Supply Curve for Nimiq 2.0

Discussion Fintech Discussion
#27

I would not overly focus on what will happen in 100 years, the global reserve currencies of the last 600 years barely lasted as much. It may sounds a little bit irresponsibe but I would let future generations deal with it in the way they seem appropriate :grinning:

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Imo the mindset should be more “what’s the most appropriate economics for Nimiq to be considered a legit currency by 2025-2030?”.

I also agree with @Chugwig on fees, fees are the embedded incentive to secure the network, we want very very low fees but still enough so the network is as robust as possible. I think a feeless model is fundamentally flawed in terms of game theory for this reason: there is no hard coded incentive to secure the network and you rely on things like “goodwill” which are not really rigorous.

That said if we are moving to the topic of governance with voting inflation then the next topic should be voting the maximum supply too.
I’m personally open to hear the pros and cons of such an idea even though I am not sure if having a democratic management of the supply (with all its pitfall and instability) would be better than just leaving the protocol alone (even though we would likely end up with a conservative majority).

It would be quite radical if Nimiq followed this path though and probably be called out for recreating fiat in a way, NIM would be much “softer” as a currency compared to a Bitcoin which is hard money and as immutable as possible

I read an interesting medium post related to that question btw:

Here is the conclusion:

I believe that cryptocurrencies offer a unique opportunity to engineer long term monetary policy that is carried out in full transparency. Unfortunately, many protocols we’ve looked at do not take advantage of this opportunity, or are prone to change (which defeats the purpose).

Other than fluid monetary policy, another noteworthy trend is the steeply front-weighted nature of most distribution plans. In other words, more opportunity for early adopters to acquire a larger percentage of the total supply (assuming a similar or greater amount of economic throughput going forward). The intensity of this varies depending on each protocol’s preference for hardness in their native currency.

I wonder how future generations will feel about this? Will they resent the early adopters for having an “unfair” advantage, or will they admire the hard money that comes along with low inflation. Only time will tell.

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#28

In a Proof of Stake environment, the only thing the emission rate determines is the rate at which unstaked NIM will lose value. Anyone that stakes their NIM will own a greater and greater percentage of the existing NIM, when compared to someone with unstaked NIM. But in relation to other people with staked NIM, that person maintains their existing proportion. In essence, the amount of NIM emitted each year only affects those that don’t stake, as their NIM will lose more value the longer it is unstaked.

For this reason, I support a static percentage as an emission rate. For example let’s say 2% inflation of the total supply of NIM each year, so that every successive year the number of newly created NIM goes up. This creates fairness in that anybody can take part in the network, at any point in time, even a hundred years from now, and their proportion of the network will grow at the same rate as at any other time. That is, it will grow proportional to the amount of unstaked NIM.

The supply cap should become infinite, and periodically the decimal moves over to keep the numbers reasonable. This solves the problem of tail emissions and whether transaction fees will be enough to create incentive for validators.

I have more thoughts on this, but want to see what other people think, as maybe there are aspects I haven’t considered yet.

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#29

Take into account:

The Nimiq Network has been designed for a total supply of 21 Billion NIM. The NIM are distributed as follows:

21,000,000,000 NIM

88% [18,480,000,000] Validators Reward (mined over ~100 years)
5% [1,050,000,000] Token Sale Contributors 
2.5% [525,000,000] Long-Term Project Endowment Foundation (10-year vesting)
2% [420,000,000] Good Cause Partnerships and Sponsorships (10-year vesting)
1.5% [315,000,000] Early Contributors (6-month vesting)
1% [210,000,000] Creators (3-year vesting)

Applied to the current totaly supply:

6,024,900,645 NIM

58.71% [3,504,900,645] Validators Reward (since ~1,5 years)
17.43% [1,050,000,000] Token Sale Contributors 
8.71% [525,000,000] Long-Term Project Endowment Foundation (10-year vesting)
6.97% [420,000,000] Good Cause Partnerships and Sponsorships (10-year vest.)
5.23% [315,000,000] Early Contributors (6-month vesting)
3.49% [210,000,000] Creators (3-year vesting)

-> 2% inflation of the total supply would equal a 2% deflation of the premined centralized stakes

At the current block reward scheme half of the total NIM supply is mined 2022 (i.e. 24% portion premined). Is that correct?! If there would be a change to a 2% inflation scheme today this status is reached 2047/2048.

I think, a possible change to a fixed emission rate shouldn’t be before 2022/2023, or more explicitly, not until half of the total supply is mined.

#30

There is always the argument with POS that, on the one hand, the rich become even richer, when staking reward/chance is set to the amount of capital. On the other hand, if you do a lottery and every network participant has equal opportunities, you just need a lot of accounts or nodes …

Another idea could be to take not only the amount of capital into account, but time. So, if you lock your coins for one year, you will have a higher chance to get a stake than someone who does it on a daily basis. But I don’t know if that works with a fixed final supply. And, would it mean that someone who locks one coin for 1,000,000 years has the same chance like someone who locks 1,000,000 coins for one year!?

Perhaps this is rather an idea for a ‘banking app’ on top of Nimiq. Pool staking with fixed-term contracts.

One important question is, if anybody understands the theory behind inflation? If hodlers are rewarded with stakes it just has the consequence that as we already have a fixed scarce total supply, the circulating supply is further reduced. Investors like this idea, because they anticipate higher fiat prices for the coin. But what is a payment network worth in which all participants are hodlers!? What is needed is demand (!) … and possibly revenue (usage) should be rewarded. The idea of inflation is that money is shouldn’t be saved but invested. The flow of money creates economic wealth.

Think about this: Every purchase that uses the Nimiq’s Who Commerce receives a discount of 2% in NIM. Idk, if Nimiq’s Safe will be able to use OASIS and SOFORT/SEPA or the equivalent in USD, maybe you could become your own market maker!? For example, if you buy NIM for 100 Euro and this is locked for one hour. In this hour you could buy stuff, for 100 Euro as the shop owner would receive the 100 Euros from your OASIS contract. The customer instead would get a cashback in NIM, perhaps 2% of the sum at his/her former fixed exchange rate. This cashback has to come from a fund, which is possibly filled up with stakes!? The shop owner would have a happy customer, he/she needs only to implement the Who Commerce plug in, no risks. The customer would be happy as well - but he/she is requested to change his/her fiat money to NIM before - but for this he/she receives a cashback. The hodlers are happy, because demand is created. I don’t know if something like this would be possible - the idea is just: If you want that your network is used for payments, payments should be rewarded (more than fast and free of charge).

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#31

Another thought:

Hardware, which is used for proof of work, is usable for other things as well and costs are mainly energy costs. Is an investment really that risky?!

Conversely, the only way to participate in a POS network is to invest fiat money.

Nimiq’s ‘The emission is like Bitcoin, but ten years back’ is not simple to understand. So, one idea to discuss is: Nimiq’s initial investors and holders are at extreme risk regarding the new POS network (vulnerabilities). Perhaps, this is the chance to reward NIM holders severely during the first one or two years of the new POS network and to catch up with Bitcoins emission rate (up to five years!?), so that the slogan changes into ‘Nimiq is similar/as scarce as Bitcoin - just the decimal point went rightwards and get rid of three digits’. (New) Investors would be motivated to hold NIM and network participation would hopefully grow. I think, the critical point is an inflation <5% which is currently reached in 2027. Would be great to be already there in 2022/2023.

#32

This certainly brings up the question of how to incentivize people to transact with NIM rather than just hoard it? This goes for all crypto… but it is especially an issue with one that exists solely to be proof of stake payment system, as there are no electricity costs to offset. Maybe you have ideas on how to reward people for transacting?

There’s also danger in creating artificial scarcity via a hard supply cap. It mimics the way price deflation works in our modern economy, which can be catastrophic. Economic activity grinds to a halt because nobody wants to buy something today that will be cheaper tomorrow. That’s why central banks always aim for controlled price inflation, it forces people to spend or invest. In NIM’s case, having a hard cap with a declining emission rate makes the existing NIM worth more and more as time goes on. Great for people that hold onto it, not so great for people that spend it (just ask the guy that bought a couple of pizzas for 10,000 bitcoins back in 2010.)

This is why I like the idea of removing the supply cap, picking a low inflation rate, and sticking to it. It creates a hybrid between fiat currency and a hard-cap currency like bitcoin, but it gets the best of both. As a comparison, last year the United States money supply grew by nearly 6% (that is M1 money -which is cash or things like travellers cheques that can be quickly converted to, or used as cash, basically hard currency). Back in 2012, it grew by around 15%. (I use M1 because it is closest thing that can be compared to cryptocurrency). So not only is the hard money supply unpredictable, it grows at a high rate if you were to compare it to something like a steady 2% (or similar) inflation rate for NIM. So a low inflation rate still creates some amount of scarcity when compared to fiat, but not so much that people will be afraid to spend it.

Beyond that, by having the ability to stake, your NIM is always protected from losing value, not against fiat, but against the growing supply of NIM. (The same cannot be said of fiat currency). Something that is priced at 100 NIM today and 102 NIM next year won’t matter because, assuming you staked, you will have 102 NIM to spend. In fact, because some NIM will always be unstaked, you might even have 102.1 NIM! Proof of stake only serves to punish those that don’t stake by taking the value they lose through dilution and distributing it among the stakers. It’s the same as holding onto cash instead of putting it into an interest-bearing savings account. So having a high inflation rate early on does nothing to reward early investors, it only punishes those that choose not to stake at a faster rate. Not a very good way to incentivize people to transact and spend NIM in my opinion.

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#33

In my opinion, by being an inflationary coin (even slightly) people will always tend to prefer FIAT over NIM. The only way to make people to resort to FIAT as a last resort is by being a deflationary coin, which is what happens to Bitcoin, that is still used as a mean of payment even when most people are just holding it.

#34

Why do you think people would prefer fiat over NIM if NIM became an inflationary coin?

#35

@rraallvv
I’m not sure that’s accurate. Bitcoin is still going to have supply inflation for the next 120 years, if that’s the kind of inflation you’re referring to. The only way for it to have a deflationary supply would be to somehow have a burn rate that is greater than the emission rate, so that there are fewer and fewer bitcoins in existence. A hard supply cap just means eventually there will be no new bitcoins created, which is still not deflationary. This is a great discussion to be having (or halving lol). Since you (and many other people) are in support of a hard supply cap, here is a question I’m curious to know your thoughts on: When the supply cap is reached and there are no new bitcoins or NIM being created, how will the network be secured and still remain decentralized? What will be the financial incentive for someone to stake if (as in NIM’s case) the transaction fees are near-zero?

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#36

To me this whole discussion is creating a bit of an existential problem for the future of NIM. Does it exist solely to be a usable, stable, and widely adopted form of money? Or does it exist to enrich early investors and people that helped to create the ecosystem? Obviously there will be some of both, but where should the focus be? One of the things I find unpalatable with almost every crypto is the pure speculation involved: the belief that XYZ coin will be worth more tomorrow than it is today, with no actual real-world usage that creates value or justifies its price. It feels like buying that coin is only allowing someone that bought it earlier than me to make a profit, and the only reason for me to buy it is that I hope to do the same by unloading it on the next guy. It’s nothing more than a glorified Ponzi scheme, and I think this is part of why the masses continue to ignore crypto. I’d like to see Nimiq move away from that, even at the expense of some of the potential ‘profits’ that might be made. For the record: I’ve invested heavily in this project and I would like to see it succeed as much as the next guy. Personally I think the best way to do that is to level the playing field for everybody so that late investors aren’t being punished, and to focus on creating value through widespread adoption and use, rather than through artificial scarcity and FOMO. That is difficult to accept for people that are only concerned with how much money they can make in the short-term, but should we really be letting the desire for fast profit be the thing that drives this project forward?

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#37

I think there might be some confusion between money (NIM, USD, etc.) supply inflation: the amount of new money being created, and price inflation: the cost of the same goods going up over time. With crypto, supply inflation rate is hard-written into code and can’t be changed. With fiat, supply inflation is always changing and is at the whim of central banks who decide how much new money to inject into the economy through various means, and commercial banks who create money via new loans.

Price inflation is a completely different thing and is the result of many different factors such as supply & demand, money supply, cost of materials, etc.

It is important to keep the idea of money supply inflation, and price inflation separate. Although one is affected by the other, they are two different things.

#38

Well I don’t think opinions here diverge as much on the end goal as they diverge on the path to reach it. :grin:

I agree with your views on the Ponzi Scheme aspect, that said I think we should not lose the plot either: most people were drawn to Bitcoin during the last bubble because it was going up.

Many of them seem to have been “ideologically converted” in the aftermath, but at first they were baited by an opportunistic expectation of profits. It isn’t wrong, just how it happened. The concept of store of value and artificial scarcity helped tremendously with that.

Bitcoin built its booming network effect on this success. That’s why I personally am more for a pragmatic approach over a virtuous one. Nimiq must do what is required to be successful, what works in a competitive environment of hundreds of other payment coins.

If we decide to have Nimiq go for an uncapped supply with tail emission then we should have another debate on the rate too.
For example the US dollar since its inception in 1860 had an average inflation of around 2% a year with many years, during 80 years (1865-1945) the cumulated inflation has been close to 0%, up to Bretton Woods.

How do we balance things between a good SoV (Store of Value) and a good MoE (Mean of Exchange)?
If Nimiq goes for the uncapped stupply and tail emission then the SoV optics loses a good amount of appeal.

#39

Awesome points Talleyrand!

The current U.S. (fiat) inflation rate was just one example. If you were to look at a country like Germany, pre- Bretton Woods, there was massive currency devaluation (aka supply inflation) caused by the seemingly endless printing of money.

Nowadays, since the gold standard has come and gone, we are seeing a similar albeit less dramatic inflation of currency supply via quantitative-easing (which we are likely headed towards again in the near future). In this case we are not talking about a currency war, but simply trying to maintain economic growth while drowning in debt. We are in uncharted waters when it comes to our current economic climate and recent monetary policies, so we can’t count on the past for guidance.

