Accounting In Steem
The increase in the supply of STEEM is mostly an accounting artifact created by the desire to
avoid charging negative interest rates on liquid STEEM. Negative interest rates would
complicate the lives of exchanges which would have to adjust user balances to account for
the negative rate of return of STEEM held on deposit. Mirroring the blockchain logic exactly
would be error prone and complicate integration and adoption. Therefore, STEEM has
chosen to never charge someone’s account, but instead to increase supply. This achieves a
similar economic result without forcing everyone accepting STEEM deposits to implement
negative interest rates on their internal ledger.
A side effect of increasing the supply is that the network will require ever increasing levels
of precision in its accounting. On average the number of bits required to represent a typical
account will grow by 1.3 per year. It will only take 10 years before numbers involved no
longer fit within the 53 bit precision supported by JavaScript or the 64 bit precision
supported by CPUs. Over time the magnitude of the numbers involved grows beyond
human scale and comprehension; furthermore, the least significant bits have so little
economic value as to render them meaningless.
In order to compensate for the ever increasing precision, the STEEM network performs a
10:1 “reverse split” every 32,000,000 blocks (about 3 years). At this point in time all balances
of STEEM are divided by 10 and all prices are multiplied by 10. Cryptocurrency exchanges
will have to suspend trading around this time and update the account balances and price
history to reflect the “reverse split” before resuming trading.
All rounding errors will be in favor of the network. Every balance may lose up to 0.009
STEEM due to rounding, but this amount of STEEM should be economically insignificant.
Collectively all holders of SP will lose at most 0.009 STEEM.
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Inflation is a hidden tax which is levied against any person who saves money. As an example a typical bank in Canada will pay 1.35 %. This means if you invest $1000 in one year it will have $1013.50 - making a $13.50 profit. Inflation is calculated by a basket of goods. According to Statistics Canada the inflation rate was 1%. This means that on a $1000 investment, the profit was $13.50 - $10.00 = $3.50. To complicate the matter, inflation rate fluctuates. In January the rate was 2.1%. This means that it is possible that a saver lost money $13.50 - $21.00 = $ -7.50
Just an added complication is that savers tend to be a very specific demographic group. As an example senior citizens tend to be savers. They do not buy or build houses, they do not buy many cars etc. They tend to buy food. Currently in some areas the inflation rate on those specific commodities is 25% or more. Evaluating inflation specifically for their basket of goods, seniors are heavily taxed by inflation:
$13.50 - $250.00 = $ -236.50
Inflation in cryptocurrencies occurs as a natural function of technology. Inflation occurs as more dollars chase after a static or declining quantity of goods. Cryptocurrencies continually increase up to a certain limit at a set rate as dictated by the formula the coin is based on. For instance Bitcoin has a set limit of 21,000,000 which it will reach in over 20 years. Inflation will not affect most cryptocurrencies for many years because they are expanding markets. Inflation occurs as more dollars chase after a static or declining quantity of goods. Every day new retailers and products become available causing the rise of the value of Bitcoin specifically and cryptocurrencies in general - outpacing the built in inflation rate.