Could Deflationary money work long term?

Hi Guys, I’m new to this community but have been following zcash since inception.

A thing that has been bothering me for quite a long time regarding BTC is that it is deflationary. Eventually the mining reward will be very little and very few new BTC will be mined until the inevitable 21m supply cap. Could this deflationary money actually work long term since AFAIK, it has never proved to work before in human history. Even Gold is slightly inflationary, and that is by far the longest lasting & most successful ‘money’.

BTC is not used as money pretty much anywhere, it’s primary use has so far been as a speculative asset and a store of value. People tend to hoard it and never use it, and it’ll only get worse as the new supply decreases further. This is without even taking into consideration all the lost/destroyed BTC. The inevitable supply cap pushes humans to have this pessimistic scarcity mindset regarding the future which will probably lead to slow down in economic & human growth and will significantly increase the wealth gap between different classes of society if BTC were to take over the world like the maxis would have us believe.

Now, What if BTC were to suddenly turn inflationary when the mining reward drops too low e.g. Somewhere between the year 2050-2060, BTC suddenly starts adding around 1BTC/day to total mineable supply, and that continues on forever. It shouldn’t be too hard to put that into code, and by that time, BTC will be mature enough to withstand this change. People also won’t panic since it won’t be happening immediately.

I’m not an economics expert, I don’t know what the ‘right amount’ of inflation is, and what is the right time for introducing it. I’m just throwing a wild idea out there to hopefully start a conversation. I don’t know if this is a good idea or not, but I do believe this idea deserves a discussion.

I’m also aware that changing BTC like this is next to impossible since it is too big now and the community is extremely hostile to any suggested change (“cOdE iS LAw!!!”), and that is why I’m posting here on ZEC forums. ZEC has similar tokenomics, and is arguably heading in the same direction as BTC, but this community is much more welcoming towards new ideas than the BTC community (at least for now since it is still relatively small).

It’s never going to happen for BTC, but maybe ZEC can adopt a new economic model and succeed where BTC has clearly failed as money. Satoshi was (probably) human, Why couldn’t he have made a mistake with BTC tokenomics? Why should we treat Satoshi’s ideas like the word of God?

I mostly stay away from discussions on the internet and keep to myself, but the idea of uncensorable private money is too exciting for me to not talk about it.


Hi @LiV3WiR3 welcome to the forums :slightly_smiling_face:

I tend to think that the fact that it’s deflationary (a forever fixed amount) is a feature not a bug. The entire reason Satoshi invented Bitcoin (and Zcash followed the same model) was to counter the unlimited money printing by governments that debase the economy and individuals savings due to inflation.

I guess the primary question is what problem are we trying to solve by being long term inflationary rather than deflationary? Network security? Incentive to use rather than to hold?

Don’t forget that Zcash can be divided to .00000001 of a ZEC thereby making it still useful even if a “whole” coins cost is a high.

Also, what are your thoughts on the proposal for Zcash to go Proof of Stake?


You pose a super interesting question, and one that as far as I know has no real answer. As you correctly point out, the idea of widespread use of a truly non-inflationary SOV/means of exchange has no real precedent in recent history. Under the fiat regime (and commodity-backed money) some degree of inflation is desirable or even necessary - deflation or completely flat prices disincentivizes investment in the future and curbs the appetite for risk, holding back economic growth.

Now some maxis might see a future where currencies like ZEC or BTC replace fiat, but I think much more likely is one where they operate alongside each other. I think the question of whether or not central banks ought to have COMPLETE control over money supply is very debatable, but I’m very much of the view that they ought to and like will retain SOME control and maintain an inflationary regime that most assets and goods remain denominated in.

So a scenario where the supply of cryptoassets is flat/declining, while Fiat currency remains inflationary creates some really interesting dynamics. Will investors and consumers stockpile the non-inflationary asset, driving up the value while holding back the use case? I don’t know. But unless we presuppose the idea that Fiat money will completely disappear, it doesn’t necessarily follow that ZEC would need to introduce inflation to remain functional - only that it remain divisible into smaller and smaller units to reflect the needs of real-world transactions.

Anyway, I also don’t have any answers, only more questions. I have some background in economics but not to where I’m able to run models to try and envision possible scenarios I hope others will weigh in too and keep the conversation going.


Exactly @Shawn Shawn, as long as some amount of inflation remains in the form of an ongoing fiat regime, the divisibility of ZEC into tiny fragments will preserve it’s usability. At some point in the far future, even 1 ZAT might be an impractically large number to transact with - I wonder about the feasibility of even further sub-dividing 1 ZEC.

Imagine a future a where you can buy a loaf of bread in either USD or Microzats :slight_smile:


Hi! Thanks for posting such a thought provoking thread.

There’s no precendent, and I don’t think anyone knows what the perfect strategy wrt inflation is. I agree that Zcash is flexible, and think we have the luxury of a late start. If this becomes an obvious problem for Bitcoin, and an infinite, small tail emission is clearly the better option in practice, we have time and can adjust accordingly.

I think lost / destroyed coins are especially interesting. They make unknowable the size of every cryptocurrency’s monetary base. I imagine a system where emissions continue forever, supplied by dead coins (maybe they haven’t moved in 100 years or they’re in a deprecated pool). It keeps emissions flowing to miners/stakers, maintains a stable monetary base of 21M, and has a certain poetic “circle-of-life” feeling to boot. It also might be a bad idea, but it charms me. This is probably interesting:


I must mention here that I assume in my Original post that there will be NO FIAT in future and we all would be using Crypto.

My point in favor for introducing a ‘very slight’ inflation really comes from my limited understanding of Gold. Gold has some inflation and it has stood the test of time as a means of exchange + SOV.

I don’t know how it would impact network security, but introducing some gold-like slight inflation is definitely for encouraging spending and keeping the economic ball rolling.

I know that ZEC is divisible just like BTC, but I’m not sure how it changes anything. And It also has the same hoarding problems of BTC which I’m worried will only increase the wealth inequality further. You always see people storing their BTC in a HW wallet buried in their backyard, but how many people have you seen using BTC or SATS in daily life for buying stuff? and why wouldn’t the same thing happen to zCash? For someone living in the 1st world country, wealth inequality may not be very noticeable, but being from a 3rd world country, I see everyday what wealth inequality actually does to people.

I understand that Greed is a very basic human emotion and humans are unable to control their greed when they see a scarce asset, so the optimal inflation strategy might be somewhere in-between “money printer go brr” and “HODL forever bro”.

Regarding ZEC’s shift to POS; At first I hated the idea because I used to think that spending energy using POW gives the coin value. I still have some mixed feelings about it, but tbh, I think I still need to learn about it a lot more to pass judgement.


It’s an interesting idea to recycle old coins. Personally, I’d like for them to be left alone as forgotten or Lost treasures for future treasue hunters to find.


While the idea of recycling ownership is interesting, I would worry about the perceived “forced seizure” effect of such idea. If there were a family that would keep ZEC as their family fortune, and they don’t want it to be moved as that would reveal some information about such fortune.

It would be fun to write stories based on Zcash. What if the Atreides started as a family of cypherpunks that values freedom and privacy? I am waiting for the story @cypherpunkZero though. Hopefully we’ll have a bunch of fanfics based on Zero story.


I don’t think most lost/destroyed private keys have a lot of potential for Treasure Hunters to discover them. And we’ll never know how many lost coins/keys there are. Not entirely sure if this matters to a SoV/MoE, but I think it might.

And replying to @tokidoki:

I wouldn’t assume that moving shielded funds once every 100 years would be an impossible task to achieve privately, but I’m certainly sensitive to the perception of forced seizure. How do you feel in the case of pool deprecation? I don’t think recirculating coins from deprecated pools is anything like forced seizure.


Significant deflation is harmful to economic growth. Here I am using the term “deflation” in the widely-accepted meaning, i.e. a decrease in an economy’s general price level. When deflation is used in the cryptocurrency sphere, often people mean “decrease in the money supply” or “decrease in the rate of growth of the money supply”.

Deflation is harmful to economic growth and welfare because it encourages people to hoard money rather than spend it. If you don’t believe in this phenomenon, I encourage you to visit some BTC communities where spending of BTC is discouraged due to a belief that its purchasing power will increase in the future.

Efficient allocation of factors of production and goods and services toward their best use is a major benefit of free markets. Slowing the allocation through deflation prevents the free market from fulfilling one of its main roles. At the extreme, extreme deflation can turn into autarky at the individual level.

