Inflation for Nimiq 2.0

The team is engaging economic experts regarding a possible change of emission rate and the switch to proof of stake in Nimiq 2.0. Let’s discuss and share ideas and opinions from the Nimiq community.

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I think that a reduction of the emission rate with the beginning of Nimiq 2.0 makes sense in order to keep the staking rewards and therefore intentions high for longer. It also decreases the sell pressure which could further increasing holding and staking incentives.

I’m very looking forward to what the economic experts suggest and how this will be handled :slight_smile:

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Likewise, it will be interesting to see what they come up with. I imagine it is challenging even for experts to create an economic model for a currency/payment network that is completely new and untested, as Nimiq will be after the switch to proof-of-stake.

One advantage of the current emission rate is that it is familiar to people vis-a-vis the Bitcoin network, but you’re right it does create a lot of downward pressure on the price of NIM this early in the emission curve. Also it will make a few early adopters very powerful while people who come later will only have crumbs.

There’s a lot of questions to consider… Such as how do you incentivize people to spend/transact NIM rather than just hold/stake it? If most of the future staking rewards go to the few thousand people that currently hold NIM, how will that affect adoption? Will people even want to take part in a network that benefits a small number of people? But then you could also consider that POS will allow holders to earn ‘interest’ like a bank account, which is beneficial to the unbanked people in the world. How does something like removing the 21B cap or flattening the staking rewards affect those things? It’s hard to know what the right answer is… it makes my head spin!! Not only do economics need to be considered, but to a large degree psychology does as well.

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Bitcoin emission scheme has never been explained (and so justified) by Satoshi as far as I know and was merely a guess, people seem to copy it solely because well… it worked (price-wise at least).

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Eventually NIM will have to add more divisibility too, since taking the whole 2100 trillion Luna divided by 7 billion people results in 300000 Luna (3 NIM) per person, which seems too little if we consider that the world’s population grows exponentially.

Edit: Or maybe use some floating point data type :thinking:

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You’re right. I just had a quick discussion with Marvin and Pascal about it. There is no definite answer, but I can give some points:

  • It’s indeed about ~2.3 NIM per person, if we divide the total supply by 9 billion owners.
  • Although it would be definitely great to reach every person on the planet, we can do this in steps :wink: Hard forks take time, but we’ll have quite some time until we reach the point where this needs to change.
  • 233333 Luna per person would be equivalent to 2333.33 $ in terms of divisibility. So it’s not a very big amount, but not very small either. 2000 $ is quite some money for most people on this planet right now.
  • We can actually represent balances much larger than the max supply. This is because the number of decimals was reduced form 8 to 5 before the mainnet release. So 3 digits would be in there from the range of what the integers could represent right now.
  • Currently the integers used are 53 bit, because of how numbers work in Javascript. Since Nimiq 2.0 is being written in Rust, we can use a full 64 bit integer. This means we could add 6 decimals (to the 5 we have right now) and it would still fit.
  • I think the max supply is not likely to be increased. Obviously if you increase the max supply by a factor of 10, you can have one less decimal place.

It’s good that you brought this up, so we can think about it. We’re not considering it too much right now, since we have enough other features until Nimiq 2.0 that keep us busy. But we might discuss it during diner now and then. And since we are also consulting for the economics, we could bring that up there too. All those values have to fit together very well to make sense in economic terms. And to be honest, we are programmers, not economists, so keep that in mind. But yeah, that’s why we’re reaching out to experts.

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Pretty cool! Thanks for your prompt reply :+1:

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It a great reply considering many aspects, thank you!

I agree that the toal supply doesn’t have to be fixed - it could go well above it. Then again I would rather like to see a lower inflation rate as Redexe has pointed out - too much sell pressure is keeping from new people buying in. A steady small inflation % with no fixed cap could give more value to current holders and more incentive to hold long-term as well as give more opprotunity for future newcomers.

Also, I would opt out of playing with factors - quite a lot of uncerntainty around it. Will everyone receive x10 of coins? In this case excnhages are winners since a number of people hold there their coins.

As a reality check, currently the price floats around 6 satoshis per NIM. If we were to increase the supply x10 fold, then the price should be 0.6 satoshis… and not all exhanges support that - which likely would mean a price of 1 satoshi for a very long time with low liquidity.

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To be clear: I was listing the possible options. Although I can (and did) give technical opinions on those options, I can’t give an economic analysis of those - as I’m not an expert on this at all.

But your points are very good. I personally would also avoid changing the supply at all cost, as it introduces too much uncertainty. But again I’m not an expert on this, so I’d prefer to just look at the technical possibilities and consult economists for the economic aspects.

The inflation rate is definitely something we’re keeping an eye on. I think the team shares a similar opinion to you. But our team also consists mostly of people with background in computer science and not economics. So in my opinion the right path to take here is to consult people who actually know this stuff - like real experts in that field :wink:

Besides the point that it totally makes sense to do this, I think it’s also a great way to show our dedication. We’re dedicated to make this right, and if it’s not our field of expertise we’re going to listen to people whose field of expertise it is. I’m not sure how many crypto projects do this, but I don’t hear too often about this issue. Which quite weird, now that I think about it.

