Print Page - Idea for an altcoin: Central-Bank-Coin

Most serious cryptocurrencies adopt Bitcoin's predictable-inflation model, where you can calculate from the time or block height the total number of coins in existence. I think that this is in fact the best model; however, the dominant schools of economics (Keynesianism and similar) would consider this type of currency to be inherently flawed. In the views of these economists, widespread usage of any currency with such an inflexible emission schedule would lead to a fragile economy prone to wild inflation, deflation, extreme booms and busts, etc. Even though I think that they're wrong about that, it would be interesting for someone to create a cryptocurrency which operates more similarly to central-bank-managed currencies like the dollar or euro.

How such a cryptocurrency would probably work is:

- You'd have a "central bank", which could be a multisig setup among some fixed group of people, or a PoS voting thing, or something like that. I do not recommend giving miners central-bank powers.
- The central bank buys and sells bonds issued by the system itself. When the central bank buys existing bonds, it creates money out of thin air to do so; when it sells bonds, the proceeds from the sale are destroyed. (Although money tied up in bonds still technically exists, it's removed from the economy for a long time until the money plus interest is recreated from thin air again at maturity, at which point the central bank can just issue more bonds if necessary.)
- If the central bank thinks that prices are too low, it creates x bonds and sells them at auction. If the central bank thinks that prices are too high, it conducts a reverse auction in order to buy y previously-issued bonds. (Where x and y are guesses by the central bank.) If there are far too few bonds in existence, the central bank could instead create money by doing a positive-EV lottery or something.
- The central bank typically aims to keep inflation at a target rate, often somewhere between 1 and 3 percent. In a debt-based system like this, it is difficult to keep inflation below about 1%, and you're definitely not going to keep it at 0% long-term. But as fiat currencies worldwide demonstrate, a few-percent inflation rate is entirely survivable. The central bank needs to be quite disciplined; if it isn't careful, hyperinflation is very easy.
- There'd be an initial bootstrap period where the central bank wouldn't worry about inflation/deflation. You need enough currency issued to get things rolling.

The system could, if well-designed, remain somewhat decentralized by imposing hard limits on what the central bank can do (ie. not allowing it to issue too many bonds, or bonds with too high interest rates, etc.) and by having a fairly decentralized central bank (eg. multisig among 100 independent entities).

Investors would find this fun/different, because you'd invest in it in a very different way. You can't just hold the currency, since the currency is supposed to have a relatively stable value, and in fact decrease in value slowly over time. (By the way, this makes it especially well-suited as a short-term value store, possibly competing with things like USDT.) Instead, if you believe that the currency is strong, you'd buy and hold interest-paying bonds issued by the system, and if the currency became weak, you'd sell your bonds to other traders or back to the system in one of its reverse-auctions. A whole market would develop based on trading these bonds.

If someone is going to do this, you should try to get at least one person with a mainstream economics degree on-board.

Again: Although mainstream economists might like this cryptocurrency (if well-designed), and it'd be interesting, I don't think that this currency would be better than Bitcoin.

Bitcoin Forum

Alternate cryptocurrencies => Altcoin Discussion => Topic started by: theymos on October 15, 2017, 06:32:03 PM