An unchanging money supply generally will lead to deflation. Why? Examine the equation of exchange:

M * V = P * Q

where, for a given period,
M is the total nominal amount of money supply in circulation on average in an economy.
V is the velocity of money, that is the average frequency with which a unit of money is spent.
P is the price level.
Q is an index of real expenditures (on newly produced goods and services).

Q is basically real GDP. As a simplification, assume that V, velocity, is constant.* Then it is easy to see that if there is economic growth, but the money supply M is constant, then the price level P declines. That’s deflation.

I know of few macroeconomists more hawkish on inflation than Milton Friedman. One of his proposals was to have central banks step back from active management of the money supply and instead commit to a fixed percentage increase of the money supply every year indefinitely, targeted roughly at the expected rate of economic growth in the future so as to keep prices unchanging. This is the K-Percent Rule.. So even Friedman probably would not have support BTC’s (and Zcash’s) eventual transition into an unchanging money supply. And as has been pointed out above, the issue of permanently lost private keys makes the problem worse.

* : Central bank policy can affect the velocity of money. For example, over the last decade or so many central banks have created a large amount of money through quantitative easing and pandemic support policies, but the money has been stashed in places in the financial system such that it isn’t readily spent, and therefore velocity declines and inflation is less than the rise in the money supply. Note also that the equation of exchange is not an economic theory, but rather an accounting identity; velocity is defined in terms of the other three easily-measured quantities. However, subjective views on which variables in the equation of exchange are exogenous and which are endogenous do shape competing economic theories.


Reading this gave me deja vu of my quantity theory of money classes :slightly_smiling_face:


I wonder about the hoarding problem: if there was only the option to use btc to buy things (in the case of the btc community hoarding problem you mentioned), would people spend it more freely? I’m assuming people holding btc still use fiat currency to pay for everyday things, so they can afford to hoard their btc.

Another factor is the culture that has been set for a given crypto community. If the culture of the community is to use the currency instead of hoard it for an eventual payday, might the deflation problem be overcome?

I like to think of two other factors as well: privacy and utility. I know when I started using Zcash shielded transactions, I spent my zec much more freely than btc. I think there is something to be said for knowing that nobody is watching your transactions or no one will dig into them in the future to come asking capital gains taxes on mundane transactions. I’ll be curious to see if private transactions alleviate the hoarding problem.

As for utility, I like to think of Eth as a comparison. Since there is so much utility and economic opportunity (investing in DeFi, NFTs, etc.) for using eth, it gets used quite a lot. Indeed, under eip 1559 the eth supply only becomes deflationary when it is being used (not hoarded)! Unfortunately, btc does not have as many use cases and so may get used less, perhaps contributing to hoarding. This is one of the reasons I think it is paramount for zec to develop as many use cases as possible both in the digital and real worlds.


It can only work for a limited set of spot exchanges but not as a universal unit of account and a general medium of exchange for an extended period of time. This is because many financial contracts are spread across time and are almost always nominally fixed, i.e. they don’t automatically adjust to changes in the real purchasing power of a single unit (creditors don’t renegotiate nominal debts downwards, workers rarely accept nominal wage reductions, etc.). In a society where people are free to enter into money-denominated contracts, the total value of contracts outstanding will quickly outpace the availability of a deflationary currency which depresses spending (i.e. incomes) and is thus prone to liquidity crises. While this may be great for creditors and asset holders (at least in the short term), for entrepreneurs, debtors, and workers it increases the likelihood of financial ruin. From the point of view of social stability and cohesion, it is generally preferred that most of the people are able to pay most of their bills most of the time. As long as population and economic activity are growing, this is best achieved with an inflationary currency.


For what it is worth, I really do not believe that fixed-supply/predictable-supply/volatile assets are bad for medium-of-exchange, for long-term contracts, for store-of-value, or for anything

The reasons I am skeptical of that claim are all three of: theoretical, emotional, and empirical.

On the theoretical side, that argument boils down to “Regular people are too dumb to understand how the value of a currency might change over time, and the impacts that could have on their own plans, and the solution is for wise economists/politicans to manipulate the accounting numbers of the regular people in a way that they won’t understand but will trick them into accidentally doing what’s best for themselves and for society.”.

I am very skeptical of that idea theoretically — I don’t see why in the long run regular people aren’t at least as good if not better at adjusting their behavior and planning for their future than wise economists are. In any case I’m more confident of the regular people having their own best interests at heart, than I am of the wise leaders having the people’s best interests at heart.

I also find it repugnant. I don’t want to be that person. It feels wrong to me. Not saying anyone else is bad or wrong if they think it’s a good idea, but for me it just doesn’t sit right.

But most of all, it doesn’t fit empirically with the facts that I’ve seen. For example, I remember Paul Krugman saying this about Bitcoin in around 2011. He was saying, “this Bitcoin thing can never be used as real money, because it is “deflationary” (although I always wondered if he knew that the Bitcoin supply was inflating at a tremendous pace during those years), and a deflationary thing can never be used as money.” And then what happened? This:

In other words, Bitcoin experienced the typical “hockey stick” of exponential take-off, of more and more people using it to buy and sell goods and services. (Note that this graph excludes any “store of value” measures and it excludes dark-net markets — this was just a graph of above-board, taxpaying, “medium of exchange” usage of Bitcoin.) So, it looks to me like Krugman’s prediction was falsified by later data.

Anyway, this discussion may be somewhat theoretical, at least for now, because the Zcash money supply is pretty tightly locked-in by the current Zcash community and it would be hard to change, but I wanted to speak up because I didn’t see anyone else just expressing skepticism about the assumptions.

P.S. But after 2017, usage of Bitcoin for normal payments dropped off. This wasn’t because of money supply policy — which hadn’t changed — but because of transaction fees skyrocketing. Ethereum later went through that same problem. My conclusion is that if we want ZEC to be useful as money, we should prioritise UX and scalability so that transaction fees remain low and predictable even while usage levels skyrocket.


Being “locked-in” makes me very sad. But I appreciate the “for now” :grimacing:. In my mind the only technical problem that I haven’t seen discussed is that ZEC will be the underlying fee/reward for transactions for shielded assets. If we solved this problem (e.g. fluid fee mechanism or forking/shard/mergeable chains with different base assets) there’s no reason why we couldn’t have all the economic models represented in Zcash as seperate shielded assets.

Also, at a high level, I don’t think we should automatically assume this would be a bad thing for Zcash/ZEC.

Its a good question and yes, most main stream economists think deflationary currency is bad. Some people in cryptocurrency feel otherwise. Speaking as a cryptographer and one of the original inventors of the protocol in Zcash, the nice thing is the debate is moot for Zcash. Zcash can support both deflationary money, neutral money, and inflationary money on the same platform using ZSAs/zk-assets. Then we can give people the choice. And they can all get shared privacy no matter which choice they make. Because the actual point of Zcash is privacy.

Of course, some people don’t like choice. I’m no doubt butchering the details here because I do crypto(graphy), not currency: but I’m told (by @valkenburgh) this is a philosophical debate in Austrian economics between Hayekians and Rothbardians. Hayek believed there should be a free market for what is money: people get to choose, for example, if they want deflationary currency vs inflationary. Rothbard believed institutions pick and there should be one.

History aside, what I have noticed is there are some very loud voices in cryptocurrency who seem to be of the Rothbardian persuasion. They are also usually of the “this one thing nearly everyone thinks is bad, is actually good” view of things (in this case deflation). And they tend to think there should be one true coin and it should be deflationary. It’s an odd choice for a group of people who generally view the modern financial system built around one true coin(the US dollar) as a monopoly imposed on them. Apparently there problem isn’t the imposition, its that they were not the ones doing the imposing. The only way I can explain it is to keep in mind 1) just how much of their OneTrueCoin they are holding and that they think their deflationary position is the best way to cause those coins to appreciate 2) their lack of expertise in … well pretty much anything. Most voices in cryptocurrency got lucky and now think they know something. It’s like asking a lottery winner for math advice or how to break a cipher.


@zooko, don’t you think that denominating contracts in a deflationary means-of-payment can easily lead to financial problems? For example, are you comfortable recommending that millions of people take out multi-decade mortgages or businesses sign wage contracts denominated in hard-capped BTC or ZEC that a lot of people prefer to hold for investment purposes? A deflationary environment can be quite destructive in an economy where the financial survival of both households and businesses is entirely dependent on their ability to continue making payments they’ve agreed to in the past: even a small shift in economic sentiment can dry up liquidity and destroy demand (i.e. incomes), which can easily lead to mass insolvency and to all sorts of social tensions, political instability, and even violent conflict. It’s not that there cannot be financial crises also in inflationary environments but there’s considerable evidence and agreement that deflation multiplies both the risk and economic/social damage, at least in large advanced economies where the scale and complexity of economic activity is too large for most economic agents to consistently make adequate predictions about the future (i.e. where uncertainty is very high). I should re-emphasize that none of this is to say that something like ZEC can’t be used for spot exchanges where it’s much easier to change/renegotiate nominal prices, or that something like BTC can’t be a fantastic long-term investment vehicle. But whenever money itself (i.e. that which is most widely used as a financial unit of account and a general medium of exchange) becomes an investment vehicle, the economy as a whole is not poised for success, I’m afraid. But I’m definitely trying to keep an open mind here, so I’m curious to hear your thoughts.


Modern finance and economies that are based on inflationary economics need to be re-thought. Deflationary economies have worked successfully for centuries when a large metal coin mintage was cut into smaller pieces over the decades to account for the increase in output. There is surely a way to redesign every financial product considering a digital deflationary currency that is easily divisible. Maybe we get a world with a higher quality of goods and services instead of a high velocity of goods.

Thinking on a multidimensional front, although our world is seemingly globalized, the economies that are closer to certain natural resources will always have benefits from such resources vs people living in a metropolis operating purely from a service-based standpoint. Each ZEC is divisible by 100 million zats, and every local economy can price its goods in fractional zats, all handled by the Wallet/Point of Sale system for their region. Pricing of goods and labor can be set by each region’s people/business/government who will manage the inflation/deflation of local goods & services. They might even deploy a local token as a local currency(using ZSA of course), which can be easily swapped with zats. I imagine a time when one could freely travel everywhere and spend ZEC/zats around the world, without needing to worry about the underlying swaps or token conversions, similar to how we spend fiat today without worrying about the subsidies that enabled the local economy to price things or pay for labor. Zcash will thus become the ultimate fungible money powering global trade and finance.

(Year 2414 - goods priced in fractional zats in Altered Carbon, a fictional TV Series)


The historical tendency towards using the nominal value of tokens as opposed to their metallic content in financial accounting supports the point that a growing economy requires an elastic money supply. And that doesn’t even count the popularity of credit money which has been instrumental not only in the development of capitalism but also - as historians and anthropologists have shown - intimately tied to the known origins of money. A metallic standard (which is often hinted at by those who promote the ideal of deflation) has always been merely a special case of a much broader phenomenon, and thus not a good starting point for a general theory of money.

But let’s leave all that aside for the moment and, for the sake of argument, assume a hard-capped monetary supply and a deflationary price environment in a large advanced economy. What you’re suggesting is that, in an economy with a growing population and activity (which usually means an expansion of financial obligations), instead of gradually inflating the money supply to reduce the likelihood of mass financial failure, everyone should regularly renegotiate their financial liabilities downward. In other words, people need to be conditioned to accept nominal wage reductions, creditors to accept receiving back less than they lent out, businesses to earn less than they invested, etc., not to mention the higher risk of economy-wide liquidity crises that can lead to serious economic depressions. Such a system would no doubt encourage extreme financial discipline (which is often lacking in excessively inflationary environments) but don’t you think it would also increase the likelihood of financial failure and thus quickly trigger popular opposition? I asked @zooko this question and I’ll ask you as well: are you comfortable recommending that millions of people take out multi-decade mortgages or businesses sign wage contracts denominated in hard-capped BTC or ZEC?


I agree that an elastic money supply is important, hence the use of ZSA tokens by people/businesses/governments to create a local economy. I brought up the idea to re-create all financial products for a deflationary base asset, your points are tied to the idea that, if a sudden switch is done today, everything from wages, credit, loans can trigger a mass financial failure. We’ve seen such massive failures happen in history, repeatedly. With the current inflationary system, all that the central banks do is devalue assets over a long period and kick the can down the road through inflation.

I believe we will see ideas around assets becoming scarcer, divisible and still incentivize generations of businesses and people to provide goods and services to earn more of the scarce asset over time. The scarce asset holder would also be incentivized to spend their assets. Maybe there’s a way to fund comprehensive research about how deflationary economies would function holistically.

Today’s multi-decade mortgages products are suited for an inflationary economy and it might still work assuming the assets is taken in a city coin aka local economy token, and as the ZEC value rises (with real-world use), less ZEC needs to be swapped/paid in city coin to pay off the debt. Businesses might get to a point of paying ZEC/city-coin wages in real-time - every second/minute of work depending on the nature of the business.