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!