Peercoin was the first Bitcoin-based monetary system to make use of proof-of-stake as a mechanism to ensure its own integrity. However, there are a few objections to Peercoin's proof-of-stake model. This information presents those objections plus a similar system redesigned to handle them.blockchain
In a simplified version of Peercoin's proof-of-stake design, each node can use section of its balance as a stake allowing it to chain blocks. The bigger that stake, the more chances this node has of increasing the block chain. The reward for chaining blocks is 1% of the used stake as newly minted coins, annually. Conversely, making transactions requires paying a fee that destroys 0.01 coins per transaction. For example, after having chained a block using one coin of stake, Bob makes one transaction. Then, the fee of 0.01 coins he pays for making this transaction destroys the 0.01 coins he minted in reward for chaining that block.
Here are five objections to this proof-of-stake model:
It amplifies wealth inequality. Suppose Peercoin is the only real type of money for both Bob and Alice. Bob's income is 200 coins per month, while his expenses are 80% of his income. Alice's income is 800 coins per month, while her expenses are 50% of her income. Assuming, for simplicity, that neither Bob nor Alice has any savings -- which Alice is more likely to have -- Bob and Alice will have the ability to reserve 40 and 400 coins as block-chaining stake, respectively. Then, Alice's block-chaining reward will undoubtedly be 900% larger than Bob's, although her income is 300% larger than his.Blockchains STELware
It makes the cash supply unstable. Inflation becomes directly proportional to successful block-chaining rewards, yet inversely proportional to paid transaction fees. This variable inflation adds an unnecessary source of price instability to the rather inevitable ones -- exchange value of merchandise and velocity of money circulation -- thus unnecessarily reducing price transparency and predictability. Peercoin needs to have a reliable money supply, as Bitcoin may have after year 2140. Whenever total paid transaction fees are significantly less than total successful block-chaining rewards, all inactive or unsuccessful block-chaining nodes will pay a fee to any or all successful ones through inflation. This implicit value transfer disguises the cost of participating in the system.
As coins upsurge in value, the (now 0.01 coins) transaction fee could eventually become too valuable, thus requiring Peercoin developers to lessen it. However, choosing its new nominal value is an economic decision -- rather than technological one -- which creates a political problem. System integrity is dependent upon extrinsic incentives: both block-chaining reward and its offsetting transaction fee need arbitrary adjustment, which again involves an economic decision, thus creating a political problem.
Transaction Rights In place of Money
Every one of these five objections have one common origin: the extrinsic, pecuniary nature of block-chaining incentives -- the block-chaining reward less its offsetting transaction fee. Hence, only an intrinsically nonmonetary block-chaining system can address all them. However, is that system possible?
Yes, if instead of newly minted coins -- as well as old ones -- the reward for chaining blocks is the best to create transactions. Then, that reward no further needs to be directly proportional to stake. For example, merely having twice the quantity of money owned by Bob is inadequate reason behind Alice to create twice the quantity of transactions created by him. Still, just how to estimate the transaction volume needed with a block-chaining stake owner? Is there any objective indication of this volume?
Yes, despite merely a generic one: the particular transaction volume in the system. Then, the reward for chaining a block will not be considered a monetary value, but instead the combined size of transactions for the reason that block as future transaction rights. However, this reward must exceed its own size for future transaction volume to grow if necessary. For example, instead of newly minting 1% of its used stake annually, a block-chaining reward -- in Peercoin, a stake output -- could allow its winner to make a future level of transactions 1% greater compared to combined size of transactions in its containing block.
In a simplified version of Peercoin's proof-of-stake design, each node can use section of its balance as a stake allowing it to chain blocks. The bigger that stake, the more chances this node has of increasing the block chain. The reward for chaining blocks is 1% of the used stake as newly minted coins, annually. Conversely, making transactions requires paying a fee that destroys 0.01 coins per transaction. For example, after having chained a block using one coin of stake, Bob makes one transaction. Then, the fee of 0.01 coins he pays for making this transaction destroys the 0.01 coins he minted in reward for chaining that block.
Here are five objections to this proof-of-stake model:
It amplifies wealth inequality. Suppose Peercoin is the only real type of money for both Bob and Alice. Bob's income is 200 coins per month, while his expenses are 80% of his income. Alice's income is 800 coins per month, while her expenses are 50% of her income. Assuming, for simplicity, that neither Bob nor Alice has any savings -- which Alice is more likely to have -- Bob and Alice will have the ability to reserve 40 and 400 coins as block-chaining stake, respectively. Then, Alice's block-chaining reward will undoubtedly be 900% larger than Bob's, although her income is 300% larger than his.Blockchains STELware
It makes the cash supply unstable. Inflation becomes directly proportional to successful block-chaining rewards, yet inversely proportional to paid transaction fees. This variable inflation adds an unnecessary source of price instability to the rather inevitable ones -- exchange value of merchandise and velocity of money circulation -- thus unnecessarily reducing price transparency and predictability. Peercoin needs to have a reliable money supply, as Bitcoin may have after year 2140. Whenever total paid transaction fees are significantly less than total successful block-chaining rewards, all inactive or unsuccessful block-chaining nodes will pay a fee to any or all successful ones through inflation. This implicit value transfer disguises the cost of participating in the system.
As coins upsurge in value, the (now 0.01 coins) transaction fee could eventually become too valuable, thus requiring Peercoin developers to lessen it. However, choosing its new nominal value is an economic decision -- rather than technological one -- which creates a political problem. System integrity is dependent upon extrinsic incentives: both block-chaining reward and its offsetting transaction fee need arbitrary adjustment, which again involves an economic decision, thus creating a political problem.
Transaction Rights In place of Money
Every one of these five objections have one common origin: the extrinsic, pecuniary nature of block-chaining incentives -- the block-chaining reward less its offsetting transaction fee. Hence, only an intrinsically nonmonetary block-chaining system can address all them. However, is that system possible?
Yes, if instead of newly minted coins -- as well as old ones -- the reward for chaining blocks is the best to create transactions. Then, that reward no further needs to be directly proportional to stake. For example, merely having twice the quantity of money owned by Bob is inadequate reason behind Alice to create twice the quantity of transactions created by him. Still, just how to estimate the transaction volume needed with a block-chaining stake owner? Is there any objective indication of this volume?
Yes, despite merely a generic one: the particular transaction volume in the system. Then, the reward for chaining a block will not be considered a monetary value, but instead the combined size of transactions for the reason that block as future transaction rights. However, this reward must exceed its own size for future transaction volume to grow if necessary. For example, instead of newly minting 1% of its used stake annually, a block-chaining reward -- in Peercoin, a stake output -- could allow its winner to make a future level of transactions 1% greater compared to combined size of transactions in its containing block.
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