Peercoin vs Paul Krugman's Criticisms

Economics Minting (Proof of Stake)
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I posted this on reddit last week but thought I would post it here too, I’ve made a couple of changes to the original. http://www.reddit.com/r/peercoin/comments/1wdthh/how_peercoin_fares_better_than_bitcoin_against/

Bitcoin and similar communities always seem to get extremely defensive whenever a dissenting opinion on digital currencies is raised by an economist. Fortunately, Peercoin appears to come out quite positively (I think) when put up against the criticisms most commonly associated with Bitcoin. I’m far from being an expert, but below I’ve summarised some of Paul Krugman’s arguments and explained how they might relate to Peercoin. I’m sure there are mistakes so let me know what you think.

Criticism #1 - Bitcoin is deflationary. “Inflation” is a dirty word in the Bitcoin community, who think that that Bitcoin’s deflationary aspects are revolutionary. However, Krugman argues that inflation itself isn’t a problem, but rather the manipulation by governments and hyperinflation. Krugman points out why he doesn’t believe these are actually things to be worried about at all: “Yes, Weimar. Also Zimbabwe. And, in recent decades, who else? Actually, nobody. The real track record of fiat currencies is that most of them are run responsibly except in the aftermath of political chaos. If you look at the actual facts, you discover that episodes of high inflation have become quite rare, even though nobody is on the gold standard or (except in the euro area) anything like it.”

How it relates to Peercoin: Peercoin’s Proof of Stake minting allows users to effectively earn interest (or “mint” new coins) at a rate of 1% per year, giving Peercoin a theoretical inflation rate of 1% per annum. The actual rate of inflation may be lower due to the fact that not everybody would be constantly minting coins, and also as a result of the destruction of coins as transaction fees. Either way, Peercoin is neither deflationary nor hyperinflationary. And of course, since Peercoin is decentralized, there is no possibility of any manipulation by a centralized authority.

Criticism #2 – Bitcoin is more a political movement than a currency. Krugman says: “One thing that happens when you try to have a rational discussion of Bitcoin, gold, and/or other libertarian causes is that you get a lot of cynical remarks about government (which is one of the clues that this is, to an important extent, about politics)” and later… “So, again, the notion that governments can’t be trusted with the printing press sounds cynical and realistic, but it’s actually a fantasy, probably brought on by reading Ayn Rand instead of Tolkien.” This is a legitimate point, especially considering /r/bitcoin even has links to libertarian, anarcho-capitalist and Austrian economics subreddits in its sidebar.

How it relates to Peercoin: While Bitcoin is largely influenced by Libertarianism, the Peercoin community also has elements of humanism, and is arguably more “left wing” than Bitcoin. Unlike Bitcoin though, there is no “foundation” or lobbying groups. Its design was not mostly influenced (as far as I know) by political ideology, but rather as an effort to eliminate the concerns regarding Bitcoin’s long term scalability and security.

Criticism #3 – Bitcoin is not a stable store of value. Krugman says: “It remains completely unclear why Bitcoin should be a stable store of value”, before going on to explain how gold and dollars etc. have intrinsic value which makes them a reliable store of wealth. Bitcoin proponents would argue that trust in the cryptography and the protocol is what gives it intrinsic value.

How it relates to Peercoin: Admittedly, Peercoin does suffer from similar problems to Bitcoin in this regard. However, Peercoin has taken further steps than Bitcoin to counteract this issue. The proof of stake minting encourages long term investing, thereby reducing volatility. The higher transaction fees have a similar effect.

Criticism #4 – Bitcoin mining is a waste of resources. Krugman argues: “The whole concept of having to “mine” Bitcoins by expending real resources amounts to a drastic retrogression” and later… “And now here we are in a world of high information technology — and people think it’s smart, nay cutting-edge, to create a sort of virtual currency whose creation requires wasting real resources in a way Adam Smith considered foolish and outmoded in 1776.” Of course, Krugman isn’t the only person to make this point. There have even been articles on this from Bloomberg and Forbes.

How it relates to Peercoin: This is obviously one of Peercoin’s huge strengths. Its use of a Proof of Stake hybrid instead of solely Proof of Work results in a vastly reduced energy requirement. As the Peercoin network grows, this energy consumption will reduce even further, saving potentially billions (yes, billions!) of dollars’ worth of electricity in the long term compared to Bitcoin. The fact that Peercoin is so much more energy efficient and environmentally friendly than Bitcoin really deserves much more recognition, in my opinion.

So that’s it! I’m sure Paul Krugman has never heard of Peercoin and probably doesn’t care, but if he did maybe he might think that it is slightly less “evil” than Bitcoin :wink:

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Thanks for the info!! :slight_smile:

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Very interesting, I agree with your statements. Thanks!

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Well, I think there is a lot of truth in this post, but there is more to it, still:

Criticism #1: Every economist knows that deflation is much worse than inflation. In fact an economy can suffer from deflation longer that from hyperinflation (look at Japan, which has deflation since 20 years or so). Bitcoins deflational model turns it into a “crisis currency” like gold is - whenever there is a kind of economic crisis, the price jumps up because people are scared of inflation. Gold works just like that all the time, there has been a long history of gold prices, which jump up to heaven when there is not much trust in the economy (e.g. Euro crisis, finance crisis 5 years ago, oil crisis in the beginning of the 80’s), but falls like a stone down to earth afterwards. With bitcoin it will be similar: like gold it is hard to get, limited in existence and thus deflational. Like gold, it is deemed to large price jumps. However, gold is also a commodity with a value as such… whereas bitcoin has no commodity value.
The counterpart, inflation, is important for economy. Normally the currency’s sole purpose is to trade goods and services. So there must be something that “pulls” value out of the currency - because goods and services loose value (a 10 years old car is not as valuable anymore like a new car etc.), the currency must loose value too. Otherwise it will not be spent and does not float… which leads to deflation, which in turn is bad for economy. Normally the inflation leads to this process of loosing value. People who still keep the currency get compensated by earning interest, which is fine to some extend. So, peercoin fulfills an important economical principle by enabling people to get “interrest” via proof of stake minting, and at the same time mint transaction blocks, which is great for stability and leads to less waste of energy (criticism #3 and #4).

BUT economics induces a problem with peercoin: as stated above, people earn interest on savings and this compensates inflation. But if the money just sits in a wallet, it is useless, and leads to economical difficulties - which we have experienced not long ago (or still are experiencing). That is the reason tha interest is cut down to near zero by central banks: to make savings less worth than spending or investing the money. By doing this, economy is stimulated and money goes into the flow that it is aimed to be in, as exchange material for goods and services.
However, Peercoin has a fixed and high transaction fee. From an economical point of view is this contra productive, when money is stuck and economy needs to be stimulated. First it is more interresting to keep peercoins, because they can “breed” by proof of stake minting. Second it is not very interresting to spend peercoins, because -at least atm- there are virtually no goods and services that you can get for ppc. Third, in addition to the usual obstacles (unstable exchange rate, infrastructure) it is very hard to offer payments in ppc because people like to “sit” on their peercoins and not spending them, because of first and second. And that could become a problem for ppc in the foreseable future. The public interrest in ppc needs to grow, but it doesn’t, as long as there is no place where the coins are accepted, and as long as the transaction fee is so high that people prefer to have the coins in their wallet rather than spending them.
I am not an expert technically, but I think it makes sense to have a “proof of transaction” (PoT) minting in addition to PoS and PoW. That means it should also be possible to mint transaction blocks and get coins by actually spending peercoins, and the difficulty for that should vary in the same way as for PoS/PoS. In the end all three difficulties should exist at an equillibrium with the economical constraints: low PoW diff - more coins generated by PoW. More PoS minters - increasing PoS diff, less coins for PoS, but decreasing PoT diff and more coins for PoT. More PoT minters (many transactions) - increasing PoT diff, less coins for PoT, but decreasing PoS diff and more coins for PoS. And, very important: the payouts can also be negative, leading to fees for holding coins or for spending coins, depending on the actual difficulty for PoS and PoT. So, in a scenario like now, where there are most ppc generated via PoW and very few ppc via PoS, and almost no ppc are traded for goods, there could be made maybe 5% by PoT and 0-1% by PoS. When a lot of ppc have been mined, and lying around, the diff increases, leading to less income from PoS up to a point where the holder has to pay a fee for holding the ppc, but at the same time he gets coins (discount) from the network, if he spends his money and at the same time generates blocks. Otherwise, if the money is floating more, the spender has to pay transaction fees, like it is today, but it means that PoT diff increases and PoS diff decreases, leading to more (positive) income from PoS minting.

