Because in cryptocurrencies we are able to tell exactly how much money has been issued and how much has been transacted in a given period, we are also able to determine the velocity of money. The velocity of money is the average frequency with which a unit of money is spent in a specific period of time.
In this chart we can see that the velocity of money (green line) increases in inflationary booms and decreases in deflationary recessions (gray bars), which is logical; when there is inflation people want to spend their money and when there's deflation they want to save it. We can take advantage of this to figure out how much money we should be issuing. If one year the velocity is 100 and the next year it's 102 we can assume that the currency has devalued so we cut the reward to get rid of the excess liquidity. If the next year it goes down to 98 we assume that the currency has appreciated because the demand for it exceeded the supply, so we pump up the block reward to bring the velocity back to 0%.
Of course, people could just send themselves money every block to fake the velocity and create hyperinflation. The solution for that is to use ( # of coins sent)*(# of confirmations on sent coins at the time that they are sent) in the equation instead of plain sent amount. This makes it a waste of time to send yourself money every block instead of waiting to make a legitimate transaction. Also, since the block reward depends on transaction volume and there can't be a transaction volume if there are no coins to spend, we would need an initial period of guaranteed reward to kickstart the economy before the transaction-based reward takes over. Let's say 2 years worth of blocks with 50 coins every block.
Yay or nay?
In this chart we can see that the velocity of money (green line) increases in inflationary booms and decreases in deflationary recessions (gray bars), which is logical; when there is inflation people want to spend their money and when there's deflation they want to save it. We can take advantage of this to figure out how much money we should be issuing. If one year the velocity is 100 and the next year it's 102 we can assume that the currency has devalued so we cut the reward to get rid of the excess liquidity. If the next year it goes down to 98 we assume that the currency has appreciated because the demand for it exceeded the supply, so we pump up the block reward to bring the velocity back to 0%.
Of course, people could just send themselves money every block to fake the velocity and create hyperinflation. The solution for that is to use ( # of coins sent)*(# of confirmations on sent coins at the time that they are sent) in the equation instead of plain sent amount. This makes it a waste of time to send yourself money every block instead of waiting to make a legitimate transaction. Also, since the block reward depends on transaction volume and there can't be a transaction volume if there are no coins to spend, we would need an initial period of guaranteed reward to kickstart the economy before the transaction-based reward takes over. Let's say 2 years worth of blocks with 50 coins every block.
Yay or nay?