I don’t have a hard and fast rule, but I would suggest that 10% annually would be about where “too much” starts to comes into play. The USA flirted with this as Volcker stepped in as Fed chairman in 1979, and the nation was generally in agreement that inflation had become a problem at that time.
I think you have probably not lived through a hyperinflation in your home country, if you need to ask.
This depends on whether the inflation is in a national currency, or a cryptocurrency. For the former situation, citizens have few or no alternatives to using the currency, which leaves these negative effects, among others:
Citizens cannot store wealth in cash, which makes saving inconvenient at best, impossible at worst
Merchants must do extra work to reprice their goods
Mispricings cause economic inefficiency (e.g. people who do not need furniture buy all available furniture because it is underpriced, or as a form of saving)
For a cryptocurrency, the negative effect would be, for anyone holding the token, the corresponding loss of value.
In crypto, inflation is bad for anyone who holds the inflating token, and good for anyone who receives the increased supply. If miners do not carry token inventory themselves, then they can get the benefits of inflation (extra tokens for themselves) without the cost (loss of value in tokens they do not own), though at the risk of destroying market trust in the token.
If miners destroy the market trust, one unknown is whether another crypto with the same PoW exists that they can mine instead. For example, let’s say that Grin launched with two networks. One with variable inflation, and one with fixed 1grin/sec. Miners could then hyperinflate the former, while having the latter as a fallback to preserve the value of their hardware. This is a complex game.
But I can tell you this: I would be less likely to invest in a token which required trust that miners would not hyperinflate it (even if doing so were irrational), than a token with a known reasonable supply curve. Perhaps that is my true motive in this debate.
I’m interested in the idea of MCE but like @Chronos points out, this brings us back to the trust problem. One of the innovations of cryptocurrencies is not needing to trust in any entity. MCM seems to require trust in miners.
I think what miners will do instead is decide if they want future emissions to be slightly lower or slightly higher, perhaps depending on whether they tend to hold or sell, and just stick to that decision, rather than try to infer market demands.
I would expect emission to slowly drift around 1gin/sec, perhaps taking a decade or more to halve or double, but I would not expect this to have a significant economic impact.
Allowing for significant economic impact would require larger deltas, but then you also get a larger risk of reflecting the whims of miners rather than the overall economic interest.
Weighed against the loss of a, not only immutable, but also trivially understood emission (1 grin / sec), I think the added complexity is just not worth it…
@Chronos thanks for your responses, I think that it’s clear where we differ now.
Regarding how much inflation is too much, my postition, and I think you would agree, is that 10% is an arbitrary number, and so is any percentage. Rather the inflation rate should be based on the demand. After all in the first few years of the coin the inflation rate will have to be in the thousands of percent as we will be going from 0 or 1 to a legitimate quantity of coins.
Regarding effects of inflation
I agreed that the “negative effects” of inflation would be primarily felt by HODLers. As what are traditionally the negative effects of inflation are mainly due to the lack of choice associated with a national currency, and a cryptocurrency can’t suffer from many of these negative effects. That said, I would posit that the deleterious effects to HODLers is a benefit for cryptocurrencies.
Regarding inflation’s effects on miners.
I would assume that miners have a choice and could mine another, non inflationary, coin with the same hardware.
Regarding “destroying market trust”, I would argue that the threat of inflation would do more to protect market trust than destroy it. As evidence I would point to the massive coin reserves currently held by miners, which I evidenced in OP. The threat of an increasing rate of inflation should encourage miners to sell off their gains and allow them to hit the market quickly, decreasing the chances of price shocks or rapid, unpredictable devaluations like we see in other coins.
Nevertheless you seem to agree that giving miners control over the emissions rates would make mining more profitable than other coins and this should make the coin more secure, and ultimately I believe that the security of a privacy coin is where it derives its value.
This is what it all comes down to. If we want to make a coin that is widely adopted, we can’t focus on investors rather it’s imperative to focus on the interests of merchants and users, both of whom are primarily focused on price stability. The fundamental assumption behind my argument is that Grin should not be an investment, but rather should only be held for use, and price stability is essential for this.
@Makkari cryptocurrencies are not totally trustless rather they work based on game theory, and MCEs do not require any more trust than PoW mining does in general, and may even require less. PoW mining requires trust that a majority of mining power is decentralized and acting in its own best interests, accepting that so long as this holds true for at least 50% of miners then it doesn’t matter what the rest do. If miners all stopped accepting each other’s chains or stopped submitting blocks and focused on 51% attacking then the system breaks down, but so long as 50% of miners accepted each other’s blocks and didn’t try to attack the network, this would only harm the attackers. MCEs similarly require 50% or more of miners to be acting in their own best interest.
In fact I think that this deserves a whole section dedicated to it, which I will add to my OP.
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.
We are at risk of mixing two concepts: economic inflation (rising prices) and supply inflation (money printing). It sounds like you would attempt to minimize economic inflation by increasing the variability of supply inflation, similar to the objective of a central bank.
@tromp I don’t really understand your reply, perhaps you could elaberate the following points:
I agree that this is how individual miners will decide, but this is the definition of market demand, individual miners deciding to sell or hold based on the price and quantity they can sell and their own need for capital.
Why?
The whole idea is to give miners significant economic impact, moderated by time. I clearly outlined my proposal in the OP and I am not sure how you define “significant economic impact”.
I have outlined numerous reasons why a capped emissions rate is harmful to a the usability, scalability, and sustainability of a coin. Thus we would not be loosing anything except for simplicity, which is not reasonable to protect, economically, when we certainly don’t protect it technologically. Grin’s goal isn’t to be the simplest coin, but rather the best.
I don’t see why the desires of a handful of the largest miners would correspond to the needs of the market. If they’re hodling coins long term and acquired a huge stash, then they’d want to limit future emissions as much as possible, whereas the market might call for increased emission.
tromp:
Waiting a decade for significant change seems too slow.
Most of your reasons are against capped supply, not against capped rate.
With linear emission starting from 0, Grin is already the most inflationary coin in existence, and getting lots of flak for it.
And your proposal does in fact cap the rate: “This field could and probably should be limited to a very narrow range”.
I just don’t see emission between say, 0.5 and 2 grin per second, depending on miner whim, being any better than a fixed 1 grin per second.
To put it simply, you are conflating the “market” with a Nash equilibrium. The Nash equilibrium, if we choose all favorable assumptions, could very well be that loyal miners keep the inflation down to a minimum, or at a constant rate. A big factor–miners don’t want to keep adjusting the inflation rate based on changing theories. It will be an equilibrium based on convenience. However, the market of miners will likely just mine the coin when it is profitable and leave when it is not–not caring at all what the rate of inflation is set to (again, some constant very likely). Miners can also simply move to a different coin with a better PoW inflation model. Further, if you think the “market” should decide, why cap the rate of change? That sounds like centralized fixing of the market–read, “it is.”
You are also ignoring volume. That is the biggest reason for having inflation. As you say, on the current path, Bitcoin will run into problems with adoption as it turns into more and more of pyramid scheme. It is a healthy scheme right now because it is very liquid compared to all other coins in existence. That dominance in liquidity could last for decades. The solution for when mining contributes less to liquidity and price discovery? People fragment and migrate to the other more liquid alt-coins regardless of their long-term inflation model. In other words, liquidity is something you have to prove now. It can’t be “promise us, it will be more liquid than all the other coins at some point in the future.”
In the end, Bitcoin already has an “MCE” model. The miners simply choose to keep the issuance model as it currently is. There is nothing that says it can’t be forked in the future. If it is such a slam-dunk idea, it will be adopted. If it isn’t Bitcoin, it could be any of the top 10, 20 mining coins, which all currently have asymptotic supply caps or set tail emissions.
I agree with this, but when we refer to the miners controlling the emissions rate we are really talking about pools and solo miners controlling the emissions. Here we start to get into the game theory behind MCEs. Since pool’s would have an incentive to keep the current profitability at a maximum, in order to attract the most miners and thus the most fees. While solo miners would want to focus more on the long run profitability (most likely reducing the mining reward or keeping it steady). Whoever has the most mining power would win, which would help them attract even more mining power.
I haven’t heard a single argument yet for how MCEs could actually be harmful to the network.
Not sure what you meant by “read, “it is.”” but the reasons for limiting the rate of change are 2 fold. First there needs to be some limit technologically, since unlimited rates would expose the coin to a simple attack where someone could input numbers that are just too high to compute. Secondly, the tighter the limit the greater the consensus around it, very loose limits would allow one or two miners to drastically change the inflation rates for brief periods of time, but tighter limits mean that more miners need to be involved in any large change one way or another.
As for the dominance in liquidity that Bitcoin currently maintains, I would point to the fact that more liquid coins have been increasingly successful despite their lack of maturity and other shortcomings. I do agree that Bitcoin’s hard cap is an illusion as I pointed out in my OP. The coin that is first to market with an improved emissions method will have a huge advantage and it will take a long time for Bitcoin to catch up. See the same argument about Bitcoin and smart contracts, aka Bitcoin maximalists argument why ethereum wouldn’t succeed.
This is not even close to what is being discussed, please go back and look at what I am proposing in the OP. Under MCEs there would be no limit on the inflation rates in the number of coins, only in the rate of change.
I have no idea where this idea comes from. There is no evidence that solo miners care only about long-term profitability and pool miners do not. I can think of plenty of personal anecdotes where the opposite is the case. These seem like wild guesses on people’s behavior.
No, it doesn’t. Putting arbitrary limits on the rate of change is simply… arbitrary. You might as well just set a flat rate. Again, it could be forked later to something different, just.like.Bitcoin.
“An improved emissions method” is not something that is objective. You have to convince people it is a good idea. It improves FUTURE liquidity problems ASSUMING it would be liquid to begin with. In other words, you still have to convince people to buy the coin no matter what the inflation is. A LOT of people (think big investors) believe the limit should be capped. Why do you think ETH and ETC forked their constant emissions rate?
Are you saying Ethereum has succeeded? I believe the jury is still out. I think Ethereum owes a lot of its current success to its mining algorithm. But true to my point… other top coins (not Bitcoin) are implementing smart contract solutions now. You aren’t competing against just Bitcoin. And you can’t compare Bitcoin’s extreme dominance in liquidity to features like smart contracts, privacy, etc.
I see; you’re not limiting the range of emission, only the rate of change.
In more discrete terms, over every 1,000,000 blocks, or 1.9 years, the miners decide to adjust emission in the range [emission / e, emission * e], where e = 2.71828…
While this is a reasonable way to do variable emission, I still believe that cryptocurrencies’ mission to avoid arbitrariness in emission is best served by a completely immutable one.
I agree completely. Putting it another way… if miners choosing their block reward is a problem, limiting the rate of change doesn’t solve the problem, it just limits the problem–at best.
@tromp How does this proposal make emission rates arbitrary? It would be controlled by miners through a voting mechanism with strict rules that are pre-defined and transparent to all on the network, similarly to how the consensus mechanism is. If anything, isn’t the current 60/sec a typical example of arbitrariness?
@Ben I’m not sure I follow. The current proposal (as I understand it) is for a miner who mines an accepted block to have a chance to alter the emission rate for the subsequent block by a fixed amount, let’s say it’s +/- 0.1% as an example. What are you suggesting instead? That the miner who mines an accepted block should have the right to alter the rate of the next block with -100% < x < infinity? How would that make any sense?
I don’t think the point is that ‘miners choosing their block reward is a problem’. What @InflationsNotBad is trying to do is to devise a mechanism that allows emission to be adjusted over time via the network itself, so that the network can find the right equilibrium of emission at a given time. Rather than just sticking an arbitrary rate in there, saying “we promise it’s the final rate and that we won’t change it”, and then praying it will prove to be the right one for the network, for all perpetuity.
In the context of what OP is trying to achieve, it then makes sense to have a fixed incremental step for the rate adjustment, so that miners only vote in the “direction” of the emission (should it go up or down), rather than the actual rate of emission. The smaller the incremental step is, the more blocks (and therefore more miners) would need to vote in the same direction for a meaningful change to occur.
@lehnberg I’m saying that cryptocurrencies are opposed to the sometimes arbitrary changes in fiat money supply, and the strongest form of such opposition is to not allow for any changes.
The grin emission is 1 per second which is arguably the simplest possible one.
It doesn’t, nor does arbitrarily limiting the rate of change. How are you determining best limit to the rate of change?
How is that determined? OP thinks there is some interesting game theory scenario between solo miners and pool miners to determine it. I think that is just wild guessing–and wrong based on past evidence.
I’ll try this again… you.can.always.change.it. No one can promise that it won’t change. If someone wants to increase or decrease block reward changes, a hard fork can be proposed and miners can vote. By allowing the miners to increase the reward without a hard fork, you give malicious miners another tool they don’t have with other coins. That’s playing with fire.
What is “meaningful”? And I understand that it is just whoever finds the next block determines his reward, with limitations, right? If it is too high or low, it doesn’t get accepted by the rest of the nodes on the network if all goes well.
I agree @tromp, 1/s definitely is simple. It’s also most definitely deflationary over time. Is that a good thing?
How do you determine the best constant emission rate? The difference between the two is that one has the actual emission rate practically set in stone. The other one allows for some flexibility and the network itself to adjust over time. Which one do you believe to have more tolerance for the initial rate being set incorrectly?
What evidence are you referring to? Has this been done before?
Define that. Many coins have forked their issuance model multiple times.
Do you think you are being clever with words? The “network itself” is the miners with the most hashpower. Is that not correct? Why are you using “network” so nebulously. The correct way is subjective. Letting malicious miners have a voice could result in an even MORE incorrect way–even if they can only do it slowly.
I have solo mined many coins. The fact that you had to ask reveals how much you know.
Ok, @Ben, you are correct that this is not something that I backed up well, though it’s not very important to my argument. My thinking is that both solo mining and running a pool take an amount of fixed costs. And solo miners are willing to put up the cost because they believe in the long run profitability of the coin (I have no real evidence for this), while pools believe that they can collect fees by attracting miners, and thus focus on short term profitability (again I don’t think this is important enough to defend).
My point is that there will be miners focused on both short term and long term profitability and that this may change over time. It doesn’t matter who is focused on what, or even whether or not everyone is focused on only one, what’s important is that the actors in the system itself can decide what is important to them, and thus determine what’s best for them rather than be constrained by arbitrary limits set by the devs.
Saying that we shouldn’t have consensus driven, on-chain, transparent, rules based, changes in emissions because central banks are bad seems like cutting off your nose to spite your face. May I ask why cryptocurrencies are apposed to changes in the money supply?
Is the correct way is subjective the how can you objectively call any miner malicious? Why should the devs have more of a say in the emissions rate than the miners?
tromp: