Note: this is part of Grin Money Explained series by CryptoProfG
It’s worth to explore Grin’s monetary schedule in comparison to Bitcoin, Gold and the US Dollar. Grin is as different from the regular token, cryptocurrency ICO projects as can be (not speaking of scams..) and is the closest project to Bitcoin in terms of goals and way of development. This is the 4th article as part of our series on Grin:
- Greater than Bitcoin? Myths around Mimblewimble and Grin Unlocked
- Money: origins, purpose and inflation
- Supply and Monetary Schedule of Grin
- Grin’s design can make it a sound form of money only if it is in high demand. A combination of high demand, circulation (use) and a steadily disinflating linear supply rate can make Grin a key new form of digital money.
- Grin’s predictable, linear rate supply function is a relevant aspect of fulfilling Grin’s vision of a decentralized, immutable, lightweight, privacy-oriented digital money because it complements Grin’s technical, privacy and network security properties.
- If Grin really is to become a used digital form of free speech money it will have to fulfill the 3 properties of money: medium of exchange, store of value, and unit of account.
- What is more important than the emissions curve is demand. Important factors that can help generate demand early on are speculation which brings in capital for builders/developers/startups, hype, and positive expectations about Grin’s future, community and properties. Besides expectations, starting the use of Grin in niche circles and communities focused on privacy (cypherpunks, privacy advocates, activists, covert use-cases) will be important.
- Grin’s emission over time in terms of volume is fairer than Bitcoin’s, though it’s a guess whether actual value distribution will be more fair.
- Inflation, despite being relatively higher and fiat-resembling in the first few decades, will be falling — disinflation is a good property of Grin.
- Grin has very strong store of value properties in the long-run, as it will probably be in scarcer supply than gold (if demand is strong for it) and given a high enough loss rate could actually see decreasing circulation of supply.
- Grin is an early-stage, high risk experiment. Just like Bitcoin is an experiment, and fiat currencies are too but over a much longer time horizon. The unit of account for most people in the world today is fiat, and USD is recognized and used the world over. Until that is the case for Bitcoin and Grin, they will not reach global unit of account functionality, and until that time we will see much speculation relative to ‘traditional’ fiat currencies.
- Check out the charts at the bottom of the article :)
Value of a linear money supply rate
A linear emission schedule has much value for a privacy coin, since rewarding miners that are securing the network does not have to rely on transaction fee-based rewards that could reveal information (addresses and amounts) in order to preserve privacy better. In this way the emission schedule complements the characteristics of this money. Second, it is straightforward to understand for anybody interested, which should ease adoption. Third, and above all, Grin provides much certainty in a linear supply rate. There is a lot of value in knowing exactly what the future holds on the supply side, as it makes expectations about the supply curve stable. It’s essential to understand that vs fiat, which is controlled by governments and is continuously debased and becoming worthless, Grin’s emission:
- is minimizing monetary inflation over time until it becomes miniscule, while fiat is inflationary and manipulated
- is fully transparent and predictable
- supply will be so miniscule in the long-run that Grin will likely become a store of value
The certainty the emission schedule provides to forming investor, miner, buyer and developer expectations is positive: we know Grin won’t be a hyperinflationary digital money; and we know that monetary inflation will be decreasing. This provides pretty complete supply predictability, like in the case of Bitcoin, that in the future Grin is going to disinflate into an emission curve that is close to gold’s emission curve.
For Grin to significantly increase in value millions of people will have to use it — there must be demand, irrespective of supply. Thousands of tokens with low or fixed emission came to market 2017–2018, and most have collapsed in terms of value not because of their emissions curve, but because of lack of interest ie. lack of demand for them. With increasing demand and economic activity on Grin, falling monetary inflation helps increase the value of Grin. What will bring this demand in are unchangeable properties of the coin (ie. private, censorship-resistant p2p digital cash transfers), ease of use (UX/UI services) and network effects (adoption and infrastructure that will enable the network to grow).