I agree that copying an emission scheme like Bitcoin’s might drive the same speculation that happened in 2017, and that would be very beneficial for the price of NIM. So the pragmatic approach is probably the best one when your audience is people that are already involved in the crypto space or new people that are just looking to turn a quick profit. But what about everyone else? I don’t think that point would sit well with the many people that bought in late and lost all of their money. Or their families, friends, coworkers that stood back watched it all happen. While the number of people in the space certainly grew, how many others were driven further away? And can we realistically expect another parabolic bull run like the one a few years ago? To be clear, I think you are absolutely right in your assertion, I just wonder if we can expect history to repeat itself here, and if using FOMO is a sustainable way forward after what happened in the space over the last couple of years.

That being said, I would be supportive of dropping the NIM emission rate to match Bitcoin’s current rate, with the small difference of continuing with tail emissions after Bitcoin’s supply cap is reached. As I mentioned, I am already in support of lowering the emissions, so whether that is 3% dropping to 0.25% over many years, or staying constant at some other rate, I don’t think it makes much difference. The point where we will probably continue to disagree is on the hard supply cap. My earlier question still stands: When the supply cap is reached and there are no new NIM are being created, how will the network be secured and still remain decentralized?

As far as store of value proposition being hurt by removing the supply cap, my opinion is that it will probably make the currency less susceptible to wild price fluctuations by taking some of the speculation out of the picture. So although will it might be less of an ‘investment’ per se, it will be actually be safer place to store value than BTC in the long run because of price stability.

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#40

@Bruno it seems to me that most governments will always try to use FIAT to control their economy, or even their own government-backed cryptocurrency, so that they can change things like emission rate, supply cap, inflation, etc. as they see fit. Open and decentralized cryptocurrency, on the other hand, will have less liquidity because FIAT will be the first choice for transferring and storing value, and cryptos will be only attractive if they can serve as a better store of value, that still can be used for payments.

@Big_Mac if the number of Bitcoin users is increasing at the same rate of growth that the global population, Bitcoin, in its current incarnation, would be deflationary since there will be much more demand for money circulation than what the supply cap allows.

#41

@rraallvv
Okay I understand what you are saying now. You mean bitcoin is deflationary when using it to purchase goods. 2 pizzas costing 10,000 bitcoins in the past, today costs .0003 bitcoins. So although the number of bitcoins is still increasing, the cost of things in relation to bitcoin is decreasing because bitcoin is in limited supply. That is definitely deflation, you are 100% correct. That brings up a question for me: Lets say you are going to buy pizza for dinner tonight and you have the choice of either spending fiat currency which will lose value over time, or spending Bitcoin, which will gain value over time, which one will you choose to spend?

#42

I see your point. For small purchases, if I had a deflationary crypto that I use to store value and that I can use to buy things too, I would either have some FIAT at hand, previously converted from crypto for daily expenses and emergencies, or buy directly with crypto if conversion rate fees aren’t too high, but I would always avoid as much as posible to convert crypto to FIAT. I would still have to pay with crypto for most things anyway, and there is no way to avoid that, if I’m using it to store value. The right balance wold be a coin that is deflationary enough to allow for storing value, or maybe has a way to lock/stake coins with a higher saving rate than FIAT, but that has low fees for transfers and conversion rates.

#43

I understand your argument. But unfortunately, stores of value (SoV) and mediums of exchange (MoE) have opposing needs, especially when we are talking about cryptocurrencies.
A good SoV will have no inflation at all, but will have very high transaction fees. However, this isn’t a problem for SoV since they are rarely transacted.
A good MoE requires low transaction fees, but this is only possible if there is enough inflation to subsidize the miners/validators.
This isn’t to say that it needs to be either one extreme or the other. But unfortunately any supply curve will necessarily be some trade-off between low inflation/high fees and high inflation/low fees.

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#44

I see. Would it be posible to to have an emission rate that allows that those staking the coin can avoid the inflation rate, thus using staking as a mechanism for SoV, while still having unlocked coins for MoE?

#45

Yes, that always happens in PoS with any supply curve. If you’re staking you don’t feel the inflation since you are receiving a portion of the emission rate.

#46

So, as long as I’m staking I’m protected from inflation, and it doesn’t matter if the coin is inflationary or not. However, a constant emission rate will still cause the coin to lose value compared to FIAT if the demand don’t growth at the same rate. On the contrary, if there is a limited supply it will cause transaction fees to rise and the coin to be used as SoV independently of whether it’s being staked or not, and people not using it as MoE. Is there a way to to have a middle ground? For instance, assuming volume is a good mesure of the demand for the coin, if the emission rate is a function of volume inflation could be controlled to make the coin still attractive as a better SoV than FIAT when staked, but also a better MoE when not.