A look at zero-cost blockchain, interest and inflation with 0Chain
0Chain are creating a ground-breaking platform with their ultra-fast blockchain based around a zero-cost model, but what are the implications of an unlimited token supply when so many other blockchains have a finite maximum?
Initial token allocation
The initial 0Chain model was based on a maximum token supply of 400million. Of this, 200million was set aside for the mining pool, the original plan was the pool would last 100 years if it was released at 1% per year. The initial token sale was 10% of that total at 40m, the remaining other 160m is made up of team allocation, seed and reserve pools.
Change to Interest model
As the 0Chain protocols matured, late in late 2018 the team changed to an interest model and the cap was removed, the team burned the 200m tokens set aside for mining and now the amount of mineable tokens is uncapped.
This model gives interest to miners for locking tokens which also secures their services and the interest generated by the client staking their tokens can be earned by them or apportioned to miners who provide services to them.
With interest comes inflation, but before exploring possible inflationary effects on 0Chain, let’s look at traditional inflation.
Inflation as part of a Traditional Economic Model
Inflation is the supposed periodic increase in overall cost (or wealth) of a particular entity, let’s say a cost of living in a particular nation. If this marker increases by 5% per year then inflation should be determined at that level. If wages on average were to increase by more than that 5% then there is a perceived increase in wealth of the people of the nation. Likewise, if interest on savings is above the inflation rate, the incentive to save should be high as your wealth would increase.
However, there are many hidden factors that can undermine this (and the whole economy). I’ll just highlight one of these factors.
Fractional reserve banking combined with interest.
Fractional reserve banking allows interest to be charged on loans which have only fractional backing with currency value. So, with a 10:1 ratio, a bank can generate loans for 10million with only 1million capital to back it. Now that in itself seems plausible assuming the risk of repayment failure would be less than a 10%, the 1million capital is there to cover it.
But then add to this that loans are generated from capital that itself might already be derived from a loan..
Then add to this interest. For simplicity, let’s say 5%. So from the 1million capital used to back 10million worth of loans, 500k interest will be paid. But this figure could be even higher if loans are using capital ‘generated' from other loans as described above.
But just the 500k figure represents a 50% increase from the initial capital which really should be the inflation of that area of banking.
Now if that ‘created’ money was to enter the economy, it would devalue the existing wealth in circulation and drive up inflation. It’s my guess that the only reason it doesn’t is because of the massive amounts of wealth being moved into offshore accounts and therefore out of that economy every year!
So, once upon a time, money was minted (printed) in conjunction with inflation, but it is no longer a reliable factor in this modern era with electronically generated funds.
What I am trying to illustrate here is that inflation is just a small part of the picture of the health of a traditional economy. Although inflation can be a useful indicator, there can be many other hidden factors to consider.
Back to the blockchain
When we talk about inflation on the blockchain, we are referring to the increase in number of circulating tokens each year.
The majority of blockchains such as Bitcoin have a finite amount of tokens. The release or mining of tokens is designed so that they are released in an ever decreasing fashion. This produces a lower level of inflation year upon year which gives the impression of a robust, stable platform.
As mentioned earlier, 0Chain have an unlimited supply of mined interest so there may be a potential concern for ever increasing inflation, so lets see the factors involved.
The 0Chain model rConclusionequires either:-
a) Clients to lock tokens to earn interest for themselves or miners providing services to them
b) Miners (inc. sharders and blobbers etc.) to stake tokens to earn interest (in addition to interest share earned from clients above).
Transactions including mined (interest) tokens on the blockchain are not only visible but immutable. This transparency is therefore entirely predictable and avoids the possibility of hidden underlying factors that can be present with traditional economic models.
Tokens left on exchanges will not normally earn interest as they will neither be locked nor staked. Initially this would also be the case for hardware wallets (although the team are exploring this possibility). This creates a scarcity of tokens on exchanges which could itself be a factor to drive up value, but the real value will be in the use of the blockchain itself.
An inflation example
(For this simplistic example, I am ignoring reserves including team allocation that might be released during the period).
An initial 10% interest rate has been indicated by the team. This means that if 100% of all tokens were locked or staked in the system, the total interest awarded to miners and clients would be 10%. However, with tokens on exchanges (and hardware wallets initially) not earning interest (lets assume 20%) that leaves 80% staked or locked split between miners and clients respectively that will earn interest.
This would generate 8% interest and therefore be 8% inflation as there are no hidden factors for us to consider (excluding other reserve tokens etc. being released as mentioned).
So, as long as the intrinsic value of the 0Chain platform increases by at least this 8%, then the value of the token should also increase. If the 10% remains fixed and the ratios of staked/locked tokens stays the same, the token inflation would remain the same even if the mined tokens increases each year because of compounded interest.
Inflation beating savings
Since, as already mentioned, it will not be possible for inflation generated from interest to be as much as the full interest rate, simply by locking tokens and earning interest, you are guaranteed to beat the rate of inflation* generated by interest. In an economic scenario, this would equate to a savings rate of 10% with inflation at 8% in our example.
* This excludes team and reserve tokens being introduced during the period as before.
So I would argue that using the scenario above, without any reserves, the token supply is in fact deflationary!
Governance protocol
An ingenious part of the 0Chain platform is the governance protocol dubbed ping-pong governance due to its back and forth nature until a decision is made.
The actual voting process requires tokens to be locked proportional to the votes cast, the tokens are then burned which itself will reduce supply and therefore reduce inflation!
Incidentally, one of the abilities of the governance protocol is to change the interest rate, so the initial 10% is not set in stone.
Inflation from token reserves
Now, excluded from my simple example, for the first few years, there are various token pools that will/can be introduced that will also increase circulating token supply and therefore inflation.
There are two reserve token pools that are set to be released in the event that the token value increases very rapidly (if zcn value goes above $10usd). This would cause a spike in inflation and help to stabilize the value.
The seed tokens are under control of the team, my understanding is that these are utilized to offer incentives etc.
The team reserves are set to be vested over a 4 year period, and it has been suggested that they would take 10 years to be fully released. The vast majority of these are going to be staked or locked as the team more than anyone understands the required commitment to ensure the early growth of the platform.
In the case of 0box offering a free tier of storage (up to 2gb without having to have any tokens at all), the team controlled tokens will also be utilized for this purpose. So effectively team tokens are locked to facilitate this free storage as then it can then be handled in the same way on the network as the locked storage, rather than having some special case exception. Of course it is hoped that a good percentage of free storage users will be sufficiently impressed to become paid subscribers of the platform, either through fiat payments or acquiring and locking tokens.
So the first few years will experience a higher inflation of tokens through release of these reserves.
These reserve tokens have been disclosed from the start, but whereas the initial model had a mere 1% annual miner reward, the new interest model introduces much more tokens per year, which gives a greater opportunity for diversity of token holders.
The growth of cloud
As this 2018 Forbes article shows, the next few years expect well over 20% growth in cloud service usage, year on year. By using using the growth in cloud as a baseline for 0Chain growth, this would negate the much of the inflationary effect of any reserve tokens being released during this period.
Conclusion
I hope that I have illustrated that there is a lot more to consider than a simple inflation figure when looking at increasing 0Chain token circulation.
Given the exponential growth that this platform has the potential to achieve, the value of the platform is likely to accelerate most over the initial years, and the inflation of tokens will be dwarfed by this initial growth.
In future years when the platform has matured and the team/seed/reserve pools have been released, the inflation will also decrease and a stable token will be the result.
About The Author
(I am a blockchain enthusiast, fairly active in the 0Chain telegram with ambassador status. My comments and views are not necessarily that of the 0Chain team)
