I would like to quote this guy “JohnyLatte” from Reddit: http://www.reddit.com/r/peercoin/comments/1s3y70/analysis_peercoin_01ppc_destroyed_when_a/
If you cut the supply of a digital currency in half and the value of the currency doubles then that currency is exactly as efficient as if you left it alone because it cost exactly the same amount to secure the same amount of value in either case. If we where talking about a commodity currency then yes digging up an amount of gold then throwing away half of it would be inefficient but thats because you lose half of the “intrinsic value” of the commodity: half of the utility as a commodity. but digital currencies are not commodities except in a very abstract sense, what they really are is mathematical constructs. Creating more units or destroying them has absolutely no effect on the “efficiency” of a digital currency that tends towards a particular marketcap. Whats really going on when the fees are destroyed is an extreamly efficient way of making a payment to every single holder of the currency in the exact opposite way that the creation of new currency is a transfer of wealth from every single holder of the currency to the creator of the new money.
I have not missed the fact that PoW uses energy. Thats the point of PoW. But PoW does not create the new currency. Its the protocol that creates the currency or more accurately: the consensus of the network to accept a block as part of the blockchain that creates the currency not the proof of work. The proof of work is just a way of choosing who gets to have a block accepted in such a way as to make it always in their best interest to make a useful block rather than attempt a double spend or stall the network. The actual currency creation is pretty much free and proof of stake demonstrates this by substituting the economic cost of hashing a function with the economic cost of having to hold a currency and so lose the market value that would be lost if their is an attack on the network.
Think of it this way: a certain amount of work goes into making a company on the stock market. If you do a reverse split on the number of shares in the company (say 1 for 2) then that means you have half as many shares. You destroy half of the shares in the company! does that mean you have really destroyed anything of value? no you have just transferred value from every 2 shares and put that into 1 share. Destroying the transaction fee is the same. You are not destroying any of the utility of the currency by reducing the number of currency units you are just shifting the value around, in this case from the sender to all holders proportional to their holdings. Their is no destruction of a thing that was created from work because the currency is not created from the work even for bitcoin. In fact when I first read a headline about bitcoin it said “currency made from cpu cycles” and because of that nonsense I dismissed the article because currency that gets its value from work is pure labor theory of value nonsense: you can guess how regretful I wan’t more curious about that article back in 2009 but how was I to know the reporter didn’t know what they where talking about!
Here is how I judge the efficiency of Peercoin:
Market Value:
Bitcoin $11,959,473,135 USD
Peercoin $107,970,227 USD
Hash Rate:
Bitcoin: 6.341 Phash/s
Peercoin: 43.212 Thash/s
USD secured per GH/s
Bitcoin: $1886.05
Peercoin: $2498.62
Efficiency: (2498.62 -1886.05) / 1886.05 = 0.3247899 or 32% more efficient than bitcoin.
One of the reasons this efficiency is achieved is because transaction fees are burned. If they where not burned then their would be more of a financial incentive to do proof of work (to get the fees) but instead Peercoin has a diminishing return for PoW to discourage it. If it was just as valuable to do PoW then there would be no reason to cut back on doing it just because you have the option of PoS. You would do both.
To be fair to your criticism of Sunny this may have not been his intent but it is an effect that I see happening and one of the reasons I jumped on board. I think its fair that a person making a transaction is the one that pays a cost: be that a transaction fee or even proof of work like how bitmessage does it but PoW is a waste and I believe that paying the miner is doing it wrong because they are not the only ones that bare the cost of a bloated blockchain. Paying everyone in proportion to their holding might not be right either but I think its closer. Microsoft has a whitepaper that suggests paying the nodes that transmit the transactions as well but I’m not sure how that would be achaived other than that it would be nice to achieve it.
To be fair when I first looked at PPCoin as it was called at the time, the inflation model bothered me quite a lot because there was no grantee that the creation of new currency would have dropped the way it has. The currency having very low inflation of supply seemed very much dependent on it being successful but I’m used to looking at the success of a currency as being determined by how its inflation is managed. Looking at gold there seems to be a natural regulation where increased value of gold results in more supply as people now find it profitable to dig up more and decreased value of gold results in it being used or exported from an area. PPCoin seemed completely backwards with a low price bringing about more supply and in my mind a high probability of hyper inflation or if it goes the other way (which we have) a strong reinforcement of the value by a closing up of the money spigot. In my opinion this should result in an even stronger network effect for currencies that use this inflation model since they will be harder to boostrap from no value while keeping the same block reward model. In fact I’m not sure novacoin even kept that when they cloned PPC so I don’t think that novacoin will even have the energy savings of Peercoin: just more supply / inflation. But it will be harder to make the comparison since it uses script and so you cant do a strait GH per dollar secured comparison.
EDIT: seems like novacoin did keep the block reward model so the only real change was the use of script
I have to add that my efficiency calculation is not risk adjusted. If someone believes that peercoin is less secure due to proof of stake then 32% increase in efficiency is irrelevant. I personally think it is more secure and also that BTC/LTC/PPC are more secure then they need to be anyway but only time will tell. The cool thing about PoS is that the costs are asymmetrical: it will cost an attacker when they attack because they lose value in their currency but if there is no attack then their is no real cost other then the opportunity cost of holding (which most people want to do anyway).