trading volume), then perhaps the ever increasing number and scale of 51% attacks would seem to point to a problem incentivizing security? In addition I would point to the hording of coins as extremely detrimental to both adoption and utility of coins, especially privacy coins, for evidence of this see the articles I linked to at the top of my OP.

Your assertions are striking me as odd. Are you assuming in this system that most people are miners? I’m assuming that a very small slice of the total economy are miners.

No I am imagining a limited number of miners in a larger economy. It doesn’t matter what you are producing, dollars, oil, diamonds, gold, etc. over production will diminish your purchasing power vs production cost. This is why OPEC doesn’t produce as much oil as they can every day, but rather they limit production to ensure demand is stable and thus they can profit.

Too late to avoid crippling hyperinflation.

I have to go back to that thought experiment, but let’s make it even simpler. Imagine if 50 people, one in each state of the USA, possessed a money-printing machine that created $100 bills at the press of a button. The catch: each time anyone uses their machine, all the other machines also create $100.

On the first day, you might print some money and use it to satisfy simple desires. On the second day, you would maybe print a bit more. But by the end of the first week, I think you would find a roomful of money spewing out of your machine, as other users became addicted to the easy money. Hyperinflation would be unavoidable.

I guess I’m just more pessimistic than you regarding the ability of humans to discipline their present behavior in order to avoid future pain. I hope I’m wrong, though! :slight_smile:

1 Like

@Chronos Ah, I see the issue here, you are assuming variation in the rate-of-change in inflation, and under those conditions your assumptions are 100% correct! However let me point out what is wrong with your hypothetical:

The biggest difference is that other users can’t create money at will. What I am proposing would be more like this (emphasis on the changes):

Imagine if 50 people, one in each state of the USA, possessed a money-printing machine that automatically prints a $100 each day. The catch: each day every user is given the choice to increase OR decrease the amount of money printed by 0.0029% (roughly the equivalent to what I am proposing) BUT this change affects all the other machines as well.

Why these changes are important:

  1. A bad apple can’t spoil the bunch (the power of a single user, or even a small group of users to change the inflation rate is relatively small)
  2. Even if EVERY user votes for the maximum change each day, the path to hyper inflation would be very slow (it would take more than 28 years to match the current money supply of $14,Trillion, and given the historic current rate of US inflation it would take more than 67 years to create more coins than dollars)
  3. A few good users could easily counter act a lot of bad users (if 45 users increase the inflation rate at the maximum and 5 users decrease the inflation rate as much as they can then it will take more than 35 years to double the money supply, 67 years assuming historic inflation)

EDIT: Just to emphasize point #3, if 20 users voted for the maximum increase each day, 5 users voted for the maximum decrease each day, and the other 25 users didn’t vote, it would take 259 years to have $1 printed for every $1 issued by the government (assuming historic inflation rates)

Also, not saying that this will happen, but lets say worst case scenario, what would actually be the negative effects of “hyperinflation” on a cryptocurrency? Assuming that the goal is to have the coin be used as a means of exchange (for transactions) and not a store of value (for saving), predictable and stable hyper/high-inflation shouldn’t be harmful.

I’m hearing two arguments.

  1. Miners can’t wreck supply because their power is limited.

Either it’s so limited that the whole scheme doesn’t matter (just use 1 grin/second), or it is not limited enough to protect against hyperinflation. This might come down to a difference of opinion about the existence, size and importance of any middle ground between these extremes. Personally, I think there may be no middle ground between these.

  1. Hyperinflation might not be bad.

If there were only one currency in the world, maybe it wouldn’t be bad. However, Grin must compete against many other options for currency. If Grin were hyper-inflating, it would probably be less popular as a means of exchange than other coins, leading to further loss of value. See Gresham’s Law (good money drives out bad).

I wouldn’t say I have two arguments, as I clearly listed out my points and have at least 3 points which I used to refute the idea that MCEs would result in hyperinflation. However in addition to my arguments on why MCEs would not result in “hyperinflation”, I did want to offer the counterpoint that “hyperinflation” might not even be bad for a crypto asset.

The idea that there is no middle ground between limited supply and harmful inflation strikes me as somewhat absurd, as there are many assets; dollars, oil, gold, euros, etc that have inflation without hyperinflation. If your argument is that the methods, with which I proposed MCEs would avoid hyperinflation, would not be adequate then please feel free to address the points that I made in my reply to your previous post. A rebuttal that comes down to “a difference of opinion”, rather than any refutation of my points will have to be met with Hichen’s razor.

Just to be clear the middle ground comes in giving limited power to the miners to manage inflation so that no single miner has too much power but together, through consensus, all miners can have a significant effect over time.

Regarding the negative effects of hyperinflation your evidence seems to support the very idea you are arguing against, namely that hyperinflation would not be harmful for the adoption of the coin.

Despite your misquote Gresham’s law in fact states “bad money drives out good”. I.e. that over time, given a choice people will choose to transact in the more inflationary/less-intrinsically-valuable currency.

This is because people would always rather spend the less valuable or inflationary coin than the more valuable or deflationary coin.

Finally I want to make clrea for anyone reading this that I am not arguing for hyperinflation. Rather, in response to my argument for MCEs @Chronos seemed to argue that MCEs would lead to “hyperinflation”. This lead me to question what “hyperinflation” of a digital asset would look like. I firmly believe that MCEs would not result in the typical definition of hyperinflation, but I encourage us to explore whether “hyperinflation” would actually have a negative effect on digital assets, since most of the negative effects tend to be associated with menu-costs and reduced saving/over-spending, both of which could be beneficial to a crypto asset. I use the term “hyperinflation” in quotes as I think the first step should be to define this term.

1 Like

Not only did I misquote Gresham’s law, but I seem to have misapplied it, as well. You make excellent points.

I did not mean that there is no middle ground between limited supply and harmful inflation, rather, that there may be no middle ground between emasculated (hyper-limited) miners and dangerous (hyper-inflating) ones under this scheme.

I will have to think before I can reply further.

EDIT: Hmm… I guess if the former middle ground existed, that could be the allowed range for the miners. Still thinking here.

OK, my argument is this: under this scheme, I think miners would run the inflation rate at their allowed maximum, obviating the benefit of this scheme when compared to a fixed supply inflation rate.

One aspect that has not been mentioned is the potential existence of another coin with the same PoW algorithm. In this case, miners could freely inflate coin A while planning to switch to coin B in case of trouble.

@Chronos at this point I need to ask you some questions because I am having difficulty understanding your logic. If you don’t have a good answer for one of the questions that’s fine just move on to the next one and maybe we can come back to it later.

Please explain the following:

  1. How would you define too much inflation (aka hyperinflation)?
  2. What are the negative effects of too much inflation?
  3. Is too much inflation good or bad for miners?
    4.a (If bad) Why would a majority of miners choose to keep increasing inflation if is harmful to them?
    4.b (If good) Then who is it bad for and why should it be avoided?