ZIP - Changing Zcash supply curve to 3% yearly after 2020 halving

1 - Header

ZIP: unassigned.

Title: After 2020 halving; change Zcash issuance to consistent 3% yearly inflation (no more halvings) until remainder of 21 million ZEC supply’s exhausted.

Proposer: @kek (zcash forums)

ZIP Status: Draft

Community Status: Final : @ Kek’s proposal: Changing Zcash supply curve.

Category: Process

Created: 09/04/2019

License: CC BY-SA 4.0 (Creative Commons Attribution-ShareAlike 4.0) [1]

2 - Terminology

To understand this ZIP it is critical that people understand the right terminology so their requirements can be quickly checked.

The key words “MUST”, “MUST NOT”, “REQUIRED”, “SHALL”, “SHALL NOT”, “SHOULD”, “SHOULD NOT”, “RECOMMENDED”, “MAY”, and "OPTIONAL"

Have special meaning and people should familiarize themselves with it. - https://tools.ietf.org/html/rfc2119

For clarity in this zip I define these terms:

· Spirit is defined as what is the intended outcome of the zip.[2]

3 - Out of Scope for this proposal:

· Everything except Zcash supply curve

4 - Abstract/Spirit

High inflation is jeopardizing Zcash SoV proposition. Zcash will maintain comparatively high inflation after 2020 halving.

Halvings introduce supply shocks that should be avoided on payment networks.

5 - Motivation

To continue improving Zcash as both a store of value, and medium of exchange.

6 - Requirements

Change Zcash emission schedule.

7 - Specification

· . After 2020 halving change Zcash emissions to 3% yearly inflation until remaining supply’s issued.

Raised objections and issues so far:

Implications to other users.

· Impact of this zip to exchanges and wallet developers might be non-trivial.

[1] - https://creativecommons.org/licenses/by-sa/4.0/

[2] - If there is contradiction between Spirit and any other part of the proposal that needs to be addressed. in the even it is not addressed Spirit is assumed to overrule all.

5 Likes

Question, why 3% ?

Comparing that to the fiat world where central banks have a 2% target.

An interesting difference is we’d hit our target all the time whereas banks usually don’t, nice advantage.

Just did some calculations and i think this would be doable only with a POS design:

If we assume that 10,500,000 ZEC have to be mined and of these 3% per year have to be released than it would result in the following:

Zcash final supply would be reached in ~33 years

The mining calculation would be (in case my calculation is correct!)

315,000 ZEC per year
= 863 ZEC per day
= 36 ZEC per hour
= 6 ZEC per 10 minutes
= 1.5 ZEC per block/2.5 minutes

This raises 2 major problems:

  • The network in my opinon can not be secured with POW mining, but it needs a POS design
  • The dev fund discussion would have to change to a total different level.

I like the idea in principe but it’s not an easy one to get there.

figured if the community decided to extend devfund 10-20% of that 3% could be going to ECC/ZF. figured 3% would still give miners a decent payout (at least 1 whole zcash unit when they win a reward). ; ) plus 3 is prettier than 2. honestly wouldn’t mind 2%, tho! i’m open to that (a lot of brain power/energy went into finding that number, so might no be a bad idea to follow suit)! this ZIP is a rough draft, ATM.

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thanks for posting numbers! honestly appreciate that!

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Are you sure? I didn’t double check my above calculation but if the calculation is correct a 20% dev fund at 3% issuance rate would mean the following:

0.3 ZEC per block for Dev fund at 20%
1.2 ZEC per 10 minutes would be dev fund
7.2 ZEC per 1 hour would be the dev fund
172.8 ZEC would be the daily dev fund at 20%
5,184 ZEC would be the monthly dev fund at 20%

That’s why i added in my first reply that it would bring the dev fund discussion to a totally new level.

1 Like

i’m out-n-about. i’ll double check when i get back to the homebase.

Yes, double check, i allready double checked meanwhile and if i didn’t make the same mistake twice both calculations are correct, but i suggest you double check them as well !!

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Scratching around for historical events that might match to see how this could play out, closest I’ve come up with is the 1973 OPEC energy crisis, two years after USD left the gold standard.

So, lets pretend that ZEC is oil, BTC is gold & USD is still bits of green paper (stretching things, but what the heck).

The supply cut forced prices up, along with shortages and damage to industry - the negattive aspects of that wont apply as ZEC is a (very) long way from global use, which leaves us with the ZECFIAT price going bat-country-nuts.

Non-OPEC producers (ie: West Texas) boomed, from what I read they saw 250% growth in the following two years. I would compare them to ZEC miners, so thats a pretty good future for them.

An important difference is there’s no way to increase ZEC production (you cant just drill more wells) so at this point history is no longer a guide, that would make the effects of a supply shock permanent.

