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 are going to talk about Peercoin’s economic model. Cryptocurrency broadly promises to revolutionize economics across the globe through distributed consensus of economic rules. In crypto, money is no longer printed at will by centralized institutions like governments and central banks, but instead according to incorruptible protocols. Bitcoin is sometimes referred to as “digital gold” because its total supply cannot be controlled by centralized institutions. However, in contrast to actual gold, Bitcoin has a predetermined fixed-supply of 21 million coins, such that its and due to this hard limit, Bitcoin’s core economic principle is one of deflation.
At the end of the day, the fundamental problem that cryptocurrency seeks to fix is not inflation. In fact, global economies have explicitly shown that a well regulated inflation rate of about 1-3% is critical to incentivizing the use of currency. The problem is inflation that is excessive and centrally controlled. Therefore, the solution is not zero inflation, but inflation that is limited and decentralized. This is the heart of Peercoin’s economic model.
Peercoin Proof of stake minting in Peercoin allows for a 1% annual inflation of the coin supply without a hard cap. Peercoin achieves this increase in supply by rewarding everyone who helps secure the network with freshly minted peercoins, proportionate to their level of participation. Because of this limited inflation, similar to a banking interest rate, those who do not participate in the minting process will feel economic pressure to act with their investment.
As we mentioned in Part 1 of this video series, proof of work mining will continue to trickle out new coins to give new opportunities for miners to enter the ecosystem. However, the rate of this trickle is designed to decrease as more mining power is directed at the network. After one year, in 2013, annual growth in the coin supply was down to about 8%, whereas at the time of this recording, in 2019, it’s well below 3%. Peercoin shares a mining algorithm with Bitcoin, so as the mining industry progresses, the impact of the proof of work component of Peercoin on the inflation rate will gradually and smoothly diminish until it is negligible.
The final component affecting the Peercoin supply are is the 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 destruction of fees implies that all coin holders are rewarded for increased usage of the chain. The size of the fee in Peercoin is fixed at a rate of 0.01 peercoins per kilobyte of data usage, which is tiny, but with enough transactions that can really add up. The transaction fee also improves security and decentralization by deterring spam transactions which bloat the size of the blockchain. This helps keep the blockchain a healthy size, enabling coin holders to store the whole chain on their computer and participate in minting. Peercoin’s transaction fees counterbalance 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!
In the end, the Peercoin supply is allowed to breath through a continuous and regulated stream of new coins that will enter the system through mining and minting, and a reduction through burned fees. This economic model stimulates circulation of coins by encouraging spending, helping to avoid the creation of an economy full of hoarders, which is the risk with the fixed-supply model of Bitcoin. The forethought that went into Peercoin’s economic model echoes centuries of good practice by financial institutions around the world and codifies it into an incorruptible blockchain protocol. Peercoin truly is the best of both worlds!
We have now seen that Peercoin is economically viable. But what is the overall purpose of this cryptocurrency? 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!