Peercoin was the very first Bitcoin-based financial system to utilize proof-of-stake as a mechanism to ensure its integrity. However, there are some objections to Peercoin’s proof-of-stake version. This report presents those objections along with a similar system built to address them.
In a simplified version of Peercoin’s proof-of-stake design, every node can use part of its equilibrium as a stake permitting it to chain blockchain. The larger that stake, the more opportunities this node has of raising the block chain. The reward for chaining blocks is 1% of the utilized bet as newly minted coins, yearly. Conversely, making trades requires paying a commission that destroys 0.01 coins each trade. For example, after having chained a cube with one coin of stake, Bob makes one trade. Then, the fee of 0.01 coins he pays making this transaction destroys the 0.01 coins that he minted in reward for chaining that block.
Here are five objections to this proof-of-stake model:
It amplifies wealth inequality. Bob’s earnings is 200 coins per month, while his expenditures are 80% of his income. Alice’s earnings is 800 coins each month, while her expenditures are 50% of her earnings.
It gets the cash supply shaky. Inflation becomes directly proportional to successful block-chaining rewards, yet inversely proportional to compensated transaction fees. This factor inflation provides an unnecessary source of cost instability into the rather inevitable ones — market value of product and speed of money flow — hence unnecessarily reducing price transparency and predictability. This implicit value transfer disguises the price of participating in the system.
As coins grow in value, the (currently 0.01 coins) trade fee will eventually become too valuable, thus requiring Peercoin programmers to lower it. However, picking its new nominal worth is an economic choice — instead of a technological one — that creates a political issue.
System integrity depends on extrinsic incentives: equally the block-chaining benefit and its offsetting transaction fee need arbitrary adjustment, which involves an economic decision, hence creating a political issue.
Transaction Rights Instead of Money
These five winners possess one common source: the extrinsic, pecuniary character of block-chaining incentives — the block-chaining reward less its offsetting trade fee. Therefore, only an nonmonetary block-chaining system may address all them. However, is that system possible?
Yes, if instead of recently minted coins — or perhaps old ones — that the reward for chaining blocks is the right to create transactions. Afterward, that reward no more has to be directly proportional to stake. By way of example, merely having double the amount of money owned by Bob is inadequate reason for Alice to make twice the quantity of transactions he made. Still, how to estimate the transaction volume required by a block-chaining stake owner? Can there be some objective indication of the volume?
Yes, even though just a generic one: the actual transaction volume in the computer system. Afterward, the payoff for Indices a block will no longer be a financial value, but instead the combined size of all transactions in that block as potential trade rights. However, this reward has to exceed its size for prospective trade volume to increase if necessary. By way of example, instead of recently minting 1% of its used stake a year, a block-chaining reward — in Peercoin, a bet output — could allow its winner to make a future volume of trades 1% higher than the combined size of all transactions in its containing block.
Here is how to implement such a nonmonetary block-chaining model:
The private key signing a block-chaining reward must sign every transaction.
Each transaction signed by the personal key signing a block-chaining reward must subtract its size in the maximum trade volume allowed by this reward, which causes the combined size of transactions the exact same private key nevertheless can signal.
This design addresses those initial five objections:
It can’t amplify wealth inequality: neither its block-chaining reward nor its own trade fee represents a financial price.
It can’t create the money supply unstable: its block-chaining reward generates money nor its transaction fee destroys it.
It can’t create all inactive or unsuccessful block-chaining nodes pay a commission to all successful ones through inflation: its cash supply remains unaffected.
It can’t require adjusting its minimal transaction fee, which is chaining cubes, to variations in its own invariable since absent financial price.
It can’t demand extrinsic incentives to its own block chaining, which is a requirement for making transactions.