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: Mission
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 one of the main reasons Peercoin has value is because the supply is limited. So, what is the inflation rate, exactly?
Comment: Limited supply is not the only reason for value. It is one of the main reasons for it though, so I changed the wording slightly here.
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. On the proof of work side, the inflation rate initially started very high, because this is how the first peercoins came into existence in the beginning stages of the network. After a one year, it was already down to about 8% annual growth in the coin supply, and at the time of this recording, in 2019, it’s already well below 3% – 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 But secondly, and more importantly, the The reason why it has been decreasing is because Peercoin’s proof of work block rewards in Peercoin are designed to dynamically fluctuate based on the hashrate, the level of mining power directed at the network. specially designed to shrink as an inverse function of the hashrate on the network. As the hashrate increases, the block reward shrinks. 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. Pegging the issuance rate of Peercoin to the hashrate allows the block reward to dynamically adapt to the market. Eventually the hashrate will be high enough to decrease the block reward to a single peercoin or lower. 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, which provides less of a shock to the economy.
*Comment: I have completely removed the first point about inflation naturally decreasing. Unless you include the comment about being compared against a larger and larger base, the sentence is not specific enough to get any meaning out of it. Overall though, I don’t feel it is worth keeping. The dynamic PoW block reward is the main idea we want to get across here.
Comment: I included some of Peerchemist’s post in the paragraph here.
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. Some people say this is unfair though, and that it benefits people who already own large amounts of peercoins, but I disagree. 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 passes by, 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 the 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.
I sometimes hear Because of this, the “rich get richer” criticisms argument commonly brought up against of proof of stake, saying that is false. This argument incorrectly states the people with the most peercoins will get the most reward from that 1% growth. A more legitimate argument would be called “minters get richer,” as opposed to non-minters, who lose out on their annual reward entirely by not participating. But When you think about it in percentage terms though, you realize that they large minters aren’t actually getting away with more money, as Everyone **all minters continue s to have the same size percentage slice of the network.
Comment: I did not include the new paragraph written by Robert here because the protocol is most likely changing in the near future to incorporate RFC 0011, which will make it more profitable for minters in times of low difficulty. We will probably need to redo this video anyway at some point in the future to alter the wording for the PoS inflation section to take RFC0011 into consideration. For now though, I feel we don’t have to go too far into depth with this since it will likely be changing soon. If you still feel strongly about this, please let me know.
But there’s Another factor affecting the supply is transaction fees. Unlike in Bitcoin, where fees are paid to miners, Peercoin fees in Peercoin are actually destroyed, instead of being paid to the miners, so that which reduces the supply by permanently removing coins from circulation! The fees in Peercoin are dependent on the size of the transaction, how much space the transaction requires to be recorded on the blockchain. The standard fee is fixed at just 0.01 peercoins per kilobyte of transaction size data usage, which isn’t much, but with enough transactions, that can really add up. The transaction fee actually improves security and decentralization by acting to filter out micro-sized spam transactions, which unnecessarily bloat the size of the blockchain. The fee helps keep the blockchain a healthy size, which works to the advantage of minters who need to store the whole chain on their computer so they can participate. These fees will also act as a counterbalance to the supply of new coins produced by proof of work mining and minting, and so offsetting or moderating the inflation rate without the need for hard limits. Now that’s impressive!
The final major point is the lack of a hard limit on total coin supply. Whereas the distribution of Bitcoin ends after 21 million coins are produced, Peercoin has no such hard cap. Because of this hard limit, Bitcoin will become more deflationary over time. And as taught by economists around the world, a currency cannot perform its role effectively if it is deflationary. A small amount of inflation is necessary to incentivize actual use of a currency. At best, a deflationary currency will simply become a store of value rather than a usable currency, as incentives will align with holding rather than spending. Peercoin however supports a very limited amount of inflation through both mining and minting to help incentivize spending and normal currency use. It is precisely this attention to detail, a combination of limited, market adaptive inflation and proper economic incentives, which will allow Peercoin to find usage in the global economy.
Comment: I added in this final paragraph because I feel it is vital to talk about this topic. It is a main differentiator between Bitcoin and Peercoin when it comes to economics that we have not talked much about in official messaging.
So this is all great, but why is it important? In the next video, we’ll get into Peercoin’s mission.
If you have any questions or comments, post below. I’m Chronos. Thanks for watching!