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Over time, the marginal supply of Grin becomes a smaller and smaller percentage of the existing stock. This is very apparent when the supply growth rate decreases, as can be seen in the logarithmic supply curve above. Furthermore, at a certain scale, the actual amount of Grin in circulation is not important (as long as there are enough divisible coins to perform the functions of medium of exchange and measurement).
What matters is the supply rate, which is constant. Economically, the key to Grin's ability to retain and store value is the scarcity of its currency relative to demand. Anything that is scarce has to be in demand. If Bitcoin were unpopular, would it be scarce or abundant from an individual's perspective? So in the short term, the supply curve has little impact. Let's consider an interesting thought experiment by changing the analytical framework for thinking about Grin's issuance.
First, let's look at the launch of the Euro on January 1, 1999. It took more than a decade to prepare for the launch of the Euro (EU member states agreed on politics, operations, monetary policy, marketing, circulation, financial markets, banking coordination, etc.). On that day, the Euro was introduced in non-physical form (travelers' checks, electronic transfers, banks, etc.), and the exchange rates of all participating national currencies were locked at fixed rates against each other. In addition, all bonds and government bonds issued by Eurozone countries on that day were denominated in Euros. Due to the introduction of physical Euro banknotes, and the operational and subsequent problems of removing physical old banknotes, the old currency continued to be used as legal tender until the new banknotes were introduced on January 1, 2002. After that, the Euro was quickly accepted as a unit of account, not only due to regulatory provisions, but also due to people's expectations and valuation of Euro assets.
Market traders were surprised at how quickly the euro replaced national currencies. It was expected that trading in the Deutsche Mark would continue in parallel, but the market completely changed as soon as it opened. "When we deal with digital currencies, we ignore the physical part. Imagine that Grin was launched in January 2019, 20 years after the euro was launched."
Now imagine that the total supply of Grin in the first decade (31,500) can provide enough digital cash flow to support the digital economy functions of Grin as a medium of exchange, unit of account, and store of value. Harry Potter took his wand and gave Grin the magic of the first 10 years when Grin was released on January 15, 2019, and put it in everyone's hands.
The magic is that everyone in the market has 10 years of Grin in their wallet, and the issuance schedule continues, with transparency, predictability, linearity, and declining inflation.
On the one hand, when you think of it this way, the discussion about Grin’s huge early supply inflation in the first 10 years is less relevant. In reality, this vision must be implemented from the top down, or through the coordinated collaboration of all parties in this digital economy, and the infrastructure is already in place and in the hands of the people.
On the other hand, this is impossible to do for any cryptocurrency: there is no infrastructure, there are technical issues, there is no adoption and the knowledge is not there, we don’t have an entity with hundreds of billions of dollars or euros to deploy to make this happen. The Grin team is not a central government, it is a differentiated incentive design that attracts and rewards miners, etc.
A privacy-focused decentralized PoW cryptocurrency couldn’t have started out like the Euro because it was launched more like a startup, and for good reason, in order to grow, develop, and reach product-market fit. Grin, Bitcoin, etc. were all launched through a bottom-up, grassroots, digital, entrepreneurial community activity approach because a) we had to incentivize early mining to ensure network security, and b) this was the right path to achieve the desired state of infrastructure buildout, adoption, etc. This is a path to “product-market fit,” but in this case, our startup “product” is a privacy-oriented digital currency that is a privately provided open source commodity.
Also, it's worth pointing out here that you can't really give a correct inflation rate for a "cryptocurrency". There is a completely unknown demand function that needs to be estimated. There are goals and properties of the product (the currency) during creation that affect demand and how it changes over time, there are cybersecurity design issues, and you have a lot of unknowns and risks. However, if a cryptocurrency is intended to be used as money, then it should be treated like money. There have been hundreds of years of research on money, and a lot of theoretical and empirical research has been done around the topic. Too many tokens that are treated as money are actually more like securities, commodities, and utilities/services than pure money.
