Peercoin – a cryptocurrency with built-in price stability and an energy efficient mining mechanism

Peercoin is a cryptocurrency inspired by Bitcoin and built on the same concept, but with some important differences.

According to a Wikipedia article

Peercoin is less wasteful than Bitcoin in its energy usage, to calculate and agree on who transacted what with whom.

Bitcoin is based on the “proof of work” principle, which means the more computer power you apply to the problem, the more likely you are to get rewarded. This leads to a computer power arms race, as Bitcoin “miners” need to heavily invest in both hardware and electricity to constantly run it, where “… as of April 2013 the generation of Bitcoins was using approximately $150,000 USD per day in power consumption costs.”

Peercoin has introduced a less calculation intensive concept called “proof of stake” which is more economical with computing power. Proof of stake uses the concept of “coin age”, which is the sum of the number of coins you own and the number of days you held them, to allow those holding the most coins for the longest time to calculate additions to the block chain in a more simple manner, using much less computing power.

Actually, Peercoin is using both the “proof of work” and the “proof of stake” kind of mining, with proof of work being predominant during the start-up period and proof of stake progressively taking over the issuance of new coins.

Peercoin is less scarce than Bitcoin, and therefore is not a deflationary currency.

One problem with Bitcoin is that it appreciates in value, which is why it is called “deflationary”. Deflating the money supply or taking a part of the money out of circulation, causes economic activity to diminish and prices to go down. Scarcity of money causes that effect. Bitcoin has programmed scarcity – there is a limited number of Bitcoins ever to be created and the issuing process slows down over time. Since the request for Bitcoin goes up with more people adopting the currency, the result is “deflationary”, meaning the value of each single coin goes up and prices denominated in Bitcoin go down. That is not a problem for those who invest in Bitcoin in the hopes that their money will be worth more in the future, but it is a problem for using Bitcoin in commerce. People like to hold on to Bitcoin instead of spending it. Also, lack of price stability means you never know exactly how many Bitcoins you should ask for what you are selling. Today’s price can be substantially different from yesterday’s price.

Peercoin’s programmers have found a way to counteract the deflationary spiral that is characteristic of Bitcoin. First of all, they set the total of coins ever to be created at 2.1 billion, which is 100 times Bitcoin’s 21 million. But even that limit is subject to being changed, if it ever needs to be. It is not an ideological limit but more like a number needed to make the  books balance.

The currency is programmed to have a yearly inflation rate of 1% – quite in line with and actually better than most of the fiat currencies we are using today. That target rate of inflation is maintained by balancing the difficulty of creating new units of currency with the currency’s popularity, measured by the number of transactions.

This already low inflation rate is then counter-balanced by a fee of 0.01 Peercoins for each transaction. The coins that are accumulated by way of transaction fees are destroyed rather than re-distributed, diminishing the programmed rate of inflation even further. The programmers hope that this way, a balance can be kept and that the value of Peercoin and thus prices expressed in Peercoin will be stable for a long time into the future.

There are other features designed to secure Peercoin from attacks and to make sure the historical chain of transactions does not get too unwieldy, but the two mentioned here seem to me to be the major innovations Peercoin has introduced to the Bitcoin protocol.

You can get some more details from the Wikipedia article linked above, but one thing not to miss to get the feel of the currency and the picture of where it is going, is the paper by Sunny King and Scott Nadal that describes Peercoin.

PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake

I would say that with Peercoin, we have a possible successor to Bitcoin.

Not to say that Bitcoin’s success will be cut short by Peercoin. Bitcoin will always appeal to the investors among us. Peercoin, on the other hand, is set to do in commerce what Bitcoin is doing in investment. It will allow payments instantly between any two parties that are connected to the internet, and it will do so in a relatively stable environment.

Peercoin is a currency that can be used to pay things in relative safety and anonymity, as we are used to from Bitcoin. But it is also a currency that is not having to satisfy investors by getting worth more and more. So it isn’t a currency that you would necessarily put your savings into, but it is – in prospective – a functional currency that can be used in a simple way and all over the world.

4 Comments Peercoin – a cryptocurrency with built-in price stability and an energy efficient mining mechanism

  1. AvatarJohn Silversmith

    Great article, thanks. You can also say that Peercoin will be more decentralized than Bitcoin because a few high-powered miners in the future will secure the Bitcoin network while average people (many, many more) all over the world will secure Peercoin. Cryptocurrencies have flourished largely because people desire a decentralized international currency. Bitcoin is not designed to fulfill this mission. Peercoin is.

  2. AvatarMatthew Slater

    Laudible intentions and clearly some improvements to bitcoin, but I don’t think it really addresses the fundamental problems of bitcoin.
    Its great that there is an elastic limit, although the engineers perhaps don’t realise the importance of the political process behind that limit.
    Why is any inflation desirable or necessary?
    Other cryptocurrencies sound more exciting, which for example clear payments faster or provide better anonymity.

  3. AvatarAaron

    One misconception that I feel may pose a problem is the matter of the .01 fee. Sunny King has stated that Peercoin is to be a “backbone” currency rather than a day to day currency for buying bread as an example. Other currencies with lower fee structures are in a better position to be adopted by consumers and merchants for this purpose. Therefore the argument for Peercoin as a transactional currency misguided unless Sunny/the majority choose otherwise. With Peercoin they are not looking to be the one and only crypto currency but a complement to others living in symbiosis. Peercoin is here to say, it’s full potential is yet to be realized.

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