Peercoin is an innovative project that pioneered the concept of Proof of Stake blockchain security in order to drastically reduce the energy consumption required to validate transactions. Since Peercoin was founded more than 7 years ago, a huge number of blockchain projects have adopted Proof of Stake in one form or another, though many have moved away from Peercoin’s approach based on the age of the minting coins (i.e. ‘coinage’) in the direction of implementations with constant block rewards that are more similar to Bitcoin’s block reward system. However, the Peercoin project takes pride in its unique approach because of the added security it provides by requiring that a validator remain invested in the network for upwards of 30 days before they are able to begin block creation. Coinage is a staple of the Peercoin security model, so its economic consequences are something we would like to explore in more depth.
When Peercoin entered the blockchain scene, Bitcoin was being modeled as ‘digital gold’ and its 21 million cap on the number of coins was lauded as a solution to the issues arising in economies all over the world where central banks were able to print paper without end. However, deflation can be a detriment to widespread use of a currency because it promotes hoarding instead of spending. Indeed, it is the centralization of inflationary decisions that should be regarded with suspicion, rather than the inflation itself. As such, Peercoin promises a continuous Proof of Stake minting reward of 1%/year. This sensible economic policy is taken as an economic fundamental of the chain, enforced by the decentralized staking method itself.
The promise of 1% minting inflation per year was implemented on a basis of coinage, which allowed all minters to claim their 1% by participating in block creation. However, in practice a majority of this reward is not claimed and Peercoin’s minting results in less than 0.5% inflation per year. Recently, the developers working on the chain have taken up the quest of changing this and fulfilling the promise of a full 1%/year proof of stake growth in the number of coins, without undermining the concept of coinage. The result is a set of rules that seeks to balance both the big minters and the small minters so that everyone is awarded their fair share.
The minting reward will be comprised of two parts, a dynamic portion and a static portion. The dynamic portion will use the standard coinage calculation, but augment it with a multiplier that is based on the total amount of coinage that was claimed in the year preceding block creation. Thereby, the dynamic portion is increased when participation in the chain is low using a year-long moving average to target the proper inflation rate. The static portion is a straightforward fraction of the existing coin supply that is split up amongst the blocks minted on average in a year. These two portions are weighted 75:25 dynamic:static such that the overall sum targets the 1%/year Proof of Stake inflation that has been agreed upon through consensus since the chain began.
To further understand the nature of this change, we can look at how the minting reward would look after this change occurs. Currently, there are ~26 million Peercoins in existence, and for demonstration purposes we can assume a constant participation fraction. Using these assumptions, a block reward of ‘x’ would now be:
(0.75 * x / participation + 1.24) PPC
Therefore, if you recently got a block reward of 0.5 PPC and there is 25% participation in the chain, under the new protocol that reward would be:
(0.75 * 0.5 / 0.25 + 1.24) = 2.74 PPC
As you can see, this new reward is 548% of the original amount, so we certainly expect to see more participation in the chain with these rewards, all while still maintaining the promise of 1% inflation per year. There are a number of mechanisms put in place to avoid bad actors taking advantage of this new system, such as a 20% minimum on the number used for participation, a 1-year cap on coinage to avoid rewarding those who are not participating for years, and the 75:25 split itself which motivates continuous minting using the standard client functions.
All in all, we expect this protocol change to significantly grow the number of minters participating continuously in block creation, thereby sustaining the Proof of Stake difficulty, and ultimately the security of the chain itself. In addition, guaranteeing the 1% inflation target will stimulate the Peercoin economy to grow and maintain good fundamentals throughout the ages.