Inflation

What is inflation?

Let's stick with the simple definition of inflation as a decline in the purchasing power of all products over time.

What are the roots of inflation?

This is still an open question as there is always room to debate where and when exactly inflation starts happening due to the imprecise methods to measure it, the velocity which money is exchanged, the human behaviour and etc. Though one thing remains valid and applicable. The supply and demand law. While all economists can't deny that flooding the economy with new created money would generate inflation, there is a huge divergence of the amount which is considered 'flooding'.

At the same time, all economists agree that inflation is an undesired effect as it is a form of taxation.

By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

It is a way to take people’s wealth from them without having to openly raise taxes. Inflation is the most universal tax of all.

If the current model is working and one of the main goals of the central banks are control of inflation, how can we have so much inflation now? Jerome Powell, chairman of the FED, answers this one:

This was a just a brief introduction to say that the focus of this work is 100% on the supply side of the currency, which is calculating the amount of XMR circulating in the economy.

Inflation is always and everywhere a monetary phenomenon.

Monero supply curve

Let's start with the theoretical supply curve of Monero, which you can see in the graph below. We can simply sum the amount contained in each block mined and see if it is following the emission rules previously agreed by the network consensus. If a miner wants to add a block with a reward value bigger than the expected reward, it will be denied by the network consensus and the block will not be validated. Although it is pretty easy to verify if the new creation of XMR is playing according the rules, it is not sufficient to prove that an unexpected creation of XMR (also named as inflation) happened. Due to the strong privacy preserving schemes in Monero, it is not trivial to evaluate if the transactions are obeying the equation Inputs = Outputs + Fees and an imbalance in this equation could lead to an inflation bug.

How an inflation bug would look like?

Although the verification of the equation Inputs = Outputs + Fees uses vectors of 256 bits, the amount range is 64 bits (the maximum transfer value in a transaction in Monero is $2^{64}-1$ units). If an inflation bug were to happen, let's say around 2020, then the supply of Monero could be doubled per each malicious transaction and the supply curve would look like this: Oh, wrong graph, sorry, the correct would be this one: Fortunately, there is no evidence that something like that has ever happened. The scope of this project goes from verifying the consensus emission curve to detecting any possible transaction that could lead to an inflation bug like the theoretical one presented.

Comparing with bitcoin

Though Monero has a tail-emission curve (constant offer of 0.6 XMR/block or 0.3 XMR/minute) its inflation rate (new amounts added/total amount) is decreasing over time. Like bitcoin, Monero's supply is bounded and predictable given a certain period of time.

More about inflation in the epic battle: Keynes vs Hayek

Round 1:

Round 2: