Not Surprisingly, Tail Emission is Inflationary
Monetary policy is one of the pillars of any economic system, where money is a merchandise that is used as a means of exchange of goods and services.
Its origin has a lot to do with the development of bartering. The difficulties of trade through bartering caused the peoples to seek a faster change system, and that also gave a more precise value to their merchandise.
Some consider that money has an intrinsic value, but I believe that the value is given by its acceptance as a means of exchange within an economic system. Let’s take the example of countries with high inflation where fiduciary money issued by governments is not accepted as a means of savings, due to its great loss of value over time. Its intrinsic value does not exist, but its value depends on supply and demand, and as citizens do not accept it, it loses more and more value.
Lebanon or Venezuela, are the countries with the greatest devaluation of the currency, at the time of writing this article. You can see the data in inflation rate for each country (if you click on the titles, you can order the values).
Thus, the money must be a half of change, unit of measure, and value deposit, and for this it must have 7 theoretical properties to fulfill that “ideal”:
- Divisibility: money must be able to subdivide into small parts with ease without losing its value.
- Fungibility: All units have the same value (they are indistinguishable from each other)
- Durability: circular in the economy in an acceptable state for a reasonable time.
- Portability: holders must easily transport money with substantial value.
Controlled emission: maintain its value, but without stopping the economy by insufficient supply, or accelerating it by surplus offer.
- Recognition and security: It is easy to identify, easy to hide and difficult to confiscate or falsify.
- Universal acceptance
Tail Emission is being executed in the Monero Blockchain since June 2022, which consists of a fixed and perpetual reward per block, justified based on the fact that miners need an incentive to undermine, and due to the dynamic size of the blocks, the competition between miners will make the rates decrease.
If mining is not profitable due to the high cost and low reward, miners would lose their incentive and stop undermining, reducing network safety.
Dogecoin also has a fixed reward system, which he refers to as a “abundant” supply.
Todd says that coins are constantly lost due to deaths, forgotten passwords, navigation accidents, etc. He also says that paying the miners perpetually with newly created bitcoins, will not make the amount of bitcoins in circulation increase forever. Instead, he believes that some bitcoins will be lost every year and, eventually, the speed at which they will be converged with the speed at which new bitcoins occur, which will result in a more or less stable amount of coins in circulation.
Todd says that at present, all the best known coins with Proof of Work protocol reward miners with emission and transaction rates. No blockchain have transaction fees consistently more than 5% to 10% of total mining, with the exception of Ethereum, from June 2020 to August 2021.
Todd argues that to date, no proof of work block has only operated with fees of transactions, and academic analysis has found that in this condition the network is unstable: On the Instability of Bitcoin Without the Block Reward.
To implement Tail Emission, an adequate emission rate must be chosen on the maximum amount of inflation that is willing to have, in the worst case, and monetary inflation will be lower on zero day due to the loss of coins and , in the long run, it will converge towards zero, and also economic volatility dwarfs the effect of small amounts of inflation. Even an inflation rate of 0.5% for 50 years only leads to a 22% drop.
Todd considers to add Bitcoin Tail Emission would be through a hard fork. While Monero was able to obtain a sufficiently wide consensus in the community to implement the Tail Emission, it is not clear if it would ever be possible to achieve that for the much larger Bitcoin. In addition, Monero has a frequent hard forks culture that does not exist in Bitcoin.
Many people responded to his publication in BitcoinTalk, and I will present the most notable quotes.
- Hard bifurcation is not required: Videu suggests that a soft bifurcation can create new bitcoins imbueting transactions outputs that pay zero satiShis with a special meaning. For example, when a node that Opt for bifurcation sees an output of zero SAT, look for the transaction otherwise the transaction. This creates two kinds of bitcoins, but presumably soft bifurcation would provide a mechanism to convert bitcoins inherited into modified bitcoins.
- There is no reason to believe that perpetual broadcast is sufficient: Anthony Towns posted on the mail list, and Gregory Maxwell posted in Bitcointalk, that there is no reason to believe that paying the miners a number of currencies equal to the average rate of coins losses will provide sufficient Pow security. If a perpetual emission cannot guarantee security, and if it has a significant probability of producing additional problems, it seems preferable to stick to a finite subsidy that, although it cannot guarantee security, at least it does not generate additional problems. Maxwell also points out that, on average, Bitcoin miners obtain significantly higher value through transaction rates than many Altcoins pay to their miners through the combination of subsidies, rates and other incentives. These Altcoins are not suffering fundamental power attacks, which implies that it could be the case that sufficient value is paid only through transaction rates to maintain Bitcoin’s security. In summary, it is possible that Bitcoin has already passed the point where he needs its subsidy to obtain enough Pow security. Maxwell describes how the loss of coins could be eliminated almost completely by allowing anyone to automatically opt for using a script that would donate any of its coins that have not moved during, say, 120 years, far beyond the expected useful life of the owner of the owner original and its heirs.
