Uncertainty clouds Dogecoin’s future

One of Dogecoin’s developers sparked uncertainty regarding the cryptocurrency’s future today with the announcement that its mining schedule might be altered, in order to buy time to counter the impeding ASIC threat. After the most recent block reward halving, it could be established that multipools are still taking advantage of Dogecoin’s difficulty adjustments. Multipools drive away dedicated Dogecoin miners, which creates a risk that the network hashrate will suddenly drop significantly when block rewards are halved. A lower hashrate means less security, and increases the chances a 51 percent attack will be attempted successfully.

Suggested solution

To fight the ASIC threat, the following was suggested:

“I am firstly looking towards scrapping the standard system of block reward halving. Instead of waiting for a halving, I intend on implementing a taper-down system, whereby the value of Doge blocks will decrease by 5k every month, giving us 2 more years of standard mining time. We will then settle on a final point of 5k (rather than 10k), to compensate for the large amount of additional coins that will be generated through this type of tapering-off system.”

Changing inflation rate

As Dogecoin’s current block rewards are set to 125,000 coins per block, this would imply adding roughly 70 billion more coins to the current supply of 80 billions coins before rewards would settle at a stable 2.5 billion coins per year. The latter would mean a maximum inflation rate of 1.67 percent per year once the final schedule is reached mid-2016. If the mining schedule is not altered, the supply would reach 100 billion coins before it starts adding 5 billion coins per year, or a maximum of 5 percent, as of January 2015.

Altering core economics

The previous significantly affects Dogecoin’s future as an inflationary currency. At first the changes would imply a prolonged state of hyperinflation, before entering a deflationary state once the final reward schedule is reached. Assuming a production growth rate of two percent, the quantity of money theory, denoted as (percent change in the money supply) + (percent change in velocity) = (percent change in the price level) + (percent change in quantity of the output), predicts the discprepancy between supply growth and production growth must lead to falling prices (deflation). This could damage Dogecoin’s ability to sustain itself in the long run, as was discussed earlier for Bitcoin. Altogether, Dogecoin’s future suddenly looks a lot less bright, and uncertainty regarding it is bound to scare off investors.

Take a second to support Digiconomist on Patreon!
Become a patron at Patreon!