Deflationary Payment System Might Be Bad, But Proof of Stake Makes It Worse

Deflationary Payment System Might Be Bad, But Proof of Stake Makes It Worse

So you might have already realized that the volume of cryptocurrency transactions are nowhere near any established payment gateways such as Visa where they claim to process 4,000 transactions per second (tps) and 56,000 tps during peak time. A comparison between several cryptocurrencies such as Bitcoin (3-4 tps) and Ethereum (20 tps) and Visa describes that scalability is an issue in cryptocurrency. I bring this fact forward before we dig down into the reasons why cryptocurrency model is not (yet) a good solution for a global payment system. There are works conducted by the community to mitigate the scalability, such as Segregated Witness (segwit) and block size increase, but those possible solutions are not really satisfying the requirement. The lightning network (or raiden network, a similar solution in Ethereum system) might be implemented to bring some microtransactions off-chain, but we might see more problems arise from such system.

The deflationary characteristic of most cryptocurrencies (let us take Bitcoin as an example in this article for convenience) is well discussed in this article, stating that the purpose of money is to serve people and inflation is required to keep the system works by incentivize people to spend the money, thus keep the system rolling. It is more profitable for people to use the money now than later when it has the best value. When you save your fiat money, you will lose a fraction of your money’s power to buy stuff because the future price of the stuff will increase. When consumption rate is strong, the production rate is stable, thus people keep their jobs and get salary every month.

In the scenario, a deflationary system such as bitcoin is a nonusable device. Everyone is incentivized not to spend money now but keep it because they believe that the future price is higher than today’s price. Saving is good in a way, but too much saving is bad for economy. When consumption goes down, the production rate also goes down: layovers everywhere and depression era starts.

No let us move to the Proof-of-Stake (PoS) consensus mechanism. PoS is somewhat praised due to its ability to fulfill the consensus function and unlike Proof-of-Work (PoW), it does not use excessive energy. The idea of PoS is similar to the way people save money in the bank a few years ago. If you save your money in the bank, you will get interest. So it is profitable to save money in the bank. Can you see the similarities? PoS deepen the problem in the deflationary system. People start to buy coins instead of buying what they need (primary, secondary, tertiary need, do not matter), and it does not help the economy at all. When the money system collapses, we can see it affects most part of our life. At the end of the day, we might want to say goodbye to our modern lifestyle, because the products cease to exist.

When you know that you are rewarded by not spending your cryptocurrency, moreover you are given more cryptocurrency to “stake” it in a consensus, then who is spending it? The fact that everyone needs food and other stuff too, they are enforced to spend a fraction of that cryptocurrency but that is all. No new invention might be found because there is no need to do it. Producers stop producing things because they get a good rate by staking their money (do not risk anything) and everyone will starve.

That is not a good way to picture the future, isn’t it?

What do you think? Write your comments.

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