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One of the most common criticisms made against Bitcoin is related to its deflationary nature. Regardless of the advantages and disadvantages of an inflationary system, would it possible to change the rate of coin generation in order to transform Bitcoin into an inflationary currency?

I know that the Bitcoin protocol and client are often updated to incorporate new features, but what part of the protocol (if any) is set in stone? Could such a drastic change be done by the developers?

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There is nothing technically difficult about making this change. Edit a few lines of code, upload a new version, make sure everyone installs it.

However, it is extremely unlikely that any respected developer will ever try to make such a change, or that enough users will adopt it if it is offered.

The reason is that people who hold bitcoins and don't get rid of them like hot potatoes, do so with the understanding that every BTC they have entitles them to 1/21M of the total eventual worth of Bitcoin and that there will be no unplanned inflation. They have confidence that the generation schedule will not change, because it has never changed so far. And people who would consider condoning a change, know that by so doing they will create a loss of confidence for future generations who will have this precedent. And, everyone knows that everyone knows that changing the schedule will create a loss of confidence, giving even more confidence that there will be no change as nobody would condone it. And so on, ad infinitum.

In short, as long as the generation schedule is sacred, it acts as a Schelling point for the confidence in long-term projections. Changing it even once will make this confidence collapse completely.

If people want an inflationary decentralized cryptocurrency, they will have to create an alternative currency and leave Bitcoin out of it. The inflation rate can be set in stone, or if they think a mutable schedule is good, they can specify on what terms it can be changed, so it can be safely changed without destroying anything.

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Changing the rate of coin generation is unnecessary and hard. Instead, an economy can simply use substitutes for currency, just as every modern economy actually does.

If there is insufficient supplies of a currency for an optimum economy, positive pressure will be applied to things that create new currency (because that currency will have more value than it would in a balanced economy). When that happens, people begin to use substitutes for currency in lieu of currency.

For example, if someone creates some other crypto-currency with a relatively stable exchange rate with respect to Bitcoins, we can use coins in that alternate currency instead of Bitcoins. Similarly, secured notes can used instead of currency.

So it won't matter. A modern economy won't tolerate a consistent deflation. The pressure to fix it would be unstoppable, unless you imagine some powerful government-based economic regulation that prevented expanding the monetary base. (Which, of course, would be politically suicidal.)

If deflation is a problem, it's easy to fix a billion different ways.

How much would it matter if the Fed stopped printing dollar bills? What percentage of dollars are in the form of physical dollar bills? A limit on one form a currency won't stop other forms from being used as a substitute for the limited form of the currency. A long-term currency deflation is basically impossible.

  • People, please consider adding comments when you downvote an answer. @DavidSchwartz: I'm guessing that the downvote is because the question is about whether it is possible to make such a change while your answer is more about whether it is desirable. – D.H. - bitcoin.se Nov 6 '11 at 7:51
  • @D.H.: My point is a bit more subtle -- the premise of the question is false. You basically can't have a currency experience a harmful long-term deflation unless something literally forces it (such as laws that prohibit inflationary economic practices). There are just much easier solutions than changing the protocol, including using alternative crypto-currencies to increase the effective supply of Bitcoins, using demand notes, and so on. (Just as we use many other things instead of physical dollar bills.) – David Schwartz Nov 6 '11 at 7:54
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Changing something like coin generation has two major risks:

a) You fork the network. If you make a change and it doesn't have universal support then those supporting the old network will see new blocks as invalid and those supporting the new network will see old blocks as invalid. To users who don't want to get caught up in a "fork war" the results will be confusing. If user on fork A send coins to user on fork B they will be gone but user B will never get them (unless he modifies his client to fork A).

b) You cause a loss of confidence. Bitcoin is based on "nothing". Part of its intrinsic value comes from the fact that nobody can make changes and thus like the "rules" or don't like them you at least know the rules won't change. Anytime you make a change someone gains and someone loses. For example if the Federal Reserve lowers interest rates that helps debtors but hurts savers. Once you start changing the rules Bitcoin becomes open to manipulation with each party pushing for changes that help them. There is a real risk that will cause a huge loss of confidence. IF you can gain enough support to change the generation rate you can change just about anything and some people won't like that ambiguous future.

Those risks aside to change the rate of generation you need to a) decide on a future block in which to change generation b) reach near unanimous consensus among users (at least among users you can reach) c) provide updated client which incorporates changes at the preset future block. d) encourage rapid and widespread adoption of clients with new changes prior to the change block. e) at the "change block" be prepared for significant issues from users with out of date clients.

There is no way to force this (or any other) change on the Bitcoin community. Any change require consensus and for something as devisive as generation change that would be difficult. If it has low support the "inflation fork" will die off. If it has high support, then even those who dislike it will eventually adopt it and the original fork will die off. A worst case scenario would be a "fork war" where both versions have roughly equal support and neither one gains an upper hand. That likely could crippple Bitcoin or at least push it back significantly.

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