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How Devcoins Fight Deflation

Introduction

One of the biggest arguments I have seen so far against Bitcoins is that they are deflationary. This means that as time goes on, they should (theoretically) keep increasing in value. It is due to the simple law of supply and demand, where time will cause the demand to keep increasing while the supply stays constant (or, in this case, even decreases).

Devcoins help fight this by increasing the supply as well. Through this article I will be looking at how Devcoins are a more viable solution than Bitcoins in this way, and also where their flaw is (or at least potential flaw). This is also a disclaimer that I personally hold Devcoins, but my goal is not to sell you on them; rather, it is to help gain a better understanding as to why they are different and why that may (depending on how you interpret it) be a good thing.

Bitcoin

When we look at Bitcoin, we usually focus mostly on either how much is out in the wild or how many we currently hold. In actuality, neither of these helps show the true supply, though, because there are other factors as well.

Bitcoin started out with a maximum of 21 million coins. There will never be more than that, because it was simply designed to have that exact amount. For people that are new to the crypto scene, this may make it seem as if there are 21 million coins in circulation, but that is not true. In fact, there are far less than that (the actual number is unknown) due to things like:

  • Formatting a hard drive and forgetting to back up the wallet
  • Not having an up to date wallet
  • Sending coins to the wrong address
  • Storing wallets on a flash drive and losing it
  • Encrypting a wallet and losing the password

Each of these events removes coins from circulation. There is no true way to completely delete any coins (as technically all coins are on the block chain and are not “in” a wallet; the wallet just allows access to them like a key) but if they are not accessible they can be considered gone. One of the problems with this is that there is no way to know (or even really estimate) how many coins are no longer accessible, since the only people with the information of how many they have lost are those that hold (or held) them. As a result, there is only one thing we know for certain: there are less than 21 million Bitcoins left and that number will continue to shrink as time goes on.

To help understand why the price should go up (through deflation of value), here is a scenario to help explain it. Let us take a car that is pretty rare like the Ferrari Enzo. There are 500 of these made and each has a value of a million dollars. After a week, 250 of them have crashed, leaving 250 left. Now that the supply has gone down to half, other collectors are starting to get more and more interested. As a result, the prices start to rise.

The same thing happens with Bitcoins. Essentially you can think of each Bitcoin as being like a Ferrari Enzo. When someone crashes theirs (deletes, forgets the password, etc.) the value of all the remaining ones go up. Of course there is a problem here, which is that with the Enzo we know how many are left and what condition they are in because they are registered and inspected. With Bitcoins this does not work, but there is another way to judge the current supply (though it will not give the total supply). This is to run it like a stock market, looking at how many are available. If there are twice as many available today as there were yesterday, we can estimate that the price should drop (inflation should take place). If there are only half as many, we can guess that the price should rise (deflation should take place). While neither of these are absolute, they are the best ways to determine value that we have available to us. Being that Bitcoin is a peer to peer currency and that it is secure as such, there is simply no way to get accurate estimates. Some have argued that you can see how long coins have been in addresses and make judgments like that, but I am positive there are some early adopters that are still holding out for the long run.

Devcoin

Devcoin is different than Bitcoin in that it has an ever increasing number of coins available. Devcoins are created at a rate of 180 million per 4 thousand blocks (around 35 days or so) and continue to be created at that rate indefinitely. A way to look at this is that it is like the USD, where the number of them in circulation is increasing daily, and therefore we experience inflation instead of deflation. Even if 90 million coins are lost one day, that will be accounted for in just half of the round's time, so it does not have nearly as big of an impact as with Bitcoin.

To bring this situation back in to the Ferrari Enzo example, let us say you have 500 Enzos. After a week, 250 have been wrecked and are no longer usable. While this means that the value should go up a lot, that is not necessarily true in this case. In that same week, another 125 were created. In essence, the creation of new Enzos (or Devcoins, in this case) leads to more being available to the market, helping to increase the supply.

All of this is not to say that Devcoin does not have its flaw. The biggest one that sticks out is that the creation of new coins is both constant and indefinite. Bitcoin does not always create coins at the same rate, but it also has a cap. Devcoin contains neither of these. When we compare it to the USD, the thing that you have to realize is that how much new money is printed each day depends on various factors. What was made today may not be made tomorrow. This helps ensure that the supply does not completely overpower the demand (and drop the value to extreme lows).

Which of These is Better?

Really, both inflation and deflation have their own pros and cons. With deflation you can view the currency as like an investment. The longer you hold it, the more value it should gain (although it could also crash, so that is not a guarantee). At the same time, this means that buying in to them costs more, increasing the risk later down the road. On top of this, selling or utilizing the currency is something that people often try to avoid because they are holding for the long run.

Inflationary currencies are much more fluid in nature. Because they should go down (or stay about equal) in value over time, they make a great source for spending (just like our USD). If we hold enough for 100 loaves of bread right now, in the next year that could only be enough for 85. Because of this, we are much more apt to trade them freely, since there is no real benefit in collecting them unless we are looking to buy something much more expensive or save for retirement.

When it comes to which system is better, I think a hybrid would work. I do not believe that a cap on the total number of coins is good for the long term prospect of coins, but a constant creation rate of new ones is not either. It should be variable, and should be based on either the current price (to help keep it stable) or the number being transferred from person to person. By running a system like this, it helps ensure that we work towards stability, rather than just throwing something out there and hoping it sticks.

Devcoin


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