Why are all popular crypto currencies deflationary?

Question

There is a lot of criticsm and debate over whether bitcoins will ultomately fail because of its deflationary nature.

I don't want to debate if that's the case or not and I also understand that the goal of bitcoin was to have a fixed amount of coins so that there is no risk of (hyper)inflation.

What I'm wondering is, would it be technically possible for a crypto currency to have a fixed target inflation rate? For example the european central bank has a target inflation rate of 2% (I think) which is supposed to stimulate growth while at the same time avoiding over-inflation.

So I guess my question boils down to: Why are all popular crypto currencies deflationary? Is it a technical problem that cannot be solved or is there another reason it was designed like this?

Answer 1

There's no technical problem with making an inflationary crypto-currency. For Bitcoin, just changing the block reward schedule would do it. And there do exist crypto-currencies that have perpetual block rewards.

The thing is, the set of people who believe that inflationary currencies are good doesn't significantly overlap the set of people who think that currencies don't need to be managed by central banks. So there's not much of a market for such currencies. It's kind of like a veggie burger with bacon.

Answer 2

It is indeed technically possible. In fact, there have been some alt-coins that do have permanent inflation.

PPCoin achieves it by creating 2 kinds of blocks: one the normal kind, where you have to demonstrate you made some work to get the block reward, and another one where you demonstrate you've been hoarding some coins for some time (proof-of-stake). First kind of reward has a cap (as in most other alt-coins) but the second doesn't.

Some minor alt-coins don't halve the reward after a certain number of blocks - they may have or not a final coin cap, some indeed dispense with the coin limit. Unfortunately none of them seem to have really taken off or at least I can't remember a notable one right now.

Answer 3

"would it be technically possible for a crypto currency to have a fixed target inflation rate?"

Nope it wouldnt, when the state economists talks about wanting 2% inflation they are talking about price inflation (so the coin being worth less) and not monetary inflation. They print more coins to archieve that (cause monetary inflation) but what they want is that coin devaluation not just compared with at its value would be if monetary inflation didnt existed but actual coin devaluation.

To a cryptocurrency have 2% value drop each year, the coin would need to be centralized, because you would need to actually somehow calculate the coin value and do enought monterary inflation (creating more coins) to make sure the coin devaluate 2%. Lets imagine you have 100 coins and print more coins enought to make 1 coin not be 1% of the total coins but 0.98% of it, if the market cap of the coin got so high that 0.98% of its price is more than 1% of the previous market cap value, the value of the coin will increase (a thing state economists dont want to happen), despise the 2% monetary inflation. You could try to use hash rate or amount of coins being staked as a method to try to gauge coin price without centralization, but that methods wouldnt be good enought.