In the long-run Grin’s emission curve will actually resemble that of gold — more on that at the end of the article though. However, Grin is lightweight and its high throughput should make it easier to be used for transfers. One of the reasons why Bitcoin is currently used for holding and promoted as a store of value, as opposed to Satoshi’s pure vision of a digital money, is due to the technical limitations on bitcoin’s block size, which complements the limited supply thesis. Given this, some argue that Bitcoin faces an issue of whether Bitcoin will generate enough mining revenues via transaction fees to keep miners incentivized enough in the long run, as the block reward gets smaller until it disappears once all 21 mln bitcoins are supplied — no one knows exactly what’ll happen then and whether there will be enough transaction volume to incentivize miners to support Bitcoin (however, such extrapolation is akin to astrology more than science, but it’s worth mentioning). This can be solved by the community agreeing to change the supply schedule, but would be risky. It’s worth mentioning that this is a risk Grin does not face, because of the linear supply curve and block reward. Realizing this just might improve expectations for Grin’s potential.
GRIN’s fair distribution = GReedy It’s Not
“GReedy It’s Not” sounds nice and was mentioned in the grin forum by Grin core dev & inventor of the new Proof-of-Work system called Cuckoo Cycle, as a way of thinking about Grin’s supply distribution. As a reference point look at Bitcoin’s distribution by address where 1844 addresses (out of over 14 mln addresses) each hold over 1,000 bitcoins and in total hold over 41% of all bitcoins. However, most of these largest addresses belong to enterprises, eg exchanges (top 5 addresses belong to exchanges).
First, what we see as fair to the mining community is the lack of a pre-mined supply, “pre-sale discounts” to potential investors, or a large founder’s stake in the total stock of supply. Second, never ending supply at 1 grin/sec can incentivize continuous mining provided it is commercially beneficial (ie. given the price), which is of relevance for clearing transactions and maintaining the chain’s security, and also for a fairer coin distribution.
Third, Grin has securing the network figured out — many investors are putting money into mining and Grin will have many micro and large miners. Since most miners sell their reward gains pretty fast after it is mined in order to cover their operating costs, this will help to secure the network and keep a fairer distribution of Grins over time as long as there are buyers.
Fourth, one way in which Grin’s coins are distributed more fairly is by not cutting the actual block reward over time. The rest of it will be determined by demand. Producing 1 Grin per second provides simplicity and is welcoming to late adopters in volume terms. This is a noble intent, but we cannot estimate what the actual monetary value of Grin and gains to nodes (miners) will be in the later future. We don’t know future demand nor how the price of Grin will fluctuate, we don’t know how much mining power will be contributed to the network over time nor the varying economic costs of mining for each decentralized mining operation. Hence, the distribution of Grins among miners will fluctuate in terms of value. It is really hard to estimate if the distribution of actual value will be more fair. However, the distribution in terms of volume is fairer.
We believe on the other hand that the main way in which Grin is unfair is for the founders and core contributors of the project who are not compensated as fully as they would have been otherwise for their hard work and dedication to a promising mimblewimble privacy coin implementation.
Inflation, expectations and soundness of money
At the outset a high inflationary emissions schedule will not disincentivize actual investors to hold the asset, trade it, or speculate in it. This is because expectations are already forming that Grin can become a safe, private, immutable, stable currency with strong store of value properties, owing to it’s design and how it is launched. Grin should be in demand early on by those who believe in this thesis. Whether individuals and professional investors buy into Grin believing in this depends on their time preference over money, investment horizon, what they believe the rest of the market thinks, and actual usage and adoption of Grin over time. Bitcoin did not become less valuable as a result of high inflation early on and Grin’s team recognizes this:
“The first four years of Bitcoin emission rate are identical to the first four of Grin. Bitcoin had a full reward for 4 years, followed by half that for the following 4 years. So compared to a constant supply, after 8 years, the total amount of coins emitted is only 33% less. Compare that to daily price fluctuations. … [and] … Compare [Grin] with other slow emission coins. After 8 years, grin only has 33% more supply than bitcoin or, to pick something more recent, zcash. Argue why this matters (or not).”
