Analysis of PoS coin mining and coin price - How to make mining more attractive

Chapter 0 Introduction

Regarding the issue of PoS coins paying interest for depositing them, simple thinking can easily lead to two conclusions: inflation, inflation, it must be a junk coin; holding the coin increases its value, users like it, it is conducive to promotion, and it is a good coin.

Obviously, simple thinking is not enough, and I want to analyze the PoS interest seriously.

Chapter 1: Bitcoin is also inflating

PoS coins are inflated. Yes, in terms of the number of coins, PoS coins are continuously increasing. But strictly speaking, Bitcoin is also inflated now. Now BTC is increasing by 1,800 coins per day. The number of Bitcoins was increased from zero. At the beginning in 2009, each block generated 50 BTC, and 7,200 BTC were increased per day. The annualized inflation rate in 2009 was 100%, and the number of BTC increased from zero to 2.628 million. From 2009 to 2012, for about four and a half years, the annualized inflation rate will decrease year by year. When it was the first half-year reduction, that is, in 2012, the annualized inflation rate was 25%. After the halving, the inflation rate was immediately reduced to 12.5%.

After the first halving (2012) and before the second halving (2016), in about four and a half years, Bitcoin's annualized inflation rate dropped from 12.5% ​​to 6.25%.

Bitcoin's annual inflation rate is now about 3.7%.

After the second halving, by the third halving (2020), in about four and a half years, Bitcoin’s inflation rate will drop from 6.25% to 3.125%.

This increase in Bitcoin issuance will continue in this regular manner until 2140, when Bitcoin inflation will stop and the number will be infinitely close to 21 million.

Chapter 2 Current inflation rates of new coins and various PoS coins

Now all kinds of coins, whether PoW or PoS, are basically inflationary. But the biggest difference between all these coins and Bitcoin is the number of coins contained in the genesis block.

The Bitcoin genesis block contains only 50 BTC.

New projects nowadays often include crowdfunding, ICO, etc. Collecting money from investors, and issuing coins to investors. All these coins will be created in the genesis block. For example, Ethereum contains 72,009,990.49948 ETH in the genesis block (60,108,506.26 ETH are issued to investors, and 11,901,484.239480 ETH are issued to the Ethereum Foundation).

At present, a large number of various coins are born, and they all contain a super large number of coins in the genesis block. The genesis block of EOS contains 1 billion coins; the genesis block of Vsystem contains 5.142858 billion vsys; and the genesis block of Cosmos contains 2.3635529 billion atoms.

After the genesis block creates a large number of coins, all these chains, whether PoW or PoS, will continue to issue a small amount of coins with each block, just like Ethereum now issues 3 ETH per block.

As mining increases, an inflation rate will be formed in terms of quantity. EOS has an annual inflation of 5%, Comos has an annual inflation of 6.94%, and Vsys has an annual inflation of 5.5%.

Generally speaking, PoS coins rarely have regular reductions in the number of new issuances like Bitcoin, until the issuance is zero. The block rewards of PoS coins currently seen are all fixed, and there is no halving mechanism like Bitcoin. In other words , the setting of PoS coins is often unlimited.

Chapter 3: All Fiat Currency is Inflationary

Fiat currencies, such as the RMB and the US dollar, are all inflationary. We generally measure the inflation rate of fiat currencies by the total amount of M2. But M2 can only have a statistically significant data, and it is impossible to be as accurate as digital currency. According to official statistics, the annual inflation rate of the US dollar is generally around 3%. It is easy to find reliable data on the annual inflation rate of the RMB, but everyone says it is 8% or even higher.

Of course, gold is also inflationary. A large amount of gold is mined every year.

Diamonds are even more inflationary. There are so many new diamonds being mined.

Bitcoin is also inflationary during our lifetime. It will only become constant in quantity, or even deflationary, after we die.

