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.
In this video, we are going to talk about
Peercoin’s economic model.
Cryptocurrency seeks 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
or central banks, but instead according to
codified protocols.
Bitcoin is sometimes referred to as “digital
gold” because its total supply cannot be
controlled by centralized institutions.
But in contrast to actual gold, Bitcoin has
a predetermined fixed supply of 21 million
coins, so it doesn’t fully represent the
asset it is being compared to.
Gold produces a little inflation from the
small amount that is mined each year and history
shows that a moderate inflation rate helps
to discourage hoarding and incentivize
the use of a currency.
The fundamental problem that cryptocurrency
seeks to fix, therefore, is not inflation
itself, but inflation that is excessive, centrally
controlled, and open to manipulation.
The solution is not zero inflation, but inflation
that is limited and decentralized.
This is the principle at the heart of Peercoin’s
economic model, which allows for a 1% annual
inflation of the coin supply, with no hard
cap, through its proof of stake minting.
Freshly minted Peercoins are given out, every
block, as a reward to coin holders who help
secure the blockchain, which can be done from
any home computer.
The minting reward allows you to truly be
your own bank, as it provides interest on
your Peercoin savings while the inflation
provides subtle economic pressure on those
who do not mint blocks to participate.
Peercoin’s proof of work mining also produces
new coins, to give opportunities for miners
to enter the ecosystem.
However, the rate of this flow is designed
to decrease to a trickle as more and more
mining power is directed at the network.
In 2013, after the first year of Peercoin,
annual growth in the coin supply was about 8%.
At the time of this recording in 2019, it’s
well below 3% annually.
Peercoin shares its mining algorithm with
Bitcoin, so as the mining industry advances
as a whole, the impact of Peercoin’s proof
of work component on the inflation rate will
gradually and smoothly diminish until it is
insignificant.
The final component that affects the Peercoin
economy is transaction fees.
As we have seen in the second and third videos
in this series, proof of work blockchains
are secured by miners who spend vast sums
of money on equipment and electricity to compete
for rewards.
These rewards come in two types, a subsidy
in the form of new coins from block rewards
generated automatically by the network, and
fees paid by users who want their transactions
processed.
For cryptocurrencies that have a fixed number
of coins, like Bitcoin and Litecoin, the
first of these two revenue sources will eventually
cease, meaning miners will have to transition
away from block rewards and survive solely
off of transaction fees.
As the block reward comes to an end, mining
operations must be sustained by attracting
high volumes of cheap transactions, or by
making transactions more expensive for users.
The first option is difficult to achieve,
because decentralized blockchains struggle
to support high volumes of transactions, and
fee income can be impacted by the swings in the
transaction load.
The Bitcoin network has chosen the second
option by limiting transaction capacity through
a smaller block size, creating competition
among users to get transactions included in
the next block.
This competition causes a fee market to form,
in which users outbid one another to get their
transactions confirmed within a reasonable
time frame, resulting in a higher fee income
for miners.
With Peercoin, however, the network itself
subsidizes block producers, completely eliminating
their reliance on transaction fees.
In fact, the fees that users pay don’t go
to anyone at all; they are burned, which returns
the fees’ value back to the network.
So, instead of receiving fees, minters are
fairly and continuously rewarded in proportion
to their coin holdings by a fixed block reward
that will never end.
This is possible because the cost efficient
nature of proof of stake allows security to
be sustained with less expense.
And since there is no competition by minters
for fees, no incentive exists to arbitrarily
limit the block size to make transaction fees
more expensive for users.
The fee in Peercoin exists only to deter spam
transactions, and is fixed at a rate of 0.01
peercoins per kilobyte of data usage, which
has the added benefit of making the cost of
transactions predictable and easy to calculate.
In summary, Peercoin is designed to have a
limited and decentralized inflation, as the
1% coin injection from proof of stake minting
provides a regulated and continuous stream
of new peercoins into the system.
This mild inflow encourages the circulation
of coins, and discourages the hoarding that
plagues fixed-supply currency models.
The forethought that has gone into Peercoin’s
economic model avoids the bad practices seen
in centralized financial institutions over
the centuries, and codifies sensible economic
practice into a decentralized blockchain protocol.
We have now seen that Peercoin is economically
viable.
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!

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