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xourexe

XRP's deflationary nature

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I guess this is a very basic-level question, but I don't see it usually comes up on this forum whenever people speculate about XRP's future price:

Given the deflationary nature of XRP, do you believe this feature might ever be an obstacle for XRP's success? I mean, people will tend to save their XRP and not to spend them because they will be supposed to get more valuable over time, but at the same time this could also result in a constraint of XRP market and liquidity. By contrast, the Stellar network automatically applies a small inflation rate of 1% to its currency that could help solve this issue.

What is your opinion? Could this be an original design flaw of XRP?

Edited by xourexe

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I think that if you're aiming at a currency directly tied to goods and services in the economy, then you will obviously need some mechanism for inflation. But since XRP is only aimed being a bridge asset mostly for financial professionals, I don't think it matters too much; hopefully if anything, it'll be advantageous. 

Saying that, in a sense there's going to be temporary inflation at a more or less "controlled rate" until Ripple have given out all their XRP. 

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22 minutes ago, xourexe said:

I guess this is a very basic-level question, but I don't see it usually comes up on this forum whenever people speculate about XRP's future price:

Given the deflationary nature of XRP, do you believe this feature might ever be an obstacle for XRP's success? I mean, people will tend to save their XRP and not to spend them because they will be supposed to get more valuable over time, but at the same time this could also result in a constraint of XRP market and liquidity. By contrast, the Stellar network automatically applies a small inflation rate of 1% to its currency that could help solve this issue.

What is your opinion? Could this be an original design flaw of XRP?

Small amount of xrp gets destroyed with each transaction and its expected that as demand and transaction will increase that destruction rate will increase which will cause the same effect as inflation because of slowly decreasing supply but since things are in initial stage its gonna take long time in my opinion.

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31 minutes ago, xrp noob said:

But how long then before all xrp is destroyed due to transactions? :)

Based on what the say it can not happen for very long time bcz the destruction rate is small and can be reduced and  each xrp can be split into drops up to six decimals.

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Good thread. I focus on the massive amount of XRP to yet be released and often forget it's a fixed supply.
There is a direct need/ use for XRP. Since the largest holders will most likely be those that have a need for XRP as a bridge asset or transaction fees this will prevent hoarding. At least to the degree that will affect long term stability.
If hoarding does become a barrier to use then the bridging and asset of trade might shift to another token or fiat- reducing the value of hoarded XRP, this creates a virtuous use cycle.

Also if the use of derivatives takes off the market bets would have to be netted out, at least assuring that a set amount of XRP is always in open play.


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2 hours ago, Mercury said:

I focus on the massive amount of XRP to yet be released and often forget it's a fixed supply.

That statement, can be misinterpreted to mean that XRP is going to be released onto the current exchanges. 

Ripple is not selling XRP on exchanges.

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4 hours ago, xrp noob said:

But how long then before all xrp is destroyed due to transactions? :)

This is not an issue because we can always change the divisibility of XRP. So as long as there are some amount of XRP in circulation, it does not matter what the number of XRP in circulation is.  If there were only 10 XRP then we could just trade very small fractions of them, and the market would effectively be the same even though the numbers are different. 

XRP destruction should more or less happen as a percentage of XRP in use over time. The number of XRP should never "run out" because the destruction rate will drop in proportion to the amount of available XRP and XRP divisibility can be adjusted accordingly. 

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It wouldn't be a trivial change to make XRP divisible to more decimal points, but it would be doable. In the scenario where that became necessary, I'm sure we could make it happen. I suppose it's possible there could be some sort of perverse incentives like with Bitcoin's block size problem, but it's hard to picture enough validators really benefiting from creating sub-drop XRP denominations. But also, as stated before, at an expected rate of thousands of years before that happens, we actually can leave that for future generations to worry about if it ever does come up in reality.

Personally, I think the small amount of indefinite inflation built into Stellar and Dogecoin is a nice feature. On the other hand, there is a certain rather nice elegance to saying, this is all the XRP there will ever be, the end. It's great because it doesn't get more predictable than that. Historically, Ripple Labs kind of screwed that up by making it hard to predict the releases of XRP into the general supply. We've made a lot of strides recently to fix that, like locking up founders' XRP and issuing the company's "50 billion left at the end of 2021" guidance.

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13 hours ago, xourexe said:

What is your opinion? Could this be an original design flaw of XRP?

Nope. 

For all the hype about a fixed supply being a downfall, look at gold.  Look at BTC.  The fixed supplies of either one hasn't impeded the enthusiasm or appetite of investors.  Quite the opposite - they flock to those "fixed supply" assets when financial bubbles burst in the economy. 

In addition, the supply is currently quoted as 100 billion "XRP", but a division by 10 or even 100 or 1000 could easily expand that quoted supply to more manageable and affordable chunks that could continue to serve the network. 

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I think there are some valid arguments that deflationary currencies tend to encourage "hording" as opposed to investment. People hold the currency in expectation of future gains, and this could result in higher priced loans and make it more difficult for companies to attract investment. I don't think this matters at all for XRP as it is not a national currency, and this is not a problem for the kind of payment Fx market Ripple is building. 

I have read a few things that argued deflationary currencies have high volatility by nature. This could be more of an issue for XRP down the line as it could lead to higher transaction costs. I am not sure I buy the argument, and I think the effect should be relatively small. There are also real benefits to the deflationary nature of XRP. And at this point, almost the sole contributor to XRP volatility is the lack of use, and arguably it would be much more difficult to jump start use of XRP if it was less attractive as an investment vehicle.

Edited by Apollo

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This short excerpt is useful in understanding the concept of "hoarding."

https://mises.org/blog/problem-hoarding

While the quotes below discuss gold, the same principles apply to any money.

Quote

Why do people keep any cash balances at all? Suppose that all of us were able to foretell the future with absolute certainty. In that case, no one would have to keep cash balances on hand. Everyone would know exactly how much he will spend, and how much income he will receive, at all future dates. He need not keep any money at hand, but will lend out his gold so as to receive his payments in the needed amounts on the very days he makes his expenditures. But, of course, we necessarily live in a world of uncertainty. People do not precisely know what will happen to them, or what their future incomes or costs will be. The more uncertain and fearful they are, the more cash balances they will want to hold; the more secure, the less cash they will wish to keep on hand. Another reason for keeping cash is also a function of the real world of uncertainty. If people expect the price of money to fall in the near future, they will spend their money now while money is more valuable, thus "dishoarding" and reducing their demand for money. Conversely, if they expect the price of money to rise, they will wait to spend money later when it is more valuable, and their demand for cash will increase. People's demands for cash balances, then, rise and fall for good and sound reasons.

 

Quote

It should be remembered that all gold must be owned by someone, and therefore that all gold must be held in people's cash balances. If there are 3000 tons of gold in the society, all 3000 tons must be owned and held, at any one time, in the cash balances of individual people. The total sum of cash balances is always identical with the total supply of money in the society. 

 

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