This is a result of the combination of the linear emissions rate and high, authentic interest/demand for Grin we can already see. In fact, in the very long run we know the monetary inflation of Grin will be miniscule — so small, that it will make Grin a strong store of value digital coin. If this thesis becomes true then those who are patient will benefit.
The project team correctly highlights the value of a transparent, predictable emission schedule, but should not dismiss the importance of scarce supply, given that Grin in the long run will be scarce:
“Sound money has more to do with transparent emission than a capped supply: One of the pitfalls of monetary inflation in fiat currencies is governments can inflate the monetary supply on a whim. This has been used to disastrous effect throughout history. A sovereign, open source, consensus based currency solves this issue by making the emission policy well known ahead of time, and makes it difficult if not impossible to change. Based on this definition of soundness, grin is just as much “sound money” as bitcoin. Removing central authorities with arbitrary control is much more what makes bitcoin important than the arbitrary amount of its capped supply. There are plenty of cryptocurrencies identical to bitcoin but with smaller capped supplies, can you name any of them?”
Grin is highly divisible with a fully predictable, linear and continuous emission schedule. When Grin’s team decided to move from a reward of 50 grins/block to 60 grins/block the monetary inflation rate did not change, because what matters is the rate of supply change, determined by the schedule function which is linear.
With time the marginal supply of Grin matters less and less as a proportion of the existing stock. This is clearly visible when we look at the log scale of supply (above) — the growth rate of supply falls. Moreover, the actual number of Grins in circulation is not crucial beyond a certain scale (ie. large enough number of highly divisible coins to perform the medium of exchange and accounting functions). What matters is the rate of supply, which is constant. Economically, what matters for Grin to be able to capture and store value is the scarcity of money relative to demand for it. For anything to be scarce there needs to be a demand for it. If Bitcoin wasn’t in demand would it still be scarce or abundant from an individual’s point of view? Thus, in the short term the supply curve matters little. Let’s consider for fun a thought experiment of how we think about Grin’s launch and emission schedule by changing the framework of analysis.
First, check out the launch of the Euro on 1 January 1999. It took over a decade to prepare the launch of the euro (EU national countries agreeing on political, operational, monetary policy, promotion, logistics, coordinating with financial markets, banks etc.). The Euro was introduced in non-physical form (traveller’s cheques, electronic transfers, banking etc.) that day and the exchange rates of all participating national currencies got locked at fixed exchange rates against each other. Also, all bonds and government debt by eurozone nations were denominated in euros on that day. Due to the operational and logistical problem of introducing physical euro notes and coins and removing physical old notes and coins, old currencies continued to be used as legal tender until new notes and coins were introduced on 1 January 2002. The euro got adopted very fast as a unit of account after that not only due to regulations, but expectations and denomination of assets in euros. Market traders “were surprised by the speed at which [the euro] replaced the national currencies. Trading in the Deutsche Mark was expected to continue in parallel but vanished as soon as the markets opened.” As we’re dealing with digital cash ignore the physical part and just imagine Grin could be introduced similarly all at once in January 2019, 20 years after the launch of the euro..
