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One question : the deflationary nature of cryptocurrencies means that early adopters are rewarded disproportionately. Is this a bug or a feature? It seems unfai

One question : the deflationary nature of cryptocurrencies means that early adopters are rewarded disproportionately. Is this a bug or a feature? It seems unfair for the late adopters and is also one of the reasons people draw parallels to a ponzi scheme. I've not come across a good explanation for this, so any thoughts?

gizmo 9y ago
I think the deflationary nature only reflects the ideological beliefs of the creators. Inflation is a type of tax, therefore for a currency to be a "true" store of value it cannot be deflationary. If extra crypocurrency can be printed, who decides when the monetary base gets expanded and by how much? That's not an easy question to answer in a distributed system. So you end up with a fixed monetary base (and therefore deflation).
- mbrock 9y ago
  This is a really complex topic that I don't really understand, but I think there's quite a lot of interesting nuance to the deflationary cryptocurrency question. For example, you could consider Bitcoin as being like a "specie" or "hard currency" within an ecosystem that also includes various types of "scrip" or "credits". Ether behaves a lot like that. It's the hard base currency in an ecosystem of tokens ("soft currencies") all with different monetary policies. There are very interesting Ethereum tokens without fixed supply, for example the token that will be issued by Maker (the "dai") which is basically an asset-backed credit token with an autonomous monetary policy to stabilize the token's market value measured against the IMF's currency basket index (XDR). This seems to be a really natural pattern: you have a small number of deflationary hard currency (precious metals, basically) that act as global store of value, hedge against local volatility, and neutral means of settlement; and then you have a whole range of other credit instruments. Random thought: to people brought up with cryptocurrencies, we might be explaining gold as "well, it's like nature's bitcoin: scarce, hard to mine, and very expensive."
- alexasmyths 9y ago
  " who decides when the monetary base gets expanded and by how much" You allow entities to trade assets for currency at a central bank. The central bank can do it (i.e. Fed exchanging currency for TBills). The ECB allows banks to exchange assets (like property) for Euros. This is good because it allows flexibility in the amount of currency in circulation. Without this, you can get into all sorts of trouble, for example, Spain, Greece, et. al. in the 'Euro trap'. Monetary policy can be dangerous, of course, like anything powerful, but it can be used for good. Also to the commenters point about 'inflation is a tax' - well, it's a 'tax on cash' and a 'negative tax to everything else'. It's really nothing like a tax at all, it shouldn't be referred to as such. Inflation/deflation is just the changing value of one good vis-a-vis another. There are a lot of 'stores of value' out there and anyone with significant enough portfolio can easily take advantage of those if they chose for whatever reason not to hold a specific currency.
- nosuchthing 9y ago
  The aspect where the majority of the supply is generated in the first few weeks after the genesis block is what makes clear the designers are running a scheme to gain control of the supply, exploiting any would be normal users in the longevity of the project. Satoshi could easily have changed the coin minting production curve to suit a long term project, but instead chose to mint the majority of coins for miners running very low hash power nodes at the start of the project. Along the lines of 10,000 bitcoins being worth 2 pizzas - this means the majority of bitcoins in existence have gone to disproportionately low value capital traders (both in computational power, actual production and electrical cost, and external capital traded for BTC) whereas now coins being produced require several magnitude more computational power to mint and the rewards are less. Paradoxically, the miners require more energy input in return for less and less rewards.
  - ballenf 9y ago
    If there's a functioning market, then there will be exactly as many miners as needed to make the value proposition slightly positive or even. Early miners took great risk in holding on to BTC to see if it would become more valuable. Many did not (my hand goes up) hold on to their BTC, thinking that it was a fad that would pass and didn't want to get left holding the bag. It's easy to underestimate the allure of being able to buy 2 pizzas with CPU power. That purchase made 10k BTC feel enormously valuable (as compared to anything else you could passively do with a home PC). (FWIW, I would've bought pizzas if I'd had the BTC at the time, instead I gave some away and forgot about the rest and formatted the hard drive.)
    - nosuchthing 9y ago
      Early miners took great risk This is verifiability untrue, as early miners used the lowest amount of energy to produce and acquire the largest percentage of the total supply ever produced. Any rational "investor" trading capital or computational energy into BTC or similar minting algorithms would be deterred by this model as the losses increase while the network grows older.
      - 9y ago
- kamaal 9y ago
  Inflation and deflation are both a kind of tax, based on who is buying and who is selling. There are no binaries good and evil in this game. You leave these things to the natural order or things. Attempts to create utopia have led to creation of hell.
nugget 9y ago
Cryptocurrencies aren't necessarily deflationary. Some aspects are quite inflationary, in fact. They can fork. They can have arbitrarily-imposed coin limits increased by changing a single line of code. Other aspects are deflationary, such as the ability for coins to be destroyed or lost forever. How these two forces are balanced against each other is up to the consensus stakeholders (miners) in each case. They should be expected to act in what they perceive to be their own best interests, which could be either deflationary or inflationary, in different scenarios. The interests in PoS and PoW systems could diverge significantly, as in a PoS system the miner's universal interest would presumably be to maximize the value of the currency, whereas in a PoW system the miner's interest would presumably be to maximize both the value of the currency they retained as well as the value of their real-world mining assets.
- namelost 9y ago
  I'm aware I might be fighting a losing battle here but the term is "expansionary" not "inflationary". Inflationary means that the value of a currency tends to go down over time. Expansionary means that the supply of a currency tends to go up over time. Bitcoin is mildly expansionary at the moment because the rate of coin creation is (presumably) greater than the rate of coin destruction. At some point this will flip and it will become contractionary. Regardless, Bitcoin is obviously highly deflationary as the value of a Bitcoin tends to go up over time.
olegkikin 9y ago
There are inflationary cryptocurrencies out there. The deflationary ones are designed that way to be attractive as a store of value. Early adopters of anything are usually rewarded because they take the risk. For instance, early Youtubers have much bigger followings, because they broke the trends, started something new.
- sillysaurus3 9y ago
  early Youtubers have much bigger followings, because they broke the trends, started something new. Not the best argument. It implies YouTube wasn't inevitable.
deleted 9y ago
[deleted]
whiskers08xmt 9y ago
The emission rate of most crypto-currencies is actually relatively high, the problem is that their value have been increasing faster than the coin supply have inflated. To keep value stable, you need an intelligent entity which can control emission, which kind of kills the point of decentralization. Bitcoin halves it's emission rate every 210000 Blocks, or roughly every 4 years. This is because of an adherence to the Austrian School of economic thought. Ethereum is planning to move towards an emission rate somewhere in the realm of 0 < Grow Rate <= World GDP Growth Rate, which should make it's value increase slightly. So to answer your question succinctly; The deflationary nature of Bitcoin is intended. It's quite possible to build inflationary Crypto-Currencies, but it would be difficult to gain traction with early adopters.
alexasmyths 9y ago
Crypto-currencies are not actually currencies (they are generally not used to buy common goods in a common market) - and so it's really not appropriate to use the terminology 'deflationary' or otherwise. I mean - I 'get what you are saying' - but the 'inflation/deflation' is really kind of a second order function of the 'driver' of this, which is really that people tend to 'hold' crytos, as opposed to doing much else. It's the 'behaviour' of the crypto-owners that's the key thing. 'Inflation/deflation' is the interpreted result of that behaviour. So, yes - if there were super-super strict monetary policy in the US - it would probably be 'deflationary' - but - that's a function of that economic system.
centimeter 9y ago
Early adopters are rewarded proportionally to the risk they took (and the work they put in). Bitcoin wouldn’t even be here today if the early adopters hadn’t spent many years making it usable and valuable. Why would anyone who was uninvolved expect to profit from that?
- Cut_N_Paste 9y ago
  I'm not sure why you're being down-voted, you speak the truth. I myself didn't participate beyond a cursory download and trial years ago, because I perceived it too risky and fad-like for my time... boy was I wrong :/
- AnIdiotOnTheNet 9y ago
  What's the incentive for anyone uninvolved in the early stages to become involved? The hope that the value will increase indefinitely? If that's true then there is will be no liquidity as no rational person is willing to part with an appreciating asset. It's precisely this deflationary effect of earlier adopters profiting at the expense of later adopters that makes the whole thing seem like a pyramid scheme.
  - centimeter 9y ago
    The incentive is that bitcoin is (for some uses) superior to existing payment/wealth storage technology even if you can’t make a bunch of money on it.
    - dleslie 9y ago
      It really isn't. If my physical wallet is stolen I can call my bank and have the cards cancelled and interim charges reversed; and I am guaranteed fraud protection at their expense. If my BTC wallet is stolen I'm fucked.
      - posterboy 9y ago
        that is unless the bank themselves are fraudsters.
rcMgD2BwE72F 9y ago
You should check out OpenUDC [0]. There are other similar initiatives, like https://duniter.org/en/ https://duniter.org/en/. The theory behind these projects is worth reading (especially its Principle of relativity) but I can't find an English translation. [0] https://github.com/Open-UDC/open-udc https://github.com/Open-UDC/open-udc [1] http://trm.creationmonetaire.info/ http://trm.creationmonetaire.info/
- sifar 9y ago
  Thanks for the link. The English Translation is at http://vit.free.fr/TRM/en_US/ http://vit.free.fr/TRM/en_US/ It seems to me all the attempts at currency suffer either from the Tyranny of the Gatekeeper (centralization) or the Tyranny of the Majority (de-centralization). Except gold(which is actively being de-emphasized), is there no substitute for an individual who wants to partake in the economy/marketplace and yet not suffer any of the above tyrannies ?
littlestymaar 9y ago
Fairness isn't even the biggest problem with the deflationary nature of cryptocurrencies: you won't have growth unless the velocity of money increases, which is dubious (it's been reducing for the last 30 years).
dizzy3gg 9y ago
The same could be said for land?
- zeroxfe 9y ago
  Yep, and gold, and oil, and any other store of value has been discovered. Early adopters either took risks or got very lucky.
rb808 9y ago
No deflationary crypto currency will be successful for transactions. If a currency only goes up in value there is no reason to spend it. If nobody spends it by definition there are no transactions.
kamaal 9y ago
Its not only a bug its a non-starter. This is the same reason why fiat currencies even exist, if a government and its massive defence infrastructure didn't exist to force a fiat currency on its people. Every few years the 99% will call it quits and start a new currency, turning the worth of the entire wealth held by the 1% to 0. The same thing will happen to Bitcoin eventually. Most of the world won't understand why they are supposed to start poor just because they joined in late. They will spawn local cyrptocurrencies across the world in their local countries, making it very hard for the existing players to watch their advantage go to dust. How that would go is for any ones guess.
freech 9y ago
People are rewarded in proportion to the risk they took. It couldn't be any different.

gizmo 9y ago

I think the deflationary nature only reflects the ideological beliefs of the creators. Inflation is a type of tax, therefore for a currency to be a "true" store of value it cannot be deflationary. If extra crypocurrency can be printed, who decides when the monetary base gets expanded and by how much? That's not an easy question to answer in a distributed system. So you end up with a fixed monetary base (and therefore deflation).

mbrock 9y ago
This is a really complex topic that I don't really understand, but I think there's quite a lot of interesting nuance to the deflationary cryptocurrency question. For example, you could consider Bitcoin as being like a "specie" or "hard currency" within an ecosystem that also includes various types of "scrip" or "credits". Ether behaves a lot like that. It's the hard base currency in an ecosystem of tokens ("soft currencies") all with different monetary policies. There are very interesting Ethereum tokens without fixed supply, for example the token that will be issued by Maker (the "dai") which is basically an asset-backed credit token with an autonomous monetary policy to stabilize the token's market value measured against the IMF's currency basket index (XDR). This seems to be a really natural pattern: you have a small number of deflationary hard currency (precious metals, basically) that act as global store of value, hedge against local volatility, and neutral means of settlement; and then you have a whole range of other credit instruments. Random thought: to people brought up with cryptocurrencies, we might be explaining gold as "well, it's like nature's bitcoin: scarce, hard to mine, and very expensive."
alexasmyths 9y ago
" who decides when the monetary base gets expanded and by how much" You allow entities to trade assets for currency at a central bank. The central bank can do it (i.e. Fed exchanging currency for TBills). The ECB allows banks to exchange assets (like property) for Euros. This is good because it allows flexibility in the amount of currency in circulation. Without this, you can get into all sorts of trouble, for example, Spain, Greece, et. al. in the 'Euro trap'. Monetary policy can be dangerous, of course, like anything powerful, but it can be used for good. Also to the commenters point about 'inflation is a tax' - well, it's a 'tax on cash' and a 'negative tax to everything else'. It's really nothing like a tax at all, it shouldn't be referred to as such. Inflation/deflation is just the changing value of one good vis-a-vis another. There are a lot of 'stores of value' out there and anyone with significant enough portfolio can easily take advantage of those if they chose for whatever reason not to hold a specific currency.
nosuchthing 9y ago
The aspect where the majority of the supply is generated in the first few weeks after the genesis block is what makes clear the designers are running a scheme to gain control of the supply, exploiting any would be normal users in the longevity of the project. Satoshi could easily have changed the coin minting production curve to suit a long term project, but instead chose to mint the majority of coins for miners running very low hash power nodes at the start of the project. Along the lines of 10,000 bitcoins being worth 2 pizzas - this means the majority of bitcoins in existence have gone to disproportionately low value capital traders (both in computational power, actual production and electrical cost, and external capital traded for BTC) whereas now coins being produced require several magnitude more computational power to mint and the rewards are less. Paradoxically, the miners require more energy input in return for less and less rewards.
- ballenf 9y ago
  If there's a functioning market, then there will be exactly as many miners as needed to make the value proposition slightly positive or even. Early miners took great risk in holding on to BTC to see if it would become more valuable. Many did not (my hand goes up) hold on to their BTC, thinking that it was a fad that would pass and didn't want to get left holding the bag. It's easy to underestimate the allure of being able to buy 2 pizzas with CPU power. That purchase made 10k BTC feel enormously valuable (as compared to anything else you could passively do with a home PC). (FWIW, I would've bought pizzas if I'd had the BTC at the time, instead I gave some away and forgot about the rest and formatted the hard drive.)
  - nosuchthing 9y ago
    Early miners took great risk This is verifiability untrue, as early miners used the lowest amount of energy to produce and acquire the largest percentage of the total supply ever produced. Any rational "investor" trading capital or computational energy into BTC or similar minting algorithms would be deterred by this model as the losses increase while the network grows older.
    - 9y ago
kamaal 9y ago
Inflation and deflation are both a kind of tax, based on who is buying and who is selling. There are no binaries good and evil in this game. You leave these things to the natural order or things. Attempts to create utopia have led to creation of hell.

nugget 9y ago

Cryptocurrencies aren't necessarily deflationary. Some aspects are quite inflationary, in fact. They can fork. They can have arbitrarily-imposed coin limits increased by changing a single line of code. Other aspects are deflationary, such as the ability for coins to be destroyed or lost forever. How these two forces are balanced against each other is up to the consensus stakeholders (miners) in each case. They should be expected to act in what they perceive to be their own best interests, which could be either deflationary or inflationary, in different scenarios. The interests in PoS and PoW systems could diverge significantly, as in a PoS system the miner's universal interest would presumably be to maximize the value of the currency, whereas in a PoW system the miner's interest would presumably be to maximize both the value of the currency they retained as well as the value of their real-world mining assets.

namelost 9y ago
I'm aware I might be fighting a losing battle here but the term is "expansionary" not "inflationary". Inflationary means that the value of a currency tends to go down over time. Expansionary means that the supply of a currency tends to go up over time. Bitcoin is mildly expansionary at the moment because the rate of coin creation is (presumably) greater than the rate of coin destruction. At some point this will flip and it will become contractionary. Regardless, Bitcoin is obviously highly deflationary as the value of a Bitcoin tends to go up over time.

olegkikin 9y ago

There are inflationary cryptocurrencies out there. The deflationary ones are designed that way to be attractive as a store of value. Early adopters of anything are usually rewarded because they take the risk. For instance, early Youtubers have much bigger followings, because they broke the trends, started something new.

sillysaurus3 9y ago
early Youtubers have much bigger followings, because they broke the trends, started something new. Not the best argument. It implies YouTube wasn't inevitable.

deleted 9y ago

[deleted]

whiskers08xmt 9y ago

The emission rate of most crypto-currencies is actually relatively high, the problem is that their value have been increasing faster than the coin supply have inflated. To keep value stable, you need an intelligent entity which can control emission, which kind of kills the point of decentralization. Bitcoin halves it's emission rate every 210000 Blocks, or roughly every 4 years. This is because of an adherence to the Austrian School of economic thought. Ethereum is planning to move towards an emission rate somewhere in the realm of 0 < Grow Rate <= World GDP Growth Rate, which should make it's value increase slightly. So to answer your question succinctly; The deflationary nature of Bitcoin is intended. It's quite possible to build inflationary Crypto-Currencies, but it would be difficult to gain traction with early adopters.

alexasmyths 9y ago

Crypto-currencies are not actually currencies (they are generally not used to buy common goods in a common market) - and so it's really not appropriate to use the terminology 'deflationary' or otherwise. I mean - I 'get what you are saying' - but the 'inflation/deflation' is really kind of a second order function of the 'driver' of this, which is really that people tend to 'hold' crytos, as opposed to doing much else. It's the 'behaviour' of the crypto-owners that's the key thing. 'Inflation/deflation' is the interpreted result of that behaviour. So, yes - if there were super-super strict monetary policy in the US - it would probably be 'deflationary' - but - that's a function of that economic system.

centimeter 9y ago

Early adopters are rewarded proportionally to the risk they took (and the work they put in). Bitcoin wouldn’t even be here today if the early adopters hadn’t spent many years making it usable and valuable. Why would anyone who was uninvolved expect to profit from that?

Cut_N_Paste 9y ago
I'm not sure why you're being down-voted, you speak the truth. I myself didn't participate beyond a cursory download and trial years ago, because I perceived it too risky and fad-like for my time... boy was I wrong :/
AnIdiotOnTheNet 9y ago
What's the incentive for anyone uninvolved in the early stages to become involved? The hope that the value will increase indefinitely? If that's true then there is will be no liquidity as no rational person is willing to part with an appreciating asset. It's precisely this deflationary effect of earlier adopters profiting at the expense of later adopters that makes the whole thing seem like a pyramid scheme.
- centimeter 9y ago
  The incentive is that bitcoin is (for some uses) superior to existing payment/wealth storage technology even if you can’t make a bunch of money on it.
  - dleslie 9y ago
    It really isn't. If my physical wallet is stolen I can call my bank and have the cards cancelled and interim charges reversed; and I am guaranteed fraud protection at their expense. If my BTC wallet is stolen I'm fucked.
    - posterboy 9y ago
      that is unless the bank themselves are fraudsters.

rcMgD2BwE72F 9y ago

You should check out OpenUDC [0]. There are other similar initiatives, like https://duniter.org/en/ https://duniter.org/en/. The theory behind these projects is worth reading (especially its Principle of relativity) but I can't find an English translation. [0] https://github.com/Open-UDC/open-udc https://github.com/Open-UDC/open-udc [1] http://trm.creationmonetaire.info/ http://trm.creationmonetaire.info/

sifar 9y ago
Thanks for the link. The English Translation is at http://vit.free.fr/TRM/en_US/ http://vit.free.fr/TRM/en_US/ It seems to me all the attempts at currency suffer either from the Tyranny of the Gatekeeper (centralization) or the Tyranny of the Majority (de-centralization). Except gold(which is actively being de-emphasized), is there no substitute for an individual who wants to partake in the economy/marketplace and yet not suffer any of the above tyrannies ?

littlestymaar 9y ago

Fairness isn't even the biggest problem with the deflationary nature of cryptocurrencies: you won't have growth unless the velocity of money increases, which is dubious (it's been reducing for the last 30 years).

dizzy3gg 9y ago

The same could be said for land?

zeroxfe 9y ago
Yep, and gold, and oil, and any other store of value has been discovered. Early adopters either took risks or got very lucky.

rb808 9y ago

No deflationary crypto currency will be successful for transactions. If a currency only goes up in value there is no reason to spend it. If nobody spends it by definition there are no transactions.

kamaal 9y ago

Its not only a bug its a non-starter. This is the same reason why fiat currencies even exist, if a government and its massive defence infrastructure didn't exist to force a fiat currency on its people. Every few years the 99% will call it quits and start a new currency, turning the worth of the entire wealth held by the 1% to 0. The same thing will happen to Bitcoin eventually. Most of the world won't understand why they are supposed to start poor just because they joined in late. They will spawn local cyrptocurrencies across the world in their local countries, making it very hard for the existing players to watch their advantage go to dust. How that would go is for any ones guess.

freech 9y ago

People are rewarded in proportion to the risk they took. It couldn't be any different.