Release and expectations
In a completely open and free market (thus arbitrage opportunities), Grin will not be less speculative given its limited circulating supply relative to other cryptocurrencies. Grin has strong capital inflows and a lot of interest. Furthermore, capital inflows and existing stock of money in cryptocurrencies are much larger today than when Bitcoin, Monero, or Zcash came out. Volatility will exist, and the supply curve will not prevent this because supply does not affect demand under the well-known fixed linear supply curve. The only way supply can affect actual demand is to unexpectedly change the supply curve (as central banks do with fiat currencies and markets).
However, the Grin team proposes the inflation hypothesis this way:
Inflation may make prices more stable, and as an experimental hypothesis, grin inflation rates may discourage hoarding and improve its distribution. This disincentivizes "whales" who would otherwise have excessive control over asset prices and dilutes speculative bubbles and price volatility...
Given the high prices needed for mining and profitability, and the volatile prices for speculation and rewards, it is difficult to determine if early inflation will make prices more stable. Early on, capital, investors, traders, and speculators play a large role in creating real demand for cryptocurrencies. Therefore, in addition to the early monetary inflation rate, what matters is a) expectations, b) capital inflows, and c) the first early use cases and usage. The need for investors to realize monetary returns will help believe in cherishing Grin, and at some point promote and spread Grin among the usage population. Speculators will continue to buy and sell Grin if there is market liquidity and when they believe in future value.
Loss rate
To some extent, what matters is the currency burn rate. How many people have permanently “lost” their private keys for various reasons (lost seeds, passwords, hardware loss, death of the holder who did not share the keys with loved ones, wallet vulnerabilities that make it impossible to access the keys)? In the case of Grin, the founding team stated:
“It is very likely that at least 2% of tokens are lost every year: multiple studies show that…”
However, if Grin becomes valuable, the loss rate will change - people will then care more about their assets. Most Bitcoins were lost when people could not imagine the high future value of Bitcoin. The important thing is:
◆ 1. Can we know Grin’s loss rate? Maybe.
◆ 2. Even if we know, do these perceptions exist among currency users, or are they just the focus of investors, traders, and developers? I doubt it.
◆ 3. Even if these perceptions are widespread, will most ordinary users care? No.
Most users will not know or care about this, just like they don't know about the dollar or any cryptocurrency, or just like many Bitcoin buyers don't know that a large portion of Bitcoin's supply has been lost. However, people can feel the impact of currency loss in daily use, because once Grin is put into actual use, it is more important to see how the loss rate and supply rate affect the exchange rate equation (the quantity theory of money MV=PQ), and thus the price of Grin. I will not consider this analysis because there are too many unknowns in the equation. If the supply of newly mined Gri is lower than the 2% loss of Grin tokens per year, then the total supply of Grin may decrease. If so, then Grin's inflation is overestimated and Grin may become deflationary in the long run. The higher the loss rate, the more likely Grin will become a stronger form of value storage currency. This will likely increase people's interest in this currency. However, don't forget that what is really more important than supply is actual demand. However, we can equally assume a loss rate of 2% between cryptocurrencies and fiat currencies, in which case, the dynamic evaluation of them will not change much.
Other considerations
In the past, currencies have been severely affected by inflation and have disappeared or lost a lot of their value, such as fiat currencies. Monetary deflation increases the value of money, making people want to hold it into the future and use it as a source of savings for subsequent consumption. Gurdjieff's Law (commonly known as the "bad money drives out good money" law) is not really a "law" and cannot withstand empirical testing. It may only apply in a world with fixed exchange rates, which we do not.
Equally important is general irrational user psychology. People don’t know the exact monetary policy of the United States — they know nothing about it. Likewise, many Bitcoin buyers don’t know about Bitcoin’s issuance schedule, supply, etc. Do users care about this when using Grin? Doubtful. However, people’s cognitive response is relative price, comparing 1 Grin to 1 Bitcoin, and many people will buy Grin thinking they can “own” the entire Bitcoin. This is human psychology at work.
