Dead-Reckoning and Bitcoin’s Inflation Control Mechanism: Re-visiting Satoshi’s Choice(s)

…a money would be more or less equivalently good if it had a completely steady and constant rate of inflation.~Ideal Money

We are back to the same old problem of failing to disambiguate the definitions of inflation and not identifying which definition we mean. Unfortunately this significant mistake is being made by key personalities that surround bitcoin’s narrative. Here I would like to annotate a little so the general interested reader can have a more accurate understanding of the relevance of the different definitions of inflation in regard to bitcoin.

What has happened is there is apparently a number of people that feel bitcoin’s finite inflation schedule of 21 million coins leads to a security problem in that there is no guarantee that the fees paid will cover the security cost when the miner’s reward runs out.

Painted Frog pointed out that Satoshi did in fact consider a non-finite inflation (ie increase in units):

I’ve written about this before because an early participant in the bitcoinforumtalk threads tried to tell me that Satoshi finally solved the cypherpunk age old problem of how to create a finitely supplied currency.

This is wrong.

The examples of cypherpunk attempts to create a digital currency had attempts to control the issuance of the money and to code away any vector for nefarious increases in the supply of units (or decreases in the purchasing power etc) but they were not all attempts to create a finitely issued money-it was not the problem to be solve!

Szabo admits this of his bitgold here with allusion to the idea that a demand elastic money is considered more ideal than a finitely supplied “trade-off” that Satoshi made:

Here Todd carelessly uses the phrase “non-ideal” inflation. But what is he referring to? The purchasing power? The supply of units? Or the non-idealness in regard to the security? Or does he feel these are interchangeable definitions?

JW points out something important) namely the impossibility of Satoshi programmatically serving John Nash’s argument or what JW THINKS Nash’s argument calls for). It is one school of thought, perhaps, that you can peg a money to an optimized basket of commodity prices and this would be ideal (ie purchasing power stable money). But with no given price oracle such a design would need to rely on some outside inputs:

Nonetheless we are 25 or so years out and just now starting to have the conversation that Nash was having with himself in his lectures:

What I don’t understand is where Peter Todd feels he has the authority and expertise to say this:

And I do suspect he is wrong. That the subject at hand is only comparable to what he THINKS Ideal Money speaks to. So we have another instance of another bitcoin elite who is willing to opine on a subject they are wholly ignorant to and since I am blocked by him and many of his peers the community has no recourse to call him on his ignorance and deceit.

Here is another tweet that does not properly disambiguate the intended definition for inflation:

So we want to question Satoshi’s motives:

And here is our problem:

An extreme compromise for an Austrian, Ancap, Cypherpunk. I do not agree with this. I didn’t find in the Austrian books I read (I have not read an extensive amount of austrian style economics I can admit) a call for a finitely supplied money (even gold is not finite in this sense). The cypherpunks were also not on this pursuit. As far as I know, in general, and also with much of the attributed Austrian philosophy, it is not a finitely supplied money that is the pursuit.

And to JW’s second point it is also an assertion that is not backed by even Austrian thought as far as I know. It SOUNDS intuitive that a finitely supplied money would be held as higher quality than a money with an never ending inflation schedule. But it is simply untrue so assert this as truth.

You cannot assert that the purchasing power would be lower without showing you are willing to assert without reason.

Todd returns us to the Keynesian orientation that in the long run we are dead:

I grow tired of the times I have to read of these people evoking Nash’s game theoretical insights while ignoring his life’s work on the subject of optimizing our money systems.

And now here I find my insight.

I have also wrote about a statement by Back that Satoshi solved the problem of inflation control. I tried to catch him on his words but I sensed a subtly that I couldn’t parse and I could never find the actually thread where he made the comment so I couldn’t explore it until now.

Here is Back explaining further:

I get this now. What he means was that they were philosophizing at the time about using POW to control the issuance of the coins. But if you do that then you can mine the coins faster with more computer power (a nuanced observation of “inflation”!).

This I think would prompt an economically minded thinker like George Selgin to suggest that over the long term you would want to counter an increase in computing power with a corresponding decrease in supply rate (and in this it is observable Bitcoin roughly matches a declining Moore’s law).

Here we can note that Selgin doesn’t think bitcoin’s finite supply or inflation rate is ideal as he is still calling for what JW notes is not possible-an elastically supplied bitcoin.

So then when Back talks about Satoshi and inflation control he is really talking about solving the last problem-the short term adjustment of the work required to mine a coin such that the intended inflation rate stays to its true course.

Here I am thinking about a not-oft cited writing by Szabo about “dead-reckoning” (bolded is my emphasis):

“…locating oneself in a Euclidean space, or a space reasonably projectable onto a Euclidean space — can usefully solve the navigation problem, figuring out such a location often requires different, and often more, information than you need to answer the questions of how to stay on or return to your desired route. And indeed this is what dead reckoning does — it gets you where you want to go with different information than what you would need to draw or find yourself on a normal map. I hope to explain more about this important incompatibility between the pilots’ and cosmographers’ systems during most of the age of exploration in a future post, but for now I will give an overview of the historical development of dead reckoning.”

Dead-reckoning is about taking periodic measurements that give an estimate on how far one has traveled and in what direction in order to make periodic adjustments to stay on course. It is a solution to a problem of limited information.

I think this is very akin to bitcoin’s difficulty adjustment algorithm-Satoshi’s genius innovation was simply that the system periodically adjusts the difficultly of the work problems based on how quickly they are being solved (ie how quickly new units are created aka inflation).

Like dead-reckoning this is a limited solution in which it only stays its course rather than a type of solution to find a destination that would require more significant information (inputs).

The Difficulty Adjustment Algorithm as a Basis For Nash’s Ideal Money

From a bitcoiner’s view there is no need to make this observation but if they would just consider it for a moment they might realize their own limited framework which they view bitcoin with.

Nash’s conceptual Ideal is a painted picture in which all nations inflation target based on a single array of commodity prices. But he notes that a technology advance could create supply shocks for different commodities being chosen:

We can see that times could change, especially if a “miracle energy source” were found, and thus if a good ICPI is constructed, it should not be expected to be valid as initially defined for all eternity. It would instead be appropriate for it to be regularly readjusted depending on how the patterns of international trade would actually evolve.

That the ICPI would need to be adjusted introduces a comparable problem that Satoshi addressed with his algorithm since it self adjusts. Thus bitcoin does not suffer from the problem that Nash admits defeats his ICPI proposal.

He does note however that considerations on the fundamental arrangement of the design of the basis would reduce the probabilities to socially acceptable levels:

Here, evidently, politicians in control of the authority behind standards could corrupt the continuity of a good standard, but depending on how things were fundamentally arranged, the probabilities of serious damage through political corruption might becomes as small as the probabilities that the values of the standard meter and kilogram will be corrupted through the actions of politicians.

It is interesting that although Nash wasn’t actually proposing a peg to an ICPI he did draw some form of an implementable insight from the concept:

The ultimately launched concept of “Ideal Money” became possible when I conceived of a practical basis for a standardization of the comparison of the value of the currency with an appropriate standard or ideal.