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Assume, we create an alternative cryptocurrency ("InflationCoin") based on the bitcoin software with one change to the protocol:

  • The Block reward is constant, e.g. 50 InflationCoin

Technically this would work just like Bitcoin while avoiding one of Bitcoin's most discussed characteristic, namely built-in deflation. The supply of InflationCoin would grow constantly, possibly leading to a controlled and predictable inflation if the InflationCoin economy does not grow as fast the supply of InflationCoins. Transactions are always cheap and therefore encouraged. Hoarding is dangerous due to the risk of inflation.

Since, both unsing Bitcoin and InflationCoin is voluntary, they could coexist and possibly attract different users or usage scenarios.

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I don't get why you consider deflation a problem and why you would actually want an economy with inflation. Personnaly I want my money to get value over time not to loose some... –  Gopoi Jan 20 '13 at 2:57
    
Inflation or deflation doesn't matter unless you have enough money that has enough value. If you have less money that values more, then you will be exchanging fewer no of coins. With inflation economy you will have more money, and with deflation economy you will have less but the value remains the same. –  vi.su. Jan 21 '13 at 3:29

1 Answer 1

The alternative blockchain Freicoin is a solution to the "deflation-causes-hoarding-problem" (assuming that you think this is a genuine problem) using demurrage rather than inflation.

As for your proposal of making the rate of money growth linear and higher than the expected rate of InflationCoin economy growth, that would accomplish the same goal: punish those who put their savings in coin rather than something productive like stocks and bonds.

According to Gresham's Law, Freicoin and InflationCoin should flourish as a medium of exchange and Bitcoin velocity should collapse as people tuck those relatively scarce coins away in wallets like they're bars of gold.

Of course, this isn't in fact happening. Maybe that's because of network effects (who accepts payment in coin of alternative block chains?) Or maybe the deflation theory is wrong.

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It doesn't happen because anything that makes someone want to hold a currency more also makes others want them to part with that currency more. You can equally well, and thus not very well at all, argue that people should offer incredibly good deals in exchange for those scarce coins, thus making them change hands even more often. –  David Schwartz Jan 22 '13 at 6:30
    
@DavidSchwartz, ok so basically you are saying that the deflation theory is wrong right? –  Pacerier Nov 11 '13 at 21:20
    
@Pacerier As applied to something like Bitcoin that is almost free to exchange, has an open market, and is effectively infinitely divisible, yes. It just cancels out. –  David Schwartz Nov 12 '13 at 1:19

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