Bitcoin Forum

I was pondering what would happen if somebody launched a completely separate Bitcoin clone except they tweaked the code slightly so the Bitcoin clone could be backed by gold. Below I discuss Goldcoin, a hypothetical Bitcoin clone except backed by gold, where goldcoins would have all the properties of bitcoins except each goldcoin would be redeemable for a predetermined amount of gold.

Overview of Goldcoin

I assume it wouldn't be too difficult to build a completely independent Bitcoin clone because Bitcoin is open source. Once this identical, yet separate, clone of the Bitcoin system were setup, the only algorithmic tweak necessary to enable the goldcoins to be backed by gold would be make it so instead of miners competing with computational power for the new coins, people would compete for the new goldcoins in auctions. The proceeds of the auctions would be used to purchase gold thus enabling each goldcoin in circulation to be backed by gold. Other than the differences mentioned above, the Bitcoin and Goldcoin systems would be identical.

Example Implementation of Goldcoin

To illustrate how this Goldcoin concept could work, In the paragraph below I make up some numbers and details about how a Goldcoin system could be implemented.

At launch, the number of goldcoins available for purchase would be identical to the current number of bitcoins (i.e. If launched today there would be an initial inventory of 6,770,350 goldcoins available for purchase). Additional new goldcoins would become available for purchase at the same rate new bitcoins became available to miners (i.e. the total bitcoins_in_circulation over time curve is identical to the total goldcoins_in_circulation+available_for_purchase over time curve). Frequent auctions of 1000 goldcoins would be scheduled whenever there were at least 1000 goldcoins available for purchase.  The minimum auction reserve price for 1000 goldcoins would be set at the price necessary to purchase an ounce of gold (i.e. gold's spot price plus around 3%). If the inventory of goldcoins available for purchase goes below 1000 goldcoins, then auctions are placed on hold until the total “goldcoins over time curve” makes it possible for more goldcoins to be available for purchase. Lastly, anyone can redeem 1000 goldcoins at any time and receive the current value of an ounce of gold less a storage fee which would be around 0.2% per year starting from the launch of Goldcoin until the date the goldcoins are redeemed (i.e. if you redeemed your goldcoins in five years from the launch of Goldcoin you would have a little less than 1% deducted from what you got for redeeming your goldcoins).

Similarities Between Goldcoin and Bitcoin

Please keep in mind how similar the Goldcoin and Bitcoin systems would be. There could be the same level of anonymity because the systems are virtual clones and you could even buy goldcoins with bitcoins. Transactions have the same degree of decentralization because the two systems are virtual clones with the gold backing being completely independent from the decentralized transaction system. The payment address conventions of Goldcoin and Bitcoin could be identical (perhaps put goldcoin_ in front of the goldcoin addresses to distinguish between the two) which would make it easy to modify existing systems that already accept bitcoins to also accept goldcoins. Also, similar to bitcoins, goldcoins could be bought and sold on independent exchanges as the goldcoin prices would actively fluctuate between auction prices and the redeemable price.

Tradeoffs Between Bitcoin and Goldcoin

The one advantage Bitcoin users would have over Goldcoin users is Goldcoin users would have to directly pay the cost of their transactions because new goldcoins aren't awarded to miners in exchange for performing computations. However, the goldcoin transaction fee system would be identical to the transaction fee system Bitcoin will use after all the bitcoins have been created.

Of course, the one main advantage Goldcoin would have over Bitcoin is that goldcoins would be backed by 0.001 ounces of gold per goldcoin. However, in the disaster scenario where the Goldcoin system of auctioning goldcoins and redeeming goldcoins completely fails (i.e. government crackdown, gold gets stolen, etc.) then the backup plan could be to have Goldcoin automatically revert to the exact same system Bitcoin uses of awarding new coins to miners. In other words, the failure scenario for Goldcoin could be to revert to the Bitcoin system.

Conclusion

If you were convinced that the hypothetical Goldcoin system described above were operated by an open source development team of the same level of skill and integrity as the Bitcoin development team, then would you exchange some of your bitcoins (i.e. currently bitcoins go for around $15 each) to get around a ten-fold number of goldcoins (i.e. currently goldcoins would be around $1.50 each)?

The reason I bring up the hypothetical Goldcoin system is because I believe it would be possible for the current Bitcoin system to be tweaked slightly so bitcoins could be backed by something like gold. For example, instead of giving new bitcoins to miners, bitcoins could be sold at auction and the proceeds could be used to buy gold and then each bitcoin could be redeemed for the amount of gold in storage divided by the number of bitcoins in circulation. This is just a crude example of how it could be done, but this simple approach of starting to back bitcoins with something now could make Bitcoin more competitive with future competing currencies like the hypothetical Goldcoin.