Maybe this is not complete, or technically impossible… but right now (after a glas of red wine) I think it makes sense :wink:

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@river333 Great post
@plasmapelz If there is a reward to spending, people would just send coins to themselves to get the reward. The blockchain will explode.

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Before the blockchain explodes, PoT diff would explode and it would not be worth to send coins to yourself. At least in my theory ;). All three diffs would need to be adjusted after every block.

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Before the blockchain explodes, PoT diff would explode and it would not be worth to send coins to yourself. At least in my theory ;). All three diffs would need to be adjusted after every block.[/quote]

As long as PoT is not negative, making a transaction puts nothing at stake. As long as PoT is positive what mechanism is there to stop people from sending coins to themselves to earn free fees ?

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They would need two or more wallets and juggle coins between them. Maybe it would be fine to say that the number of transactions between two addresses is limited, to count for PoT minting. That means, people can still exchange as many coins as they want with whoever they want, including themselves, but only the first transaction to a particular address in one day (one week, one hour, month…) will participate in PoT minting. The number of coins could also be cut, maybe at max 1% of the transaction amount. And as soon as there are many transactions and the coins flow, the PoT diff increases and PoT minting gets less attractive anyway, compared to PoS and PoW.
As far as I understand, the number of coins at stake is just an arbitrary tag in the PoS minting algorithm and could be substituted also by something else. So theoretically this tag could also be the first transaction on one day to a different wallet…

But well, maybe it is just enough to vary the tx fee with the number of transactions in the network. Few transactions → lower fee (0 at minimum), many transactions → higher fee (maybe 1 or 2% at maximum). And in addition vary the reward for PoS minting with the number of transactions: many transactions → more reward for PoS, fewer transactions → less reward for PoS. That could be independent from the PoS difficulty, so blocks are still minted at the same speed. And PoW mining is there as well, if PoS does not create enough blocks.

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They would need two or more wallets and juggle coins between them. Maybe it would be fine to say that the number of transactions between two addresses is limited, to count for PoT minting. That means, people can still exchange as many coins as they want with whoever they want, including themselves, but only the first transaction to a particular address in one day (one week, one hour, month…) will participate in PoT minting. The number of coins could also be cut, maybe at max 1% of the transaction amount. And as soon as there are many transactions and the coins flow, the PoT diff increases and PoT minting gets less attractive anyway, compared to PoS and PoW.
As far as I understand, the number of coins at stake is just an arbitrary tag in the PoS minting algorithm and could be substituted also by something else. So theoretically this tag could also be the first transaction on one day to a different wallet…

But well, maybe it is just enough to vary the tx fee with the number of transactions in the network. Few transactions → lower fee (0 at minimum), many transactions → higher fee (maybe 1 or 2% at maximum). And in addition vary the reward to PoS minting with the number of transactions: many transactions → more reward for PoS, fewer transactions → less reward for PoS. That could be independent from the PoS difficulty, so blocks are still minted at the same speed. And PoW mining is there as well, if PoS does not create enough blocks.[/quote]

Is there anything stopping people from spreading their coins amongst a large number of addresses in order to receive as many rewards as possible? I feel like this could result in a lot of unnecessary transaction bloat on the network.

I think it would be possible to develop a system that facilitates micro-transactions for Peercoin in the future, but it may have to rely on a centralized payment processor. Imagine having a “Peercoin card” that you can load with Peercoin (therefore only having to make one transfer and pay one transaction fee). Then you can make as many transactions as you want within the payment system, to merchants etc. without the high fee, similar to how the tip bots work on reddit. I know this may sound like it sort of defeats the purpose of cryptocurrencies, or that it would just be easier to convert some of your Peercoin to a transaction-friendly coin, but if it was well-designed people might prefer only having to deal with one currency for all their needs (i.e. Peercoin). If a decentralized version of this is possible then even better.

This would encourage people to spend without straining the Peercoin network. I have definitely read some proposals like this before but I can’t remember where I saw them.

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Is there anything stopping people from spreading their coins amongst a large number of addresses in order to receive as many rewards as possible? I feel like this could result in a lot of unnecessary transaction bloat on the network.

No, there isn’t anything to stop someone from doing that, but on the other hand, there really isn’t a benefit for doing it, either.

[ul][li]If I have 1,000 PPC in a single address, with the same coin age, I’ll get 1% per year on average in proof of stake rewards.[/li]
[li]If I have 100 PPC, in ten addresses, with the same coin age in each address, I’ll get 1% per year on average in rewards.[/li][/ul]

The difference being that with the 1,000 PPC address, the probability that I’ll solve a block is higher, because my combined coinage is a higher value, which means I may be able to see a small benefit by compounding my reward earlier in the year.

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[quote=“Ben, post:10, topic:1914”]

Is there anything stopping people from spreading their coins amongst a large number of addresses in order to receive as many rewards as possible? I feel like this could result in a lot of unnecessary transaction bloat on the network.

No, there isn’t anything to stop someone from doing that, but on the other hand, there really isn’t a benefit for doing it, either.

[ul][li]If I have 1,000 PPC in a single address, with the same coin age, I’ll get 1% per year on average in proof of stake rewards.[/li]
[li]If I have 100 PPC, in ten addresses, with the same coin age in each address, I’ll get 1% per year on average in rewards.[/li][/ul]

The difference being that with the 1,000 PPC address, the probability that I’ll solve a block is higher, because my combined coinage is a higher value, which means I may be able to see a small benefit by compounding my reward earlier in the year.[/quote]

Good point. When someone has spread his coins over a few hundret wallets to do many microtransactions, he might have an advantage in times when the PoT reward is positive (although the probability is low to find a block), by sending microcoins back and forth between this wallets. But the time periods of positive rewards from PoT should be reasonable short, as the PoT diff adapts to the situation. Especially it would grow very fast, when a lot of such micro transactions occur on the network. At the same time the reward sign for PoT changes very quickly and leaves the owner of the hundret wallets with a transaction fee.
So, very soon this guy will recognize that this does’t make any sense. Because for PoS minting he needs high stakes… Same if he wants to use his coins for something reasonable, like buying a book. Then he would need to collect his small amounts of coins into one wallet, paying the tx fee (because PoT reward is negative by this time), and his advantage from the hundret-wallets-thingy during a short PoT period turns into a disadvantage during a longer PoS period. He should recognize very soon, that this is not an option to become rich ;).

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It is also important that, when PoT reward is positive, the PoS reward must be negative. That means that someone who holds a big stake of coins pays kindof a demurrage fee on those, in the times when PoT rewards positive and PoS negative. Not much of course, just a few percent p.a., not enough to make somebody poor (same as tx fees do not make anybody poor). It is, in this regard, similar to freicoin or the whole idea of freigeld (http://en.wikipedia.org/wiki/Freigeld), but with the important difference, that it only takes place when there is a demand on more cash flow. These time periods should be rare and short over the long term… Most of the time the PoS rewards positive for holding stakes.
So the coin would have all important economical mechanisms built in: positive return via PoS for value (which ultimately drives the exchange rate to other currencies), positive return via PoT for spending money when there is demand (which drives the economical ecosystem of the coin at whole) and as a backup PoW to guarantee block creation anyway. All those mechanisms adapt dynamically to the conditions in the network and lead to an equilibrium that is not controlled by a central authority. All fine :).

But as I said already, it is maybe not even necessary to have PoT to generate blocks, when transaction fees and PoS reward are dynamically adapted to the transaction volume in the network: