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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
In this video, we’re going to get into the details of 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, one of the main reasons 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, 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 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.
The reason why it has been decreasing is because Peercoin’s block rewards are designed to dynamically fluctuate based on the hashrate, the level of mining power directed at the network. As the hashrate increases, the block reward shrinks. In other words, as better mining technology is invented, bringing more mining power to the network, the reward in new peercoins for each block gets smaller and smaller. 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.
On the proof of stake side, Peercoin is designed to produce a 1% annual minting reward for everyone who helps secure the network. Some people say this is unfair though, and that it benefits people who already own large amounts of coins, 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, there’s 1% more coins 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 the same percentage ownership of all coins. Even though you have more coins than before, so does everyone else, in equal percentage proportion, so nothing has really changed.
Because of this, the “rich get richer” argument commonly brought up against proof of stake is false. This argument incorrectly states the people with the most coins 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. When you think about it in percentage terms though, you realize that large minters aren’t actually getting away with more money, as all minters continue to have the same size percentage slice of the network.
Another factor affecting the supply is transaction fees. Unlike Bitcoin, where fees are paid to miners, fees in Peercoin are destroyed, 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 0.01 peercoins per kilobyte of 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 also act as a counterbalance to the supply of new coins produced by mining and minting, 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.
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!