Now imagine — in a major simplification — that the entire supply of Grin during the first 10 years (315 mln grins) is required to provide enough digital cash volume in circulation to support the functioning of the digital Grin-based economy with a money that meets the medium of exchange, unit of account and store of value properties. Harry Potter just gave us his magic wand and it gives us the wizard power to implement the first 10 yrs of Grin’s supply on January 15th 2019 and put it in everyone’s hands. The magic we achieve are 10 yrs of Grin on the market in everyone’s wallets, and the emission schedule continues as is — transparent, predictable, linear and decreasing in inflation continuously. On the one hand, when you think about it this way the discussion of the early huge supply inflation of Grin during the first 10 years becomes less of an issue. In reality this scenario would have to be realized top-down or via near complete coordinated agreement of all parties involved in this digital economy, with the infrastructure ready and in “people’s hands”. On the other hand, this is impossible to do for any cryptocurrency: the infrastructure isn’t there, technical issues exist, adoption as well as knowledge and awareness are not there, we don’t have an entity with hundred of billions of USD or EUR deploying capital to make this happen ie. the Grin team is not a centralized government, it’s a different incentive design, miners need to be attracted and rewarded, and so forth.
A decentralized POW privacy-focused cryptocurrency cannot get started like the euro, as it gets launched more like a startup and for very good reasons — in order to grow, develop and reach product-market fit. Grin, Bitcoin, etc are launched the way they are — through bottom-up, grassroots, digital, entrepreneurial community activity — because a) we have to incentivize early mining to secure the network, and b) this is the correct path to the desired state of infrastructure build-out, adoption and so forth. It is a path to ‘product-market fit’, except in this case our startup ‘product’ is a privacy-oriented digital cash that is a privately-provided open source good.
Moreover, it’s worth stating here that you cannot really “solve” for the correct amount of inflation for a given ‘cryptoasset’. You have a completely unknown demand function to estimate. You have goals and properties of the product (money) in creation that impact demand and change over time. You have network security design issues. You have many unknowns and risks. However, if a cryptocurrency is meant to serve as money then it should be treated like money — there’s hundreds of years of study of money, much theoretical and empirical research around this topic. Too many tokens have been treated as if they were money — where they actually resemble securities, commodities, and utility tools/services more than pure money.
Launch and speculation
Network launch is very close — January 15th 2019. With a modest circulating supply in a completely open and free market that is being developed (and thus has opportunities for arbitrage) Grin will not experience relatively less speculation versus other cryptocurrencies. Grin has strong capital inflows and much interest. Furthermore, today the inflows of capital and the existing stock of capital deployed in cryptocurrencies is significantly bigger than when bitcoin, monero or zcash were launched. Volatility will be present, and the emission curve will not stop this, since supply does not impact demand under a fixed linear supply curve that is known to everyone. The only way to for supply to impact actual demand would be to alter the supply curve unexpectedly (much like central banks can do with fiat and markets).
Nevertheless, Grin’s team sets out the inflation hypothesis this way:
“Inflation may make price more stable: As an experimental hypothesis, grin’s inflation rate may discourage hoarding, improving its distribution. This disincentivizes “whales,” who otherwise have an inordinate amount of control over the price of an asset, and downplays speculative bubbles and price swings…”
It is very uncertain whether early inflation will make price more stable, given that a high enough price for mining and earnings, and a volatile price for speculation and returns, will be important to launch Grin. The role that capital, investors, traders and speculators play early on to create actual demand for a cryptocurrency is significant. Thus, what matters beyond early monetary inflation rates are a) expectations, b) capital inflows and c) the first early use-case(s) and usage. The need to realize monetary returns by investors will help promote and distribute grin amongst people who believe in it and who value it and want to use it at some point. Speculators will continue to buy and sell Grin only if they believe it is worth something down the road and if there’s market liquidity to trade Grin.
What matters to a small degree is the currency loss rate, ie. how many grins get ‘lost’ permanently due to the loss of private keys for various reasons (lost seeds, passwords, hardware loss, death of holders who don’t share their keys with their relatives, wallet bugs that make access to grins impossible). In Grin’s case the founding team states that:
“It’s highly likely that at least 2% of coins get lost per year: multiple studies have shown that…”
However, the loss rate will be changing if Grin becomes valuable — people will take more care of their holdings then. Most bitcoins were lost early on when most people couldn’t imagine the future high value of bitcoin. What matters for this are the following:
- will we know Grin’s loss rate? Perhaps.
- even if we know it, is this knowledge distributed among currency users or just the focus of investors, traders and developers? Doubt it.
- even if this knowledge becomes distributed, will most ordinary users even care? No.
Most users won’t know or care about this, just as they don’t know this about the US Dollar or any cryptocurrency, or just like many Bitcoin buyers don’t know that a good chunk of Bitcoin’s supply has already been lost. However, people can feel the impact of currency loss in everyday usage, because it matters more for Grin once it is in actual use because of how the loss rate & supply production rate impact the equation of exchange (MV=PQ ~ Quantity Theory of Money) and in consequence Grin’s price. I’ll leave this analysis out of the picture, as we have too many unknowns in this equation. If the supply of newly mined Grin falls below the 2% loss rate of the stock of grin coins per year, then Grin’s total supply could end up decreasing. If this is the case, then Grin’s inflation is overestimate, and in the long run Grin might become deflationary. The higher the loss rate, the more likely Grin will become a stronger store of value form of money. And this would rather likely increase interest in this currency. Nevertheless don’t forget that what will really matter more than supply is actual demand. However, we can equally assume a 2% loss rate across cryptocurrencies and fiat currencies, in which case the comparative dynamics of evaluation each of them do not change much.
Monies of the past have been impacted by inflation so much that they’ve disappeared or lost much value (eg. fiat). Monetary deflation increases the value of a currency, making people want to hold it into the future and use it as a source of savings, in order to spend it later on. Gresham’s law isn’t really a “law” it doesn’t stand empirical tests, and it might only hold in a world of fixed exchange rates, in which we’re not.
What also matters is average, unrational user psychology. People don’t know the exact US monetary policy — they’re in the dark about it. Similarly many Bitcoin buyers don’t know the emissions schedules, supply of coins, etc. Will users care about this when it comes to Grin? Doubt it. However, what people cognitively react to is relative prices, looking at owning 1 Grin vs 1 Bitcoin many will buy Grins thinking they can “own” a whole of it.. This is human psychology at work.
What leads to a stable currency that becomes a unit of account is widespread demand, use and social acceptance of a money that’s not volatile. A stable emission schedule is not necessary for that. The US Dollar, despite being a fiat currency that is constantly under inflation and loss of value, can be considered a stable currency owing to its global reserve currency status as a settlement means, that the US economy is the largest economy in the world with the US setting or influencing to a high degree global monetary, trade and investment standards and flows, including through international political institutions such as the WTO, IMF, World Bank, G20, G7 and so forth. It is civilizations/societies that create stable currencies.
Comparing Grin’s monetary model to Bitcoin, US Dollar and Gold
To understand Grin’s supply function better let’s compare it to Bitcoin — the leading cryptocurrency, the US Dollar — the global reserve currency and global unit of account, and Gold — the leading metal store of value over millennia. Four charts below display the supply schedule (stock) and monetary inflation (growth rate) for Grin (from 2019), Bitcoin (from 2009), US Dollar M2 supply (from 1867) and Gold (from 1800). M2 represents currency in circulation in the form funds immediately accessible for spending (currency, checks, direct deposits, savings deposits). The M2 figures were the oldest we found, while gold’s global stockpile time series data trace back to the mid-1400’s but are estimates, thus we decided to show the stock gold’s schedule from 1800, when technological advancements ramped up gold production and when the gold standard monetary system (where a country’s currency had its value directly tied to gold at a fixed exchange rate) was adopted by the majority of the world’s advanced countries.
Grin provides a constant block coinbase reward of 1 grin/sec = 60 grin with a block goal of 60 seconds. This leads to monetary disinflation in the long run — after the year 2069 Grin’s monetary inflation falls below 2%.
Bitcoin has a supply capped at 21 mln BTC and Bitcoin’s 10 minute block time has its initial 50 BTC reward cut in half every c. 4 years until there are 21 million bitcoin in circulation. The money supply rate falls very fast.
