(script draft) Peercoin Primer #4: Economics

Hi, I’m Chronos, and welcome to Part 4 of the Peercoin Primer. Peercoin is one of the world’s most established cryptocurrencies, and each video in this series will explore a different aspect of it.

Show overview onscreen:

  • Part 1: Launch
  • Part 2: Security
  • Part 3: Benefits
  • Part 4: Economics
  • Part 5: Legacy

These videos are designed to be watched in any order, so feel free to jump directly to what most interests you. Today, we’re going to get into the details of the blockchain economics: inflation rates, block rewards, transaction fees, and more.

When you get right down to it, the supply inflation rate is one of the most important things to consider. I mean, the whole reason that Peercoin has value is because the supply is limited. So, what is the inflation rate, exactly?


Well, like we mentioned in Part 1 of the video series, new Peercoins come from two different sources: the proof of work that distributes coins to miners, and the proof of stake that secures the network and rewards coin holders. Let’s look at each of these separately.

On the proof of work side, this is how the first coins came into existence in the beginning, so the inflation rate started at infinity. After a year, it was already down to about 8% annual growth in the coin supply, and at the time of this recording, it’s already well below three percent – not bad. There are two things making it decrease here: first, as the supply grows, the percentage of new coins is naturally going to decrease, because it’s being compared against a larger and larger base. But secondly, and more importantly, the proof of work rewards in Peercoin are specially designed to shrink as an inverse function of the hash rate on the network. In other words, as better and better mining technology is invented, bringing more mining power to the network, the reward in new Peercoins for each block gets smaller and smaller, approaching zero.

On the proof of stake side, Peercoin is designed to produce a 1% annual minting reward for everyone who helps secure the network. I don’t even think you should really consider this 1% as inflation, though, because you get the same reward as everyone else. Hear me out. Imagine if you own half a percent of all the Peercoins in existence. Yeah, you’re pretty rich, but hey, that’s fun to imagine. Anyway, after a year, now there’s 1% more Peercoins from minting rewards, floating around out there. But when you also mint with your coins, you get a 1% return as well, so when it’s all said and done, you still have that same percentage ownership of all coins. Even though you have more Peercoins than before, so does everyone else, in equal percentage proportion, so nothing has really changed. This is kind of a mind bender, so take some time to think about it. I sometimes hear criticisms of proof of stake, saying that the people with the most Peercoins will get the most reward from that 1% growth. But when you think in percentage terms, you realize that they aren’t actually getting away with more money. Everyone continues to have the same size percentage slice of the network.

But there’s another factor affecting the supply that I haven’t mentioned yet: transaction fees. Unlike in bitcoin, Peercoin fees are actually destroyed instead of being paid to the miners, so that reduces the supply! The fees are just 0.01 Peercoins per kilobyte of transaction size, which isn’t much, but with enough transactions, that can really add up. Eventually, I think these fees alone will fully counterbalance the proof of work supply of new coins in the network, bringing the effective inflation to zero. Now that’s impressive.

So this is all great, but why is it important? In the next video, we’ll get into the Peercoin’s mission.


If you have any questions or comments, post below. I’m Chronos. Thanks for watching!

2 Likes

0.001 :eyeglasses:

@willy he’s correct.

Should’ve read that sentence to the end. Back to bed.

Edit… Nevertheless 0.001 could use a mention

It would be good to explain why is this set up the way it is.
The thesis is that the hashrate and the sha256 ASIC development (more efficient chips) is a good way to gauge the state and progress of the overall cryptocurrency movement. Ie, it gives real numbers on how many mining installations are online globally.
“Pegging” the issuance rate of Peercoin to this is better than making guesses on when will the scene be mature enough to slow down or completely cut of the PoW block reward.

And we can see that the theory works, in early days of the Peercoin hashrate was lower so inflation was higher - which served to incentivize the early adopters and bootstrap the economy. In the later years cryptocurrency movement grew exponentially, which was indicated by increased global hashrate, and Peercoin inflation fell lower.
Eventually the global hashrate will be high enough to lower the Peercoin block reward to a single Peercoin or lower.

isnt it still 0.01 PPC/kb but rounded at 0.001 PPC?

Comments and suggested amendments below:

+++

Hi, I’m Chronos, and welcome to Part 4 of the Peercoin Primer. Peercoin is one of the world’s most established cryptocurrencies, and each video in this series will explore a different aspect of it.

Show overview onscreen:

  • Part 1: Launch
  • Part 2: Security
  • Part 3: Benefits
  • Part 4: Economics
  • Part 5: Legacy

These videos are designed to be watched in any order, so feel free to jump directly to what most interests you . In this video, we’re going to get into the details of the blockchain economics: inflation rates, block rewards, transaction fees, and more.

When you get right down to it, the supply inflation rate is one of the most important things to consider. I mean, the whole reason that Peercoin has value is because the supply is limited. So, what is the inflation rate, exactly?

Well, like we mentioned in Part 1 of the video series, new Peercoins come from two different sources: the proof of work that distributes coins to miners, and the proof of stake that secures the network and rewards coin holders. Let’s look at each of these separately.

On the proof of work side, this is how the first coins came into existence in the beginning, so the inflation rate started at infinity. After a year, it was already down to about 8% annual growth in the coin supply, and at the time of this recording, 2019, it’s already well below three percent – not bad. There are two things making it decrease here: first, as the supply grows, the percentage of new coins is naturally going to decrease , because it’s being compared against a larger and larger base . But secondly, and more importantly, the proof of work rewards in Peercoin are specially designed to shrink as an inverse function of the hash rate on the network. In other words, as better and better mining technology is invented, bringing more mining power to the network, the reward in new Peercoins for each block gets smaller and smaller, approaching zero.

Comment: will it in fact reach zero? If not, can we change “approaching zero” to “but never reaching zero” or “but not quite reaching zero”.

Maybe we add then something like: “This is similar to Bitcoin’s reduction of mining rewards, but whereas bitcoin’s block rewards are cut in half abruptly every four years, Peercoin’s reduction is gradual and smoothed out”. Is there a specific advantage in gradual reduction, over halving, which can be mentioned?

On the proof of stake side, Peercoin is designed to produce a 1% annual minting reward for everyone who helps secure the network. I don’t even think you should really consider this 1% as inflation, though, because you get the same reward as everyone else. Hear me out. Imagine if you own half a percent of all the Peercoins in existence. Yeah, you’re pretty rich, but hey, that’s fun to imagine. Anyway, after a year, now there’s 1% more Peercoins from minting rewards, floating around out there. But when you also mint with your coins, you get a 1% return as well, so when it’s all said and done, you still have that same percentage ownership of all coins. Even though you have more Peercoins than before, so does everyone else, in equal percentage proportion, so nothing has really changed. This is kind of a mind bender, so take some time to think about it . I sometimes hear criticisms of proof of stake, saying that the people with the most Peercoins will get the most reward from that 1% growth. But when you think in percentage terms, you realize that they aren’t actually getting away with more money. Everyone continues to have the same size percentage slice of the network.

Comment: I wonder whether the above paragraph can be extended to say something like: “I also hear criticisms that Peercoin’s minting reward of 1% isn’t large enough, and that the minting interest should be more generous – but here the same point applies – if everyone minting received 20%, then the overall supply would increase, and so cancel out the apparent 20% gains. One per cent is just enough to give people an incentive to mint".

Also, Chronos says that minting is not inflation, because it cancels out – but I would say minting is inflation, because it is increasing the supply. Suggest leave the reference to inflation out, and replace the sentence starting “I don’t even think” with: Some people say this is unfair, as it benefits people who already own large amounts of Peercoins, but I don’t agree .

But there’s another factor affecting the supply that I haven’t mentioned yet: transaction fees. Unlike in bitcoin, Peercoin fees are actually destroyed instead of being paid to the miners, so that reduces the supply! The fees are just 0.01 Peercoins per kilobyte of transaction size, which isn’t much, but with enough transactions, that can really add up. Eventually, I think these fees alone will fully counterbalance the proof of work supply of new coins in the network, bringing the effective inflation to zero. Now that’s impressive.

Comment: the sentence commenting “Eventually” is making a prediction that is just a little too specific for my ears. I would soften it to something like: These fees will act as a counterbalance to the supply of new coins produced by proof of work mining, and minting, and so offset or moderate the inflation rate without the need for hard limits. Now that’s impressive .

So this is all great, but why is it important? In the next video, we’ll get into the Peercoin’s mission.

If you have any questions or comments, post below. I’m Chronos. Thanks for watching!

This one is good too, it seems longer than it is, the length should be fine.

I’d suggest just removing the mention of zero entirely. Saying it gets smaller and smaller is fine.

Maybe use the actual words ‘rich get richer’, as that is the name of the criticism you are rebuffing. You could say it’s more ‘minters get richer’, to get the point across that minting is good for your economic interests.

I’d prefer you didn’t say this, especially with RFC0011 on the table.

I also think it might be best to change the language in that part. RobertLlloyd’s proposal here seems ok to me.

I’d love to see a reference back to the previous video here to point out that the economics keep blockchain bloat down and keep the security decentralized.

The use of ‘zero’ here is also an issue, as it can theoretically go negative. Again, Robert Llloyd’s suggestion seems ok.