- Censorship resistance: the developer ZMNSCPXJ expanded an argument of Eric Voskuil that the transaction fees improve the resistance to censorship of Bitcoin. For example, if 90% of the block reward comes from the issuance and 10% of the transaction rates, then the largest amount of income than a miner that censures directly is 10%. But if 90 % come from rates and 10 % of subsidies, the miner could lose directly to 90 %, a much stronger incentive to avoid censorship. Peter Todd responded with the opinion that a perpetual broadcast would raise more money for Pow’s security than “insignificant transaction rates”, and that a higher block reward would increase the cost that an attacker would have to pay to the miners to censor transactions.
- Fee Sniping: Bram Cohen published about the problem of Fee Sniping and suggests keeping transaction rates in approximately 10% of the total rewards of the block (the rest is a subsidy) as a possible solution. He briefly mentions some other possible solutions, but others provided additional suggestions in more detail.
- Anticipated Rate Payment: Russell O’Connor presented an old idea that miners could calculate the maximum amount of rates they could collect from the main transactions in their group of members without encouraging the reduction of rates. Then, they could offer any additional fee that charged the next mining to build the next block in a cooperative way instead of competitive. The participants of the discussion went through several iterations of this idea, but Peter Todd pointed out that a fundamental concern with this technique is that smaller miners would have to pay further bribes than the largest miners, creating economies of scale that could still centralize plus Bitcoin mining.
- Improving market design: Anthony Towns suggests that improvements in Bitcoin software, and user processes could significantly level rates, which would make the rates less likely.
The Tail Emission contradicts the essence of Bitcoin, with respect to the shortage of its cryptocurrency, with its deterministic monterary policy.
While Whitpaper “Bitcoin: A Peer-to Peer Electronic Cash System” by Satoshi Nakamoto, published on October 31, 2008 does not explain that the amount of Bitcoin has a maximum of 21 million, is implicit in its algorithm. The technical explanation is as follows:
The number of satoshis is maintained within the limits of the double floating numbers, 64 bits, with a small margin for multiplication / division rounding. The 64 -bit flotation provides 52 bits of explicit storage. Interestingly, 2 elevated to 51 are 2,251,799,813,685,248 units. This is just enough to store 21 million coins 10 times 8 divisions.
- The number of blocks per 4 -year cycle: 6 blocks per hour x 24hs x 365 days x 4 years halving = 210.240 ~ 210,000
- Adding all block reward sizes = 50 + 25 +12.5 + 6.25 + 3,125… = 100
- Multiplying both 210,000 x 100 = Btc 21,000,000
On the other hand, the new monetary policy Tail Emission aims to solve a problem of loss of bitcoins, which, although it is true, it is not possible losses. What does “lost” mean? Should the owner report the loss of keys? How would it know if he is the true owner, if the only way is to demonstrate it with the movement of the funds with the keys?
The fact that they are lost and out of circulation does not mean that they did not exist, because they were undermined, and were part of the reward charged by the miners.
The proposal to develop Tail Emission in Bitcoin has another covert issue, and it is clear to me. Because the philosophy that is encouraged for Bitcoin is ‘Hodl’, and use is not promised as P2P cash, transactions would not increase enough to replace the mining of new BTC, this for deflationary policy through halvings.
We see that in 2032, 0.78125 bitcoins will be issued each block, and if the amount of transactions do not increase, mining in Bitcoin will not be profitable.
Solve this problem, saying that it is intended to provide security to the blockchain, to keep the incentive to the most emission miners, using Tail Emission, is to want to solve a problem of lack of scalability, and inability to generate volume of transactions into blocks of 1 MB.
Bitcoins’ shortage is something that is repeated as a prayer in the community, as a desirable virtue. It would not exist with Tail Emission.
Tail Emission would probably generate inflationary problems, since the balance between demand and supply is dynamic, and only free market can establish it.
If Bitcoin relies on perpetual issuance to incentivize mining, it means it will have no number of transactions, because it will not be ‘A Peer-to-Peer Electronic Cash System’. In that case, Bitcoin will not be worthwhile.