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100% agreed on this point. A team which knows their field and consults experts for other fields is so much more likeable than one that thinks they know everything and botch it until everything falls apart. I liked the idea to consult economics experts on this from the beginning, and I’m very much looking forward to the ideas and results of it :+1:

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I can only support the approach to consult with the economic experts :smiley:
They surely can make the most desirable scheme for distribution. It’s up to the team to draw their vision for these experts though. So far the team has done great by recording the vision and milestones. Hopefully we will see more details from the team/experts. :+1:

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I’ve been giving this some thought, and I believe it may damage people’s trust in the NIM currency if a small group of people (team + economists) can change the monetary policy of the entire ecosystem. This is particularly relevant since the emission rate and supply cap were in the terms of the ICO when the project was initially funded. In my opinion the fairest way to go forward with a change of this magnitude would be to present several cases for altering the emission rate/supply cap (including leaving things as they are) and have the entire community vote on it. To do otherwise would put all of the power into the hands of a few people, which is not far off from how a central bank controls policy for a nation.

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100% agreed, this is a decision where the community definitely shoulf be involved.

However it’s a bit more difficult.
Let’s say 1 option is to not create any more NIM in PoS, so the supply will forever be 6bn or something. I can see many profit-oriented “investors” supporting such a supply change, but it might not be the best decision for Nimiq as a payment ecosystem/project itself. So the team imo has the responsibility to kinda protect the project and act in the best interest of everyone. Like a small flame can be blown out by the wind quite easily and needs to be protected to grow first. I fully agree that a supply change should not be forced by the team alone. I hope we get first results of those expert economists soon so we as a community can start discussing and make up our minds with enough time before Nimiq2.0 will start.

That’s a really good point. There would need to be a way of balancing people’s desire for enrichment with the overall health of the ecosystem. Perhaps the community could be presented with a few different options from the team that take this into consideration, rather than the community itself choosing which proposals to vote on. I’m really looking forward to the results of consultations with the experts. This stuff fascinates me!

On another note, I know it’s uncomfortable for some people to discuss the price of NIM, but I believe it is something that needs to be factored in when looking at possible changes to emission, in order ensure the long-term viability of the project. If the foundation had to start using the vested NIM at today’s low prices it would run out of funds very quickly, while also having the feedback effect of further depressing prices as the NIM is sold off. My understanding is there is enough ICO funds for a couple more years of development at the current burn rate (not including loans). So, if nothing changes it could end up being a race between high emission rate and use cases/adoption. If the latter doesn’t happen fast enough, the project could run out of funds. That’s down the road, and I don’t mean to create panic, but it is something to consider while there is lots of time to do so.

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Although I’m curious to see how it would be to have the community involved in the decision making process regarding the change in emission rate, and whether that would be enforced for the community nodes, that’s not the case if nodes are free to skip the upgrade to Nimiq 2.0 or to every mayor upgrade, so that changes are never imposed.

That said the emission rate is obviously very important, but in the case of Bitcoin and Ethereum even when those might not be the best incarnations of a blockchain for their respective purposes, they still have a bigger market capitalization that most competitors in the cryptospace. I would argue that’s because they have the first mover advantage which plays a very important roll, even bigger that the emission rate, so the same thing could be said about Nimiq.

I seems to me that the most important thing at this point is to rise awareness even if the price tends to go down at first, which seems to me it’s only a consecuente of the lack of liquidity at this stage.

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As a follow up from telegram, three references for possible (drastical) change of supply curve: A flat supply that never changes. This means equal reward for stakers (current & newcomers), making the POS sustainable in the future, while lowering the (current) inflation by a lot.

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The 3rd scenario is not bad for me.

Might be interesting if the staking rewards (inflation) were dynamic, and could be voted on by all the stakers.
A staking transaction would be stakeCoins(amount, desired_inflation_rate)
The actual inflation weight would then be a weighted average of all the desired_inflation_rates.
This way the inflation rate could be adjusted fluidly into the future as people felt appropriate.

And then remove the max supply?

I’m really liking the idea of a constant block reward. Makes calculating future earnings slightly easier, and the fact that it still leads to decreasing inflation is cool.

Idk about having validators vote on reward. Lots of game theory would be required to ensure validators aren’t manipulating the block reward in their favor. Maybe two supply curves that dictate the minimum and maximum rewards and validators vote for a reward in that range?

Imo though that’s already complicating it more than necessary, whereas adjusting it once with a hard fork is simple and could always be done again (and the community could decide to hard fork in the future, so it’s not like Team Nimiq would be totally in control of inflation).

Regarding max supply, I think that not only needs to be kept, but shouldn’t change. A good portion of a cryptocurrency’s value proposition is the constant supply technically ensuring scarcity at some point. Sure decentralized payments and such are great, but scarcity is an important aspect of crypto and is even more important in today’s market which is led by speculators.

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