Quote from: John Smith on July 19, 2011, 06:42:38 AM

I know. But isn't the reason for the rapid price inflation that there's simply a lot of coins are being produced right now? Inflation is like 40% per year. This will eventually change, of course, as the 50 coins per 10 minutes become a smaller and smaller part of the total pool (and when the mining payouts get reduced to 25 coins).

You don't need to commit to destroy coins if you don't produce them in the first place.

In the current system everyone can anticipate how many coins will be issued, so there is no reason why a change in the issuance rate should lead to a change in prices or price volatility. The real problem is that the market participants are uncertain how widely bitcoin will be used in the future. Given this uncertainty, volatility in bitcoin's total market cap is inevitable. The prices of individual coins, however, can be partially stablized by allowing rates of creation and destruction to vary according to changes in market sentiment. Essentially you allow the market cap to fluctuate as normal, but cushion coin holders against these fluctuations by creating and destroying coins.

There are serious limitations of course. Current difficulty growth rates (still well above 50% per annum in the current difficulty cycle), my system would not have begun destroying coins. You can see then that prices would still be highly volatile. Still the knowledge that the system would begin destroying coins if difficulty stagnated even more would make an inflationary spiral much less likely.