The reason why stable currencies become units of account is the widespread demand, use and social acceptance of stable currencies. A stable issuance plan is not necessary. The US dollar, despite its constant inflation and devaluation as a legal currency, can be considered a stable currency due to its status as a global reserve currency for settlement. The US economy is the largest in the world and has policies or influence on global currencies, including trade, investment standards and processes through international political institutions such as the WTO, the International Monetary Fund, the World Bank, the G20, the G7, etc. It is social civilization that creates stable currencies.
Comparing the Grin Monetary Model to Bitcoin, the US Dollar, and Gold
To better understand Grin’s supply function, let’s compare it to Bitcoin (the leading cryptocurrency), the U.S. dollar (the global reserve currency and global unit of account), and gold (the leading metal store of value for thousands of years).
The chart below shows the supply schedule and monetary inflation rate for Grin (starting in 2019), Bitcoin (starting in 2009), USD M2 supply (starting in 1867), and Gold (starting in 1800).
M2 stands for money in circulation, which represents funds that are directly available for spending (currency, checks, direct deposits, savings deposits). The M2 data is the earliest record we have found, and data estimating global reserves of gold dates back to the mid-1400s, so we decided to choose spot gold from 1800. When technological advances increased gold production, the gold standard monetary system (the value of a country's currency is directly tied to a fixed exchange rate with gold) was adopted by the vast majority of developed countries in the world.
Grin issues 1 Grin/second, which is equivalent to a block reward of 60 Grin and a block time of 60 seconds. After 2069, Grin currency inflation is less than 2%, which leads to currency inflation deflation in the long run.
Because of the way the dollar is controlled by the government, it has inflation. This is despite it being the global reserve currency used for settlements and transactions. Since the U.S. stopped using gold in 1971, inflation has increased. Additionally, it is considered a store of value in many parts of the world because people have relatively more confidence in the U.S. economy and the dollar as a global unit of account than in their own currencies or governments (in the case of the Venezuelan Bolivar).
We can debate whether Bitcoin is a poor or great store of value, depending on the timeframe we look at (down 90% since December 2017 peak, up over 5200% since July 2013, up 7150% since January 2012, and 6,600,000,000% since August 2010), and very high volatility compared to gold and the dollar. However, volatility is decreasing as Bitcoin appreciates over time. What will happen with Grin in the future, expect it to be very volatile in the first few years and decades as well.
Let's compare the inflation timelines of these four currencies on one chart, as if they were launched at the same time. Grin's year zero is 2019, Bitcoin's year zero is 2009, and for simplicity, 1935 is the year zero for the dollar and gold. This allows comparison of their recent and current money supply rates. This helps better measure Grin and Bitcoin as opposed to the global reserve currency and the most popular global metal store of value. It is clear that Bitcoin, Grin, and Gold are much less inflationary than the US dollar in the medium to long term.
The chart below shows historical and programmed inflation since 2018, as well as trended inflation for the dollar and gold, to help understand how supply works over time. Bitcoin’s growth rate will be on par with gold around 2020, and below gold around 2024. Grin’s inflation rate is expected to be below the dollar around 2035, and below gold’s growth rate around 2065.
The sources of the above graphs and tables, unless otherwise stated, are calculated by the author.
Understanding not only the underlying technology, but also money, psychology and behavior, the function of open source communities, and how products are shipped and used to achieve product-market fit is extremely valuable in understanding cryptocurrencies like Grin. Grin stands on the foundation of Bitcoin and how it can become a potential privacy-sound 21st century digital currency. If it becomes as immutable as Bitcoin, perhaps we can call it "free speech currency." This is a huge risk and experiment, so be sure to do your own research. In an upcoming article, we will compare Grin more closely to other leading cryptocurrencies and privacy coins.
Of course, this article is not exhaustive or complete. We welcome all comments, suggestions, criticisms, and disagreements. |