How is the auction reserve price set? Where is the auctioning happening? Where can you redeem gold?

Bitcoin not having any backing assets, is not a bug, is a feature.
It means no assets to protect from any evil or corrupted entity.

The reserve price is set as a fixed ratio between gold and goldcoins. In my example I just picked 1000 goldcoins to 1 ounce of gold to be the fixed ratio for every auction. The auctions could take place on a website. The bids could be done with bitcoins (using the conversion rates between bitcoins, dollars, and gold) and you could also redeem goldcoins for bitcoins (using the conversion rate between bitcoins, dollars, and gold). Of course you could also use a service like goldmoney.com to to directly give people gold when they redeemed their goldcoins. I'm not sure if the details I picked are the best, but I wanted to pick some numbers to illustrate the Goldcoin concept.

Hypothetically, what happens when these websites don't feel like giving people gold back or they shut down?

The failure scenario you bring up would render Goldcoin to be like Bitcoin with nothing backing the coins. However, at least with Goldcoin there is a chance for there to be a backing.

I agree without this as a "feature" there could essentially be a bit-currency backed by the dollar, ie. the Bitdollar, for use in exactly the same secure, convenient, fast, cheap, online, and semi anonymous way as the Bitcoin, but exchangable for a dollar at your local bank and vice versa... and of course with value controlled by the value of the dollar

so, bitcoin is like a failed goldcoin ... smart thinking   ::)

Yes the dollar could also be a possible way to back a Bitcoin-like currency. It would actually be easier to back with a dollar because instead of having to pay to store the gold backing the "goldcoins" you could earn interest storing the dollars that back your "bitdollars". I didn't want to use the dollar in my example of backing a Bitcoin clone-like currency because people would probably attack the dollar aspect instead of thinking about the concept of a Bitcoin clone being backed by something.

I had a similar thought after reading this story today: http://www.rgbdaily.com/story/25-reasons-to-buy-gold-and-dump-dollars

Here's the thing though, as a community we have to invest our energy into Bitcoin for better or worst.  Think of Bitcoin as HTML.  It was horrible when it first came out, remember the blink tag?  Bitcoin gets better with every release of the core client/protocol.  The ecosystem is also getting better.  We have to protect our investment or something proprietary will try to shut us down when we are weak (Facebook credits).  

In your mind you have to convince yourself that you are at the beginning of something that will be lasting.  That will make your time with Bitcoin a lot more profitable.  If you are just along for the ride you might mine, hell you might buy a bunch of machines.  However the real opportunity is with real services.  Accept Bitcoin for payment.  Go through the processing headaches and just charge a markup.  Make Bitcoin real.

Ultimately backing bitcoin with gold is a feature for when the lights go out.  Being able to sync the block chain in a disconnect manner is the alternative.  As another poster mentioned, they have to be accepted, not backed.  Bitcoins are a store of value and be exchanged for tangible goods/services in a virtuous loop.  For example in a world where Bitcoin is no longer valued in USD we would see relative prices.  You can buy a pencil for $0.10 and a cheap car is 100,000 times more valuable.  Priced in Bitcoin the ratio would be maintained, but we really don't know what the Bitcoin dime looks like because the currency is not easily exchanged for goods. We can experiment though by injecting Bitcoin into closed communities.  For example Bitcoin is an excellent way to compensate knowledge workers.  Where the raw materials you are expending are skill and time.  In that way the work/electricity/time a machine miner consumes can be translated to the coin and exchanged for the bioelectric energy/time of the knowledge worker.

If Goldcoin should have its backing fail, then it would be possible to have it automatically switch to function exactly like Bitcoin which has no backing. The thought experiment of Goldcoin was designed to be a Bitcoin clone except for the tweak to allow it to be backed. Automatically undoing that tweak in an emergency situation of losing its backing could make it just like Bitcoin.

wrong- bitcoin is backed by time- literally the only constant/unchanging thing in the universe.

The problem you run into is finding a trusted, centralized authority who would back the coin by gold - fail because you lose decentralization. Having individuals back it leaves you with no guarantee they will perform. At least with the current system, bitcoin has its own value based upon its unique features, qualities and benefits. These features, qualities and benefits are valued enough by people like me who will sell you their gold for your bitcoin.

Trader Steve
http://www.GoldStarBullion.com

Goldcoins would also have value based on the unique features, qualities and benefits of bitcoins because the hypothetical Goldcoin was designed to deliberately have those same features. Goldcoins would likely trade at values above their redeemable gold value. Goldcoins would just have an additional feature because goldcoins would be backed by gold.

The main criticism I am hearing about the Goldcoin concept is that the gold backing may fail. To me this is an admission that it would be good if the backing did not fail which means people have an intuitive sense that it is better to have backing than to not have backing. If the backing of goldcoins described above were somehow magically guaranteed, then would you prefer 10 goldcoins over 1 bitcoin?

kwhcoin: but what backs gold?

Time is relative...

I did not read through all of it but was only curious about a few small things.
If by 'backed by gold' you mean physical gold, then how would you propose funding the acquisition of any where near enough gold to be able to back the goldcoins?  If you are just meaning to back the intrinsic value of goldcoins with price of gold then it would f....


nm, my head hurts and i don't really care, sorry. ;p left this here so others could see how dumb I was for attempting to contribute to something I spent 0 diligence on.

The success will depend on the "strength" of the backing, and this is not addressed in your system.

If someone wishes to attack the currency, the first place is to attack the backing.  So even if the backing hasn't failed yet, it stands to be very weak unless there is some mechanism to make it robust.  Weak backing does not deserve the term backing.

Anything other than physical coins that have bullion value have a chance of failing, but some instruments are much stronger than others.  A personal check vs a cashier's check are worlds apart in terms of their strength.  Even though neither is absolute, I would want the system to be roughly as strong as a cashier's check in terms of the level of certainty that I'll be able to redeem it.

It is theoretically possible to make it decentralized using dead drops or if some anonymous trust mechanism can be strong enough.  I think this could be a fruitful direction of exploration.  Figuring out how to set up anonymous, decentralized, guaranteed redemption is the hard part, not how to set up auctions and create the currency.

Some problems

That would mean that each bitcoin/goldcoin would have a fixed value and cannot rise in value as more people adopt it.
Ofcourse it could raise in value simply by adding more gold at a constant rate.

It would also mean that the value would be decided by the speculation in gold instead of reflecting how useful, adopted and good the bitcoin services are. Removing the very important incentive to create good services.

And question, how would you decide how much gold each coin should be worth?

But ofcourse, you are free to create such a coin.

You just need one of the worlds best securities.

Bitcoin is ok as it is, no backing is necessary. You are free to create your own goldcoin or such, good luck.

Two questions:

1. How do you want to guarantee redemption if there is no central responsible party (because if there were, it would not be decentralized)?
2. What is gold backed by?

Because of the security requirements it is very expensive to store gold. How will this be charged to the end user?

What if the backed gold is stolen? Isn't this simply a liability when compared to bitcoin?

Sure, lets make it happen.  We'll store the gold at my house and I won't charge you anything.   8)

you already have a representative failure of this concept; its called GoldMoney by James Turk.

i foresee a Bitcoin backed USD system in the long term.

Similar to Bitcoins, the largest number of Goldcoins that could ever exist would be 21,000,000. Since above I defined the exchange ratio to be 1000 goldcoins for an ounce of gold, the most gold that would ever be necessary is 21,000 ounces of gold which is just a small fraction of the amount of gold mined each year.




I agree that creating a good backing system is difficult, and I didn't address this issue because I am trying to convey a different point about the importance of backing. I also agree that the stronger the backing the better. This is precisely the point I am trying to convey, a stronger backing is better than a weaker backing and so even a weak backing is better than not having any backing at all.




The amount of gold the goldcoins could be redeemed for would be set at a fixed value at the launch of goldcoin. In my example implementation above, I picked 1000 goldcoins for an ounce of gold to be this fixed ratio. However, this is not the maximum value of goldcoins as it is only their minimum value. In other words, 1000 goldcoins gets you an ounce of gold, but an ounce of gold may not necessarily get you 1000 goldcoins.




I don't plan to create Goldcoin. I just wanted to use it as a thought experiment to make a compelling case that a Bitcoin clone that is backed by something has the potential to eat Bitcoin's lunch. The reason I mention this isn't to cause fear, but rather to suggest that it may be possible to slightly tweak Bitcoin  so the current Bitcoin system could be backed by something. For example instead of giving the new bitcoins to miners who heat their homes with GPUs, you could sell the new bitcoins in an auction and use the proceeds to back bitcoins. In other words, instead of the proceeds of newly issued bitcoins going to pay electric bills and purchase CPUs which only benefit the Bitcoin users who like subsidized transaction fees, the new bitcoins could be sold and used to benefit Bitcoin users by backing their bitcoins.





I am assuming gold is backed by the many commodity uses for gold (i.e. gold is in cell phones, computers, automobiles, hospitals, and probably even GPUs, etc.)

The transaction system of Goldcoin would be identical to Bitcoin and therefore it would be just as decentralized. However, you are correct that the backing method I suggested would need to be run by a centralized responsible party.




Below are some excerpts from my original post that answer your two questions. The first excerpt addresses the gold storage issue with a 0.2% storage fee per year. The second excerpt addresses the failure scenario and how it is not a liability compared to Bitcoin.

“Lastly, anyone can redeem 1000 goldcoins at any time and receive the current value of an ounce of gold less a storage fee which would be around 0.2% per year starting from the launch of Goldcoin until the date the goldcoins are redeemed (i.e. if you redeemed your goldcoins in five years from the launch of Goldcoin you would have a little less than 1% deducted from what you got for redeeming your goldcoins).”

“However, in the disaster scenario where the Goldcoin system of auctioning goldcoins and redeeming goldcoins completely fails (i.e. government crackdown, gold gets stolen, etc.) then the backup plan could be to have Goldcoin automatically revert to the exact same system Bitcoin uses of awarding new coins to miners. In other words, the failure scenario for Goldcoin could be to revert to the Bitcoin system.”




Goldmoney has both a centralized backing system and a centralized transaction system. The Goldcoin system mentioned above would be different because it would have a decentralized transaction system identical to Bitcoin. Also, I don't think goldmoney has failed yet, and I believe you may be referring to e-gold as the digital gold currency that has failed due to a government crackdown.

no i was referring to GoldMoney.  yes it hasn't "failed" in the traditional concept but its supposed economy is dead in the water as far as i'm concerned.

you still haven't answered the question about a centralized vulnerability of gold storage.

I agree there is a risk that the centralized backing may fail. There is definitely a risk. You may think it is a huge risk. I may think it is a manageable risk. However, I am not trying to argue the size of this risk. What I am trying to convey is that with Goldcoin there is at least a possibility that the goldcoins will be backed by gold. My point is that even a small probability of being backed by gold is better than a zero probability of being backed by gold.

You better back gold with bitcoins.

If the bitcoin-like currency had to be backed by anything, the dollar would pretty much be a bad idea. Why would you back a currency with another currency? An inflationary currency that's now only worth 4% of its original value, no less. Exchanging, say, a GBP for USD is one thing but you don't have one backing the other.

Also, if you're backing this new clone coin with gold, are you're suggesting a move towards centralization too? Who stores the gold? Who administers the auctions?

I would be happy with a cheap and reliable service to convert directly BTC to gold and silver on Goldmoney.

As others have said, give it a shot. You'll have a lot of work to overcome, though. (As in, the cumulative effort put forth for bitcoin since 2009.)

I find these ideas amusing, because it is human nature to force new ideas to 'adapt' to previous ones. It's like taking a look at a car, and deciding to weld some metal loops and supports on the frame so a horse can pull it. Just doesn't make sense, really.

What incentive would whoever is backing the currency have to back the currency? Would they just do it out of the goodness of their heart? If you want to start backing bitcoins with gold, nobody is stopping you. But I can't think of any reason anyone would do that.

+1

As already stated, you can simply "back" bitcoins with gold yourself by offering to sell gold for bitcoins.

You don't need a whole separate blockchain for that.

Which is good because if miners are spending their money on gold instead of electricity and hashinh-hardware the blockchain might be quite vulnerable to attack by anyone who chooses to invest in computing gear instead of gold.

As to it not making sense to back a currency with a currency, well, maybe it doesn't need to make sense. What is a 'reserve currency' but backing in one currency for another?

There are a whole bunch of blockchain-based currencies looking at all these concepts precisely because they do want to "back" their currencies. Part of how they plan to do that is to each buy a whole bunch of each of the others, so that all of them have a decent amount of "float" to use to buy back their own using any of the others.

If you would like to "back" one or more of them by selling gold for them, instead of or as well as "backing" bitcoin by selling gold for bitcoin, I doubt they will object. Heck they might even "back" your gold by buying it with various currencies not only with goldcoin...

Come to think of it, United Kingdom Britcoin (UKB) might for traditional reasons like to be "backed" by silver, How much silver would you sell for one UKB?

-MarkM-

Hey how about we make a Bitcoin clone backed by hookers?  You can turn in 1 Bitcoin for $5 minutes of Goodness.

OK, I realize we've all entered bitcoin for various reasons, but backing a new bitcoin-like currency with a fiat curreny that's already losing its status as such is somewhat bizarre. The US$ is a reserve currency because, in 1971, Nixon and Kissinger succeeding in getting everyone trading in oil to convert their local currency into dollars to trade (buying and/or selling). Basically, they agreed to develop Arabian oil fields if all oil trades were done in dollars. The dollar therefore went from being backed by gold up until 1971 (for international trade, anyway) to pretty much being backed by oil... as long as everyone went along with the currency conversion (Sadam Hussein decided against this oil for dollars trade, btw). This is why other countries have reserves of dollars.

However, with China and Russia having agreed earlier this year to side-step this $ for oil conversation and trade directly with each other withouth involving the US$, and with the Fed having to buy more FRNs as other countries aren't biting like they used to, the petrodollar is pretty much doomed. It's therefore hardly a wise decision to back a  new digital currency with a failing fiat one, is it?

As to  your last question. I wouldn't sell silver for a UKB, or at least would hope I wouldn't have to. If silver, or any precious metal, is backing a currency, then you'd have to be in dire straits to decide to liquidate your valuable underlying asset for said currency. So, theoretically, I'd happily use a UKB to buy gold and silver all day everday, but not the other way around, unless I really had to.

Couple of notes on that.  Part of the deal was that the Saudis MUST buy US Treasuries with a % of the income they reaped from Oil sales.  As well, on the Sadam Hussein side of things, when Sadam stopped using Dollars in Oil transactions this painted the big target on himself and his country.  Before he invaded Kuwait he was told by the U.S. that nothing would be done if he did(no one would interfere).  As we all know he did attack, and we all know what happened from there on.  He was backstabbed by the U.S. on this issue.  We can only imagine that Iraq stopping using the U.S. Dollar for Oil had something to do with this.

" Basically, they agreed to develop Arabian oil fields if all oil trades were done in dollars. The dollar therefore went from being backed by gold up until 1971 (for international trade, anyway) to pretty much being backed by oil... as long as everyone went along with the conversaion (Sadam Hussein decided against this oil for dollars trade, btw)."

+1

Thank you.

wow, what was it a week ago this was brought up? ,  and the mob pitchforks and torches came out at that time.

fickle crowd

Someone selling gold for bitcoins at a set price is not a promise but only a temporary promise to exchange gold for bitcoins at that price and that temporary promise can change at any time. If bitcoins were backed by gold there would be a permanent promise to always sell gold for bitcoins at a set price. A temporary promise that can change at any time is very different from a permanent promise. Someone selling bitcoins for gold is very different than someone backing bitcoins with gold.




I agree there would need to be incentive for someone to assume the responsibility of backing goldcoins with gold. The 0.2% per year storage fee and the 3% above spot auction fee discussed in my original post are areas that have potential for profit as it is pretty easy to store gold for less than 0.2% per year and also pretty easy to acquire gold for less than 3% above spot (i.e. the maximum over spot goldmoney charges is 2.49% and the maximum yearly storage fee is 0.18%). However, the largest potential source of profit is the likelihood that many auctions will be for more what would be required to back the goldcoins. For example, if an auction of 1000 goldcoins brought in $2000 and it only cost $1500 to purchase the necessary ounce of gold to back the goldcoins then that would be a $500 profit. There is plenty of incentive for someone to create and back something like Goldcoin.




It is not a pegging scheme because although you would have a guarantee that 1000 goldcoins gets you an ounce of gold,  an ounce of gold is not guaranteed to get you 1000 goldcoins.




The Goldcoin system proposed would be just as vulnerable to attack as Bitcoin will be after all the bitcoins have been issued because Goldcoin would use the same transaction fee system as Bitcoin. I think the Bitcoin transaction fee system is a good model for Goldcoin to follow.

100% agree.  It bugs me when people think that having a market for exchanging gold for bitcoins is as good as backing, or can even be compared to backing.  If that's the case just use your goddamn FRNs, I guess those are backed by gold because you can buy gold with them.

I changed my mind about bitcoins not being backed by anything.  Bitcoins are backed by general ignorance about the underlying nature of money.  And by the way so are USDs.  It turns out this type of backing works just great... until it doesn't.

Maybe it's easy to store gold for .2%/yr until the gov charges you 2% inventory fees or extra blah blah tax, now you have to fight the government head on when they know where your gold is or break your promise.

We've done promises, screw that.

If currencies backed by gold would have worked, there wouldn't be any fiat currency today. Currencies backed by anything are a joke, and fiat currencies are a scam. But most important of all is that you should not trust a central authority.

The place of gold is in electronics, jewelery, decorations, and food (for some).

How about a hypothetical Ferrