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"I don't think it is possible to create an inflationary currency except through central banks." I don't see why that would be the case. Would not "Bitcoin, bu

"I don't think it is possible to create an inflationary currency except through central banks." I don't see why that would be the case. Would not "Bitcoin, but the mining rewards don't decrease" be an inflationary currency?

Dylan16807 11y ago
Constant rewards would mean the inflation tends to zero in the long term. But that's easy to fix by making the rewards increase over time in proportion to how many coins exist. The harder problem is that without a central bank you can't track changes in the size of the economy. The more you want to avoid deflationary periods, the more you have to inflate "just in case". And high constant inflation has its own problems. So it's better to say that it's extremely hard to create a mildly-inflationary currency without a central authority.
- dllthomas 11y ago
  That makes sense. Sounds like it could be amenable to some control theory, but certainly it's not a solved problem.
- icebraining 11y ago
  The harder problem is that without a central bank you can't track changes in the size of the economy. Why not, if you have the total list of transactions being made - ie., the blockchain? Seems to me like it wouldn't be hard to measure the "Bitcoin GDP" and adjust accordingly.
  - dllthomas 11y ago
    You can, quite trivially, measure the total amount of BTC that moved from wallet to wallet. You can't tell what actually moved from entity to entity (at least, not without a lot of work, and probably not without some non-blockchain information). I'm not sure how good the former would serve as a proxy for the latter in your envisioned use case. Really, if we wanted to stabilize a coin, I think we'd want to be measuring how it's moving relative to other things, which is definitely external info. It would be a challenge to come up with a means of folding these observations into the system in a secure (and ideally trustless) way.
JesperRavn 11y ago
No that you mention it, I think that would be possible. The main problem is that by its competitive nature, mining rewards are actually deadweight loss. Every dollar value of bitcoin that is given to a miner is value that is destroyed. To see this, imagine that a Chinese bitcoin mining farm is making a profit mining bitcoins, gaining $10 of bitcoins for every $8 of operating expenses. Then another farm could start up with an even lower profit margin. This would continue until the economic profit was zero, i.e. every dollar's worth of bitcoin mined cost a dollar in operating expenses, which are deadweight loss to the economy. However, none of this implies that a constant inflation rate is not possible. As long as a dollar's worth of bitcoin generates more than $1 of value to the economy, the system should be stable, and the higher this number, the less wasteful bitcoin would be. Given the various figures for velocity[0][1] I've seen, it's not clear whether this system would be prohibitively wasteful or not. [0] https://en.wikipedia.org/wiki/Velocity_of_money https://en.wikipedia.org/wiki/Velocity_of_money [1] Note that velocity is the ratio of total money to nominal GDP but since one is a stock and the other is a flow, this doesn't measure how much economic activity a single dollar generates/supports.

Dylan16807 11y ago

Constant rewards would mean the inflation tends to zero in the long term. But that's easy to fix by making the rewards increase over time in proportion to how many coins exist. The harder problem is that without a central bank you can't track changes in the size of the economy. The more you want to avoid deflationary periods, the more you have to inflate "just in case". And high constant inflation has its own problems. So it's better to say that it's extremely hard to create a mildly-inflationary currency without a central authority.

dllthomas 11y ago
That makes sense. Sounds like it could be amenable to some control theory, but certainly it's not a solved problem.
icebraining 11y ago
The harder problem is that without a central bank you can't track changes in the size of the economy. Why not, if you have the total list of transactions being made - ie., the blockchain? Seems to me like it wouldn't be hard to measure the "Bitcoin GDP" and adjust accordingly.
- dllthomas 11y ago
  You can, quite trivially, measure the total amount of BTC that moved from wallet to wallet. You can't tell what actually moved from entity to entity (at least, not without a lot of work, and probably not without some non-blockchain information). I'm not sure how good the former would serve as a proxy for the latter in your envisioned use case. Really, if we wanted to stabilize a coin, I think we'd want to be measuring how it's moving relative to other things, which is definitely external info. It would be a challenge to come up with a means of folding these observations into the system in a secure (and ideally trustless) way.

JesperRavn 11y ago

No that you mention it, I think that would be possible. The main problem is that by its competitive nature, mining rewards are actually deadweight loss. Every dollar value of bitcoin that is given to a miner is value that is destroyed. To see this, imagine that a Chinese bitcoin mining farm is making a profit mining bitcoins, gaining $10 of bitcoins for every $8 of operating expenses. Then another farm could start up with an even lower profit margin. This would continue until the economic profit was zero, i.e. every dollar's worth of bitcoin mined cost a dollar in operating expenses, which are deadweight loss to the economy. However, none of this implies that a constant inflation rate is not possible. As long as a dollar's worth of bitcoin generates more than $1 of value to the economy, the system should be stable, and the higher this number, the less wasteful bitcoin would be. Given the various figures for velocity[0][1] I've seen, it's not clear whether this system would be prohibitively wasteful or not. [0] https://en.wikipedia.org/wiki/Velocity_of_money https://en.wikipedia.org/wiki/Velocity_of_money [1] Note that velocity is the ratio of total money to nominal GDP but since one is a stock and the other is a flow, this doesn't measure how much economic activity a single dollar generates/supports.