9 ms·

The fact that Bitcoin is deflationary is purely a product of the software/protocol. Given consensus to change it, one could make it inflationary easily. E.g. by

The fact that Bitcoin is deflationary is purely a product of the software/protocol. Given consensus to change it, one could make it inflationary easily. E.g. by having blocks always pay out 25 btc as a reward or even have successive blocks pay out increasing rewards.

trts 13y ago
Even though it's deflationary, I don't see that as necessarily a problem since it is infinitely divisible, which fiat currency is not. It may just take time for people to start thinking in hundredths and thousandths instead of hundreds and thousands. If Bitcoin becomes less volatile in the future and deflates at a predictable rate, then I could see it being used more as currency. Interesting to think of the reverse of "when I was a kid, a Snickers bar only cost 5 cents," e.g. "what I just paid for my new Macbook only bought me a pair of shoes ten years ago."
- nhaehnle 13y ago
  Deflation, meet downward rigidity of wages (and other prices). Basically, the problem with deflation is that everybody who has only one (or very few) income stream, but at the same time many expenditure streams (especially fixed contract expenditure streams) is going to fight very hard against reduction in that income stream. And empirical data suggests that that fight tends to be fairly successful, too. This is why deflation is poison for economic activity.
  - tbrownaw 13y ago
    And empirical data suggests that that fight tends to be fairly successful, too. This is why deflation is poison for economic activity. I suspect that demanding constantly increasing income would be rather less successful if the system weren't rigged to make expenses never decrease.
    - nhaehnle 13y ago
      The empirical data is not about constantly increasing income. It's about a number of things, but the most striking is that in a deflationary environment, wage (and other price) changes have an abnormally large peak at a change of zero; this peak does not fit into any simple assumption about how price changes should be distributed (in particular, it is clearly not a normally distributed effect).
- herge 13y ago
  It's a lot easier to give someone a raise than to cut someone's salary, even after explaining them all about how 1 bitcoin is worth more now than when he or she started working for you.
nhaehnle 13y ago
It would still be inferior to modern fiat currency from a macro-economic perspective, because whatever your rule is going to be, it will not adapt to the development of the economy. Think of it this way: The abundance of money should somehow correlate with the abundance of real resources. When this correlation breaks down, bad things happen to the economy. In modern fiat currencies, the supply adapts automatically, without government intervention to the development of the economy, via the mechanism of bank loans. When a bank makes a loan, the money supply grows. When a loan is paid back, the money supply shrinks. Bitcoin cannot work that way by design, which makes it a bad choice for a common-use currency - at least from the perspective of macro-economic behavior.
- anologwintermut 13y ago
  To be clear, I don't think bitcoin that good a currency either. I wanted to point out that the deflationary aspect is an arbitrary (and I think stupid) restriction. You are right, modern fiat currencies can adapt and that is the main thing bitcoin lacks. My understanding was that happened mainly as a result of central banks who can adjust all kinds of parameters. This is antithetical to Bitcoin's entire design principles, let alone the underlying technology (which could me modified to accept some parameters modifications from a board of governors). Normal banks can't do that. To the extent that they do cause things to happen, can't they do that with Bitcoins. I.e. issue loans and collect payments with them.
- robotcookies 13y ago
  But you're only looking at bitcoins as a replacement for fiat. What if it worked in conjunction alongside the dollar. You can have both. Just like gold is not used as currency but alongside printed money.
  - nhaehnle 13y ago
    I think that's quite a plausible future for Bitcoin, though I find it hard to give an estimate of likelihood and of the relative relevance that Bitcoin will have. The next-most plausible (though I think much less likely) future is that the hype will die down, there will be widespread disappointment, and it will turn into a kind of ghost town. One big problem of Bitcoin is that in terms of efficiency, pretty much any centralized service can beat the shit out of it. If you think of Bitcoin as a ledger, and then look at the amount of resources spent on maintaining that ledger, and compare it to the amount of resources required to run a simple centralized ledger... well, Bitcoin loses big time. This means that whenever Bitcoin comes close to having a large mindshare for everyday internet transaction, there is a serious window of opportunity for non-Bitcoin startups to take its place. The only market where this logic doesn't apply is the Silkroad-type market and the stuff that caters to gold-bug/libertarian ideologists.