The US Dollar is inflationary due to the way it is controlled by government. Despite that it is the global reserve currency used for settlement and transactions. It became more inflationary since the US went off gold in 1971. Moreover, it is considered a store of value in many places around the world, because people have faith in the United States economy and the US Dollar as a global unit of account relatively more than in their own currencies or governments (take Venezuelan bolivar as the extreme example).
Gold is extracted at a pretty constant growth rate of c. 1.5% per year, and the USD is quite inflationary at the hands of government. Grin tends to follow gold’s inflation curve after a couple of decades. Gold has a pretty linear, stable emission. It’s consistently low rate of supply is the key reason why it has maintained its monetary role in history. Grin as well expect it is falling inflation (disinflation) over time. In this way, Grin in the long-run resembles gold.
We can argue whether Bitcoin is a bad or a great store of value which depend on the timeframe we look at (-90% fall since December 2017 peak; over +5200% rise since July 2013, +71,500% since January 2012; and +6,600,000,000% since August 2010) as well as very high volatility relative to gold and USD. However, Bitcoin has been continuously gaining over time, and volatility is falling. We will see what will happen to Grin but we expect it to be very volatile as well in its first years and decades.
Let’s compare the inflation schedules for all four on one chart, as if they were launched alongside one another (so year = 0 is 2019 for Grin, 2009 for Bitcoin, and for simplicity 1935 for USD and gold to compare their recent & current money supply rates). This view helps gauge Grin’s and Bitcoin’s characteristics better vs the global reserve currency and the most popular global metal store of value. It is clear that Bitcoin, Grin and Gold are much less inflationary than the US Dollar over a medium to long time horizon.
Check the logarithmic scale chart below to better see the details. Bitcoin’s inflation tends towards zero in a step function fashion and Grin’s decreases much more slowly. What’s interesting is that pretty much after 15 years since launch Grin will not inflate much faster than the US Dollar, and over the long run will disinflate below gold (c. 52 years after launch), where gold is the strongest store of value commodity money, but will stay in much higher production than BTC.
The below plot of historical and programmed inflation, plus trending inflation for USD and Gold past 2018, helps visualize how supply plays out over time. Around 2020 Bitcoin’s growth rate will be on par with gold’s, falling below it c. 2024. We expect Grin’s inflation to fall below that of USD around 2035, and below gold’s growth rate around the year 2065.
Lastly, let’s consider the store of value characteristic by looking at stock-to-flow ratios over time. The below table shows the stock-to-flow ratio ie. the ratio of global stockpiles divided by annual production for specific years of each resource type. The higher the figure, the smaller the production for that year is relative to the existing stockpile of the resource. From this we see that Grin in 2025 is more inflationary than USD in 2017, by the year 2040 is less inflationary than Bitcoin or USD in 2017, and that by 2065 becomes less inflationary than Gold in 2017. This supports the store of value thesis well for Grin, although over a long time horizon of 46 years from 2019. For individuals with a very long time horizon and imagination this suffices as proof that Grin will satisfy the store of value property. Theoretically, the more individuals believe this, and the more others around them notice that an increasing part of the population believes this thesis, the more this belief/thesis will spread with time. Expectations could form this way through social proof and word of mouth.
Source of above charts and table unless otherwise specified: own calculations
Understanding not only the underlying technology, but the functioning of money, psychology and behavior, open source communities, as well as how products are shipped and adopted to reach product-market fit, is of huge value to understanding cryptocurrencies like Grin. Grin can benefit from the hindsight of Bitcoin, and we see how it has the potential to become digital, privacy-preserving sound money for the XXI century. Maybe we could call it ‘free speech money’ if it becomes as immutable as Bitcoin. It is a huge risk and experiment, so always do your own research. In an upcoming post we’ll compare Grin and other leading cryptocurrencies and privacy coins more closely.
This article is not exhaustive and complete of course. We welcome all comments, suggestions, critiques and disagreements.