Bitcoin transaction fee 0.01

Peercoin was the first Bitcoin-based monetary system to use proof-of-stake as a mechanism to ensure its own integrity. However, there are some objections to Peercoin’s proof-of-stake model. This article presents those objections along with a similar system redesigned to address them.

In a simplified version of Peercoin’s proof-of-stake design, each node can use part of its balance as a stake allowing it to chain blocks. The bigger that stake, the more chances this node has of increasing the block chain. The reward for chaining blocks is 1% of the used stake as newly minted coins, annually. Conversely, making transactions requires paying a fee that destroys 0.01 coins per transaction. For example, after having chained a block using one coin of stake, Bob makes one transaction. Then, the fee of 0.01 coins he pays for making this transaction destroys the 0.01 coins he minted in reward for chaining that block.

Here are five objections to this proof-of-stake model:

1. It amplifies wealth inequality. Suppose Peercoin is the only form of money for both Bob and Alice. Bob’s income is 200 coins per month, while his expenses are 80% of his income. Alice’s income is 800 coins per month, while her expenses are 50% of her income. Assuming, for simplicity, that neither Bob nor Alice has any savings—which Alice is more likely to have—Bob and Alice will be able to reserve 40 and 400 coins as block-chaining stake, respectively. Then, Alice’s block-chaining reward will be 900% bigger than Bob’s, even though her income is only 300% bigger than his.
2. It makes the money supply unstable. Inflation becomes directly proportional to successful block-chaining rewards, yet inversely proportional to paid transaction fees. This variable inflation adds an unnecessary source of price instability to the rather inevitable ones—exchange value of merchandise and velocity of money circulation—thus unnecessarily reducing price transparency and predictability. Peercoin should have a stable money supply, as Bitcoin will have after year 2140.
3. Whenever total paid transaction fees are less than total successful block-chaining rewards, all inactive or unsuccessful block-chaining nodes will pay a fee to all successful ones through inflation. This implicit value transfer disguises the cost of participating in the system.
4. As coins increase in value, the (now 0.01 coins) transaction fee will eventually become too valuable, thus requiring Peercoin developers to lower it. However, choosing its new nominal value is an economic decision—rather than a technological one—which creates a political problem.
5. System integrity depends on extrinsic incentives: both the block-chaining reward and its offsetting transaction fee need arbitrary adjustment, which again involves an economic decision, thus creating a political problem.