Am I understanding the inflation/deflation balancing in peercoin correctly?

I’m just trying to see if what I’m thinking makes sense and understand everything better… I’m from the US so just replace “federal reserve” with whatever your central bank is if you’re from somewhere else. Is this how the currency will eventually behave once POW inflation goes away?

With peercoin, deflation is built in relative to how much peercoin is being used for transactions. This is because there are set transaction fees, but unlike bitcoin, those fees aren’t given to anyone and instead are destroyed which deflates the currency.

In theory, this means that if peercoin becomes widely adopted and used for every day purchases, then more and more coins will be destroyed due to the transaction fees (deflation). This, in turn, increases the value of the coins because fewer are in existence. Generally, when items increase in value, people are less likely to get rid of (spend) them because they know they can get more for them (or buy more) the next day if they wait and hold. So if people start holding their coins, what happens? The coins start to inflate more because of the minting due to people saving. Now there would be incentive to spend because things will cost more the next day. Rinse and repeat. This should maintain a balance of inflation and deflation depending on how the market is operating and it’s not controlled by a central bank (like the federal reserve).

So is this coin literally an automated system for fiat currency that is in place today by most governments? Except it’s controlled by the market instead of a central bank trying to stimulate economic growth. The federal reserve (or any central bank) is supposed to destroy money also. Do they ever even do that?

Am I way off here?

Think of Gold.

At one time, gold was used for everyday transactions during the gold rush days.

As it became more rare, the price constantly changed.

It became easier to use printed notes backed by gold instead.

Peercoin was initially setup to be a backbone currency similar to gold in this respect. You’re right, in the long term, people will not use Peercoin to buy every day items in the long term. It wasn’t designed for that

Read this next post to see how I compare the Peercoin network against an ATM and Futurecoin for instance:

You are on the right track, but if the value of the coin goes up, then things will cost less.

If things cost less the next day, then more people can afford to spend their money on those things. If more people can afford it, it increases the amount of people that will spend. It is not increacing the incentive, it is just making things cheaper and more affordable for everyone, and they will spend more just because they can, (just because they can afford it). If you can’t afford something, you lose your incentive to spend, because you are unable to even if you want to. With Peercoin, it makes everything cheaper so saving your money will allow you to afford more and more things. Get it?

Think of it like this.

Remember back when you were a kid and a candy bar or pack of gum cost $0.35 but now it cost $1.00?
Well with Peercoin, prices will get cheaper over time, not more expensive. It is like the opposite of the way money is now.

With Peercoin that candy bar or pack of gum that cost $1.00 today will cost like $0.35 in a few years, so if you are wise and save your money for a few years, you will be able to buy about 3x as much.

Take into account that 1% inflation / year is extremely low. It is less than the population growth rate (1,1-1,2% / year). So even in a “steady-state economy” with 0% growth PPC in the long term (when PoW mining phases out) is deflationary even if there are few transactions. It’s even more deflationary if transaction rate is high.

I believe it will be a long-while before we reach the point where PoW phases out. 1/2 reward for ever 16x in difficulty is quite a slow decline. The block reward is going to be declining slower and slower and slower as it approaches 0. We are finally at about 8% inflation now, and will probably be at about 6% or 5% next year, but we will probably be at 2-3% inflation for quite a few years after that. (what the transaction fees will be 10 years from now is anybody’s guess)

“Now there would be incentive to spend because things will cost more the next day.”

Not really. The rate for the price increase is of the same order of the rate of your interest ( from PoS ), so you don’t have the incentive to spend because your buying power stays the same.