I didn’t understand this from the white-paper - is interest just created (adding to future supply) or does somebody actually pay it (meaning no change in future supply)?
The interest is created by the client. It’s adding more NuBits to the supply when a user’s client un-parks them.
Thanks for clarifying. As a follow-up question, at some point in the life of NuBits there is going to be a larger than normal drop in demand, potentially requiring high interest rates for some period. Could the future increase in supply create any issues with the ability to peg at the end of that period?
A couple of people have asked that with the following two discussions:
Perfect, thanks, interesting debates!
There could be some issues. I personally don’t think interest rates will be the only mechanism that has an impact in regulating supply. There will be other mechanisms, whether in protocol, or off it.
I think a lot of people underestimate the result of current transaction fees on the supply. It costs .01 NBT to make a transaction. We can look here at the daily transactions of Bitcoin. Let’s use 70K transactions as our value. (70,000 * .01) = 700 NBT destroyed every single day if we could get to at least that rate. If a one year park rate is set to 6% there would need to be about 11,600 NBT parked at that rate to create 700 more NBT in one year. So let’s say 100 people bought and parked 11,600 NBT at that rate. That’s a substantial amount of money for most people to take out of their pocket for a year knowing there’s absolutely nothing they can do to un-park it besides wait. That would be a 69,600 NBT increase of supply just from that one parking example. Very scary, eh? Well in that same year 255,500 NBT would have been destroyed by transaction fees alone if the transaction rate was consistent for the whole year. To counteract the inflation of those parked NuBits we would only need about 19,000 transactions per day to reach an equilibrium between parking inflation and transaction fee deflation in my example. Parking rates won’t always be available either. It shouldn’t be a constant influx.
The more transactions with NuBits the greater the supply deflates.
Now keep in mind that Bitcoin transactions are drastically low compared to the potential utility of it. Just in the past couple of months places like NewEgg.com and Dell.com have begun accepting Bitcoins as payment. Also, regular everyday transactions are still not viable at the moment. Some places yes, but not to the extent of cash and credit cards. Grabbing a coffee on your way to work or buying a stick of gum is only possible in a small number of places. That transaction volume could skyrocket in the next couple of years. Especially since big payment processing players like Paypal are recognizing and accepting that crypto-transactions are here to stay.
By the time the infrastructure is there for everyday crypto transactions I hope that the Nu network will have matured enough to respond accordingly to supply/demand needs. The mechanisms we have today should be able to meet those needs for quite some time. It will be simple for payment processors to add us to the payment systems that will be available. Especially if we can show our ability to maintain the peg. People who don’t want the risk of volatility will prefer to maintain their spending money in NuBits. They same way they keep their cash in a bank instead of stocks. I think that’s a majority of people. The ones who want to risk 5%-20% swings in value on a daily basis of the money they store is much fewer. So I don’t see volatile coins as meeting the needs of people when we arrive to a marketplace where everyday crypto transactions are viable.
Mind you I still don’t think it will be enough on its own. But by increasing the adoption of NuBits into the realm of everyday transactions it can have more of an impact every day. Lots of people still want to hoard Bitcoins or other volatile coins in the hopes that the value will go up. Hoarding really isn’t a concern for NuBits. There’s no point unless you want to park and earn more. It’s designed to be spent.
I’m sure there will be other mechanisms, but I just wanted to point out that we do in fact have a passive deflationary mechanism built into the protocol and it shouldn’t be ignored.
Thanks for this detail CoinGame - I for one certainly had not thought about how large an impact transaction fees might have, quite enlightening. It sounds like the resulting deflation acts conversely to the inflation from parking interest. However they are driven by different forces and could be potentially orders of magnitude different, couldn’t they? I’m not sure how this can be used to regulate the supply, because its determined by the number of market transactions, which is beyond anybody’s control or even forecasting power. So I’m skeptical that its something that could be relied upon to offset supply growth if interest rates began to rise to concerning levels.
I totally agree. It’s not going to be the only tool. I outlined in this post how I think we could increase the impact of it in many ways by increasing the utility of parking and introducing burn addresses. As the network grows and the utility of the services we offer grows it could have a much larger impact than people give it credit for.
It will certainly not be the only tool, and there will probably need to be much more drastic measures available in the future if things go sour. I think finding passive mechanisms are just as important as the other attempts at resolution. Their impact will grow enormously as we increase the usage and utility of the network.