Chapter 4 Inflation and Devaluation

In people's imagination, inflation is often associated with depreciation. The continuous decline in the purchasing power of legal tender is the evidence for everyone. In fact, it is not that simple.

The relative size of the amount of currency and the corresponding total economic volume is the key to depreciation and appreciation. If currency is regarded as a general commodity, especially digital currency, its price must also comply with the law of supply and demand.

The increase in the number of digital currencies corresponds to an increase in the total supply. As long as the demand for digital currencies is also increasing, and the increase is greater, it will not depreciate, but will increase in value.

Whether it is PoW coins or PoS coins, the increase in the number of coins cannot simply lead to depreciation. The key is whether the increase in quantity corresponds to the increase in demand.

Scarcity refers to the fact that demand is greater than supply, not that there is less supply.

Chapter 5 Design of PoS Mining

The specific methods of issuing additional coins under the PoS consensus mechanism vary among blockchains, mainly in the following dimensions.

1. Issuance rate.

2. Liquidity settings: whether the coins involved in mining will be locked, and the lock-up period.

3. Is there a destruction mechanism? Some coins are only issued but not destroyed, while others have both a destruction and issuance mechanism.

4. The threshold for participating in PoS mining.

We compare three projects, EOS, Cosmos and Vsys.

The annual inflation rate is 5% for EOS, 6.9% for Cosmos, and 5.5% for vsys.

It takes 72 hours for EOS to redeem after voting mining, 21 days for Cosmos to redeem, and there is no lock-in period for Vsys redemption. Vsys has the best liquidity.

Neither EOS nor Cosmos has a destruction mechanism. Vsys’ transaction mining fees are destroyed by the system.

I tested the mining of three coins. Both EOS and Cosmos rely on Huobi Mining Pool to obtain income, and they share the HPT of Huobi Mining Pool. Vsys is the most direct, with a leasing function directly in the wallet. Any user can easily participate in PoS mining and directly obtain Vsys coins. Vsys is the most convenient and simple in terms of coin deposit mining.

PoS issuance should be tilted towards the user's advantage as much as possible, so as to increase demand. So I think the fourth point is certain, it must be as low as possible, so that users can easily realize the benefits of holding coins. It would be great if the wallet has a very convenient PoS mining function integrated into it.

I think many PoS projects are not doing well in this regard. Most PoS coins require a third-party company to help users mine, and then the company distributes the profits to users. For example, EOS makes the voting function too complicated, and block.one also declares that it is forbidden to pay interest to users, which is not user-friendly. I have always been very curious about this. Why is it set like this? I have asked many people for advice. It seems that it is because of some securities laws that say that directly paying dividends to coin holders is a kind of security and is subject to legal control. However, I think this is a bit far-fetched and not conducive to expanding users.

Users certainly need a high issuance rate, but they prefer prices to rise. If a large number of coins are issued, almost at zero cost, there will be huge selling pressure in the market, and the price pressure will be very high. Especially in a bear market, the higher the issuance rate, the faster the price will collapse. In a bull market, it is much better.

I don’t know what the specific design should be. As for the design of the inflation rate of PoS coins, if we just make a decision based on the inflation rate of the US dollar, I think it’s fine.

As for the destruction mechanism, I can’t say anything rigorous. Currently, few blockchains are designed in this way. But almost all platform coins, especially those of exchanges, have a proactive destruction mechanism by the project party, and this mechanism is implemented as a way to distribute rights to coin holders.

Ethereum plans to add a destruction mechanism, and Ethereum said that it hopes to destroy half of the gas (mining fees) in the future. Vsys directly destroys all transaction mining fees.

From the perspective of Bitcoin, in a design where the total amount is constant, destruction is definitely wrong. But for a mechanism like PoS that has no upper limit, I think the existence of a destruction mechanism is reasonable.

Chapter 6 Conclusion

I didn’t expect PoS to be a hot topic this year. PoS interest represents that users want more coins. Will this be a symbol of a bull market?