trts 13y ago

Even though it's deflationary, I don't see that as necessarily a problem since it is infinitely divisible, which fiat currency is not. It may just take time for people to start thinking in hundredths and thousandths instead of hundreds and thousands. If Bitcoin becomes less volatile in the future and deflates at a predictable rate, then I could see it being used more as currency. Interesting to think of the reverse of "when I was a kid, a Snickers bar only cost 5 cents," e.g. "what I just paid for my new Macbook only bought me a pair of shoes ten years ago."

nhaehnle 13y ago
Deflation, meet downward rigidity of wages (and other prices). Basically, the problem with deflation is that everybody who has only one (or very few) income stream, but at the same time many expenditure streams (especially fixed contract expenditure streams) is going to fight very hard against reduction in that income stream. And empirical data suggests that that fight tends to be fairly successful, too. This is why deflation is poison for economic activity.
- tbrownaw 13y ago
  And empirical data suggests that that fight tends to be fairly successful, too. This is why deflation is poison for economic activity. I suspect that demanding constantly increasing income would be rather less successful if the system weren't rigged to make expenses never decrease.
  - nhaehnle 13y ago
    The empirical data is not about constantly increasing income. It's about a number of things, but the most striking is that in a deflationary environment, wage (and other price) changes have an abnormally large peak at a change of zero; this peak does not fit into any simple assumption about how price changes should be distributed (in particular, it is clearly not a normally distributed effect).
herge 13y ago
It's a lot easier to give someone a raise than to cut someone's salary, even after explaining them all about how 1 bitcoin is worth more now than when he or she started working for you.

nhaehnle 13y ago

It would still be inferior to modern fiat currency from a macro-economic perspective, because whatever your rule is going to be, it will not adapt to the development of the economy. Think of it this way: The abundance of money should somehow correlate with the abundance of real resources. When this correlation breaks down, bad things happen to the economy. In modern fiat currencies, the supply adapts automatically, without government intervention to the development of the economy, via the mechanism of bank loans. When a bank makes a loan, the money supply grows. When a loan is paid back, the money supply shrinks. Bitcoin cannot work that way by design, which makes it a bad choice for a common-use currency - at least from the perspective of macro-economic behavior.

anologwintermut 13y ago
To be clear, I don't think bitcoin that good a currency either. I wanted to point out that the deflationary aspect is an arbitrary (and I think stupid) restriction. You are right, modern fiat currencies can adapt and that is the main thing bitcoin lacks. My understanding was that happened mainly as a result of central banks who can adjust all kinds of parameters. This is antithetical to Bitcoin's entire design principles, let alone the underlying technology (which could me modified to accept some parameters modifications from a board of governors). Normal banks can't do that. To the extent that they do cause things to happen, can't they do that with Bitcoins. I.e. issue loans and collect payments with them.
robotcookies 13y ago
But you're only looking at bitcoins as a replacement for fiat. What if it worked in conjunction alongside the dollar. You can have both. Just like gold is not used as currency but alongside printed money.
- nhaehnle 13y ago
  I think that's quite a plausible future for Bitcoin, though I find it hard to give an estimate of likelihood and of the relative relevance that Bitcoin will have. The next-most plausible (though I think much less likely) future is that the hype will die down, there will be widespread disappointment, and it will turn into a kind of ghost town. One big problem of Bitcoin is that in terms of efficiency, pretty much any centralized service can beat the shit out of it. If you think of Bitcoin as a ledger, and then look at the amount of resources spent on maintaining that ledger, and compare it to the amount of resources required to run a simple centralized ledger... well, Bitcoin loses big time. This means that whenever Bitcoin comes close to having a large mindshare for everyday internet transaction, there is a serious window of opportunity for non-Bitcoin startups to take its place. The only market where this logic doesn't apply is the Silkroad-type market and the stuff that caters to gold-bug/libertarian ideologists.