Why crypto-currencies have limits?
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Hi,
I was just wondering, why the crypto-currencies limits monetary creation (Limit mining)?
What is the purpose of the limits imposed? Should not rather have money creation by X% per year?
Because once the time limit is reached, or even gain beacoup mining became less profitable, money does not lose a portion of his strength? -
It’s actually an important aspect of the way the currency is issued. Let me try and explain why it’s important.
You’re describing deflationary economics, in which a decreasing amount of currency in circulation needs to support an increasing demand for that currency. The danger of this is a deflationary spiral that could ensue. Crypto-currencies are not affected by this because they are fundamentally different from government issued fiat currencies.
Deflation is a decline in the general price level. Deflation occurs when the price of goods and services, relative to a specific measure, decline. It is not necessarily that the value of the goods and services themselves declined, it’s usually because the value of the currency itself increased, as we so often see with crypto-currencies.
For example, let us consider an economy comprised entirely of beef and oranges where the medium of exchange is gold. Both beef and oranges can decay and are not consistent, and therefore cannot be used as a currency. In order to trade, people exchange gold for either beef or oranges. They see gold as a store of value that they can use to purchase beef or oranges in the future. What happens when the economy grows and we can produce more beef and more oranges? The price of both beef and oranges will decline. To the extent our productive capacity for both beef and oranges increased at the same pace, the exchange value between the two (the amount of beef for a given number of oranges) will likely stay the same; however, those who held gold as a store of value would now be able to purchase more beef and more oranges for a given amount of gold.
A deflationary spiral occurs when the value of a currency, relative to the goods in an economy, increases continually as a result of hoarding. As the value of the currency relative to the goods in the economy increase, people have the incentive to hoard the currency, because by merely holding it, they hope to be able to purchase more goods for less money in the future. A lack of currency available in the market causes the price of goods to further decrease, resulting in more hoarding.
In our economy of beef and oranges it is easy to see how this could occur. First, people see a significant gain in productivity on the horizon; we will be able to produce more beef and oranges for the same effort in the future. The supply of gold, however, is fixed. As a result, people desire to hold gold, because they will be able to purchase more beef and oranges with their gold in the future than they can now. This will lead to a decline in the price of beef and oranges as measured by gold (an increase in the value of gold). Limiting the amount of currency in the market available for exchange can also make transactions more difficult. In a complex system where we do not only have beef, oranges and gold, this can result in a deflationary spiral where no one wishes to spend their currency and the economy itself slows as a result of the limited number of transactions. Limited demand with fixed output results in a decline in prices, which further exacerbates the problem.
In practice, there is only a limited amount of ‘value’ that can be placed upon a good before it becomes too attractive to trade for other goods (thus ending the spiral). The only time that the ‘Deflationary Spiral’ can happen (to it’s conclusion) is when people can foresee a time where they are forced to use that particular traded article.
The popular money that we trade consists of the principal of the loans of other people. All this money must be someday ‘repaid.’ When people save (pay back their loans), the total monetary supply contracts. When people spend (take out loans), the total monetary supply is increasing.
If you have people who are hoarding money, the principal still needs to be repaid. Hoarding will make it harder for other people in the economy to pay back their loans.
Because people foresee a time where they need to pay back their loans (a future fixed expense), when the value of the money starts to increase (deflation), those with loans will endeavor to pay back the loans quicker. This causes the monetary supply to reduce, reducing the total amount of money available for repayment of loans, again making it harder for people to pay back what they owe.
This Deflationary spiral diverts funds away from the legitimate economy, to the repayment of debt. Causing the economy to stagnate and stop.
The key difference is that people don’t foresee a fixed cost (unit amount) that they must pay with crypto-currency. If the value of the currency that they own increases, then any future cost will take a proportionally smaller amount of currency. There isn’t any fixed incentive to holding that currency other than speculation. If the economy that uses crypto-currency grows, the per-unit value of that currency proportionally increases also.
Everything is the opposite of the popular fractional reserve banking system (because crypto-currency isn’t a debt but an asset). Crypto-currencies only deflate in value when the crypto-currency economy is growing.
Elaborate controls to make sure that currency is not produced in greater numbers is not something any other currency, like the dollar or the euro, has. The consequence will likely be slow and steady deflation, as the growth in circulating crypto-currency declines and their value rises. The fact that these are built into the supply is very much a feature of our new economy, and an important dial on the economic controls that when adjusted has broad reaching impact.
tl;dr: Because it’s A Good Idea™.
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I could not have said that better myself. Well explained. +1 Rep :)
It has made me hungry thou, so am off for a Steak. ;)
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Oh thanks ;)
I don’t understand some parts, because english it not my langage but I’ve understand the main part !