Those times also saw the beginning of ‘strategic reserves’, state funded & lake-sized storage facilities - which sound similar to funds & secure vaults we’re seeing for BTC. Think that’s relevant as well.

DevFund? Yup, we’ll still need one of those, but if that comes from our own strategic reserve maybe we don’t. A different example, Norway invested oil income from North Sea projects & the returns on that now fund all their social programs.

Hopefully we have a few economists here (not the armchair variety, real ones that went to ‘economist school’). Anyone care to guess what would happen to the price?

Edit: I suggested at the beginning that ‘BTC equaled gold’, its only relevant as when all the OPEC trouble started some of the producers wanted to be paid in gold instead of USD.

2 Likes

You may not believe because my English is pretty bad, but i went to business & economist school :wink:

I doubt guesses could be included into a ZIP but as you asked for a guess on price under such circumstances here some thoughts from an economic point of view without any further calculation.

  • compared to right now it would of course dramaticly lower the inflation in the first years, but not in every year!

  • Regarding the last point at some time the 3% would be nearly equal and later even higher compared to the 4 year cycles it’s designed currently. If my thought is correct the 3% per year would nearly equal to the 2027 or 2028 year with the designed protocol and would be even higher in 2030. (Quick head mathematic without caculation!).

  • Back to the price guess (Short Term). It will of course raise the price as it lowers the daily, monthly and yearly supply dramaticly in the first years. But to what extend would be allready beyound guessing without knowing how big the real demand is.
    In theory there is a chance (if we exclude speculative short term demand) that even such reduction in issuance is still below the demand, about equal or indeed demand is higher. If we take today’s demand someone could guess/assume that there would be an impact but that could be even only a stabilizing one countering the downfall which in practice would still be an increasement. As said just in theory.

  • Price mid term: In my opinion it would balance mid term, means 6-8 years as the 3% effect wouldn’t be much more different per yearly issuance of ZEC than in the first years. Of course this is again only in theory without counting increased/decreased demand but using stable demand as of today.

  • Price long term: Here it gets a bit problematic as the proposed 3% per year curve gets into a time frame where it’s higher per year as the current protocol issuance curve. Means the inflation long term with the 3% proposal will be higher per year as the current design. This could in theory again be a incentive to go for other currencies that kept the original design with halvings and have at that time nearly no more any inflation at all. Even more if someone can assume that by than a lot of coins will or at least could have the same privacy level as Zcash has.

The above are just logical guesses, there will of course an impact of ZEC price, i personally have no doubt this will happen. The problematic is more if this price increase can keep the network stable and secure?

Mining profitability without an extreme price increasement would be unprofitable. I guess that at least a price of $300-400 per ZEC is needed to keep the miners profitable. Maybe even more, as it’s up to what percentage would go to the Zcash dev fund. But as a good starting point i used here the reduced block reward in the calculation some posts above. It would drop from 12.5 to 1.5 ZEC per block. Means a good starting point is to assume that at the same todays hashrate and difficulty ZEC price must be 8-10x higher to keep mining profitable, or let’s say at todays standard. Or in price terms ZEC must be $400-$500.

IF we take the 5.184ZEC as a 20% dev fund (that’s the result of ZEC by a 3% issuance) than at current price this would result in about ~$250k as a dev fund. As we know that the 20% should result in at least $1M for funding the least it needs is a 4-5x price increase, means ZEC must be at least $250.

With knowing only the real supply curve but not knowing the real demand, real volume, real anything nobody can make a fact based whatever calculation on how such change would have an impact.

The best guess is to label it as positive, negative, neutral and i would go for these lables for the different time frames:

Very short term: Very positive
Short term: Positve
Mid Term: about Neutral
Long Term: Negative
Very long term: Very negative

The above is compared to the current design and it’s halvings.

Edit: Thinking more about long term and very long term these effects could be softened maybe by reducing the issuance further to 1% or example, but than again reaching the supply fully would end in the year 2075-2100 somewhere.

2 Likes

reddit seems to like the proposal

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You know what, I think this is a good idea. I’m not sure about the specific numbers, but, like… is anyone in favor of current Zcash inflation? (Inflation relative to current supply, not relative to the total 21 million.)

I agree with @boxalex that we gotta make sure that mining is still profitable. As long as that’s feasible, it’s practically a gift to all coinholders.

Well… I guess if you believe that the market for Zcash is rational and efficient, then total supply is already priced in, and inflation w/r/t current supply shouldn’t matter.

But I don’t think that’s the right way to look at it. The price of ZEC at any given time is determined by the intersection of supply and demand at that time. When supply is growing faster than demand, of course the price will go down. So far the Zcash community has only focused on increasing demand, but it’s certainly possible for us to change the supply dynamics.

If I’m right and the issuance rate affects the price of ZEC, does that mean we shouldn’t fiddle with it? Would it cause regulatory problems? I am not a lawyer :grimacing:

@tromer, what do you think?

2 Likes

I thought a bit more about this proposal and while it is like everything a trade off it might be well worth thinking more about it, no matter that in my opinion we missed that train allready for 2020.

Just some further thoughts how this could work out:

  • In my opinion the POW mining is the biggest problem with this approach. There is a valid chance that overnight, at the time of change of the issuance, mining will not be anymore profitable for miners leaving the network naturally on risk and shifting incentive from mining for profit to attack the network for profit.

  • The only current valid option would be a some kind of POS design and/or maybe a hybrid POS/POW one, while i doubt that with such small issuance a sudden the later would work out either. But this would be part of a further research and calculations.

  • A change in the supply curve would be another broken promise actually as it would totally change the current consensus, blockrewards, remove halvings, just everything actually expect the max. supply of 21M ZEC. I personally think it could be the most acceptable broken promise from all so far, but that’s subjective for sure.

  • IF a 3% per year ZEC issuance is choosen and this with a POS design the dev fund approach must change as well somehow to fit the new circumstances. The current dev fund discussion and proposals are just not made for such dramatic change in issuance. Not even talking it must be clear first if there are stakers or miners or both.

  • The short to mid term effect for the dev funding itself would be extremely positive in my opinion as it would for sure give ZEC more stability, less volatility and it for sure would lead to a price increasement, even undoubtable in my opinion. the question is only how much and this of course can not be forseen. but less volatility and more stability in the ZEC price should all be in favour for a new dev fund.
    Compared to the current situation and if not changed the situation from 2020 - 2024 there is a more than big chance that ZEC price will continue to decline exactly due this by design bad choosen supply curve. In my calculations the first halving would not be enough to counter the inflation rate in 2020 -2024 IF demand doesn’t drasticly increase.

There are more points in favour of a reduction of the inflation to 3% in combination with a POS like design, but i’am afraid many would be consider this as off-topic or marketing for POS, hence i will stop here.

1 Like

The price dynamics for cryptocurrencies in general, and PoW cryptocurrencies in particular, are very poorly understood. That said, here’s my gut-reaction response:

“Mining profitability” is a red herring. In the long run and in the absence of severe unexpected price drops, mining is always profitable, because rational miners won’t make investments that aren’t expected to turn a profit. What is true is that reduced mining rewards will price many miners out of the game and reduce the overall hashrate.

The cost of reducing inflation is in reduced PoW-based consensus security for the network, and reduced funding for developers.

Looking at year 5 for example, this proposal would bring inflation to 3% down from 12.5% (i.e., 0.25 * 21M over the 2nd halving period, divided by 4 years, divided by the 0.5 * 21M already mined). So that’s a greater than x4 reduction in the funds available to PoW security and development, as measured in ZEC.

You may conjecture that the reduced inflation will compensate for that, by increasing the USD value of that ZEC. But I would be very surprised if this increase will be by 400%.

And you also need to factor in the effects of reduced security and development. For example, a drastic PoW hash rate drop means an increased risk of attacks on the consensus layer, and the risk of such attacks would rationally affect users’ wishes to use ZEC.

Last but not least: the monetary policy is an entrenched part of of the market expectations / social contract, and it’s best to minimize disruption of these unless there are very good reasons.

5 Likes

personally, do believe rates will increase to a level that could support miners/dev… we’ll really never know unless we try.

the one definitive thing i think a lot of us can agree on - high inflation is not good for a currency.

i view this almost as a return to the original mining “slow start”.

thanks for spending time on this, and sharing your views!

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currently one of the most upvoted posts on the front page of r/ZEC


only unpinned post with more upvotes is 3 days old.

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How so? The “slow start” in Zcash’s first month had a huge inflation APR (initially infinite!), with with monetary base growing at quadratic rate.

Currently, inflation APR decreases over time, and the monetary base grows linearly within each halving period.

Your proposal would have a constant inflation APR, with the monetary base growing exponentially and then hitting the 21M cap – which is very different than both.

the slow start started with low inflation. think we should’ve capped it before inflation went off the charts. slow start also could indicate people are okay with changing supply curve.

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Let’s see. For example, at the very middle of the slow start we had 10,000 blocks, an issuance rate of 6.25 ZEC per block (= 12.5/2), and a monetary base of roughly 31,250 ZEC (= 10000*6.25 / 2). So inflation was 0.02% per block (= 6.25 / 31250). There are roughly 210,384 blocks mined per year. So at that point in time, the equivalent inflation Annual Percentage Rate was 18,702,296,055,523,720% (= 1.0002 ^ 210384). Not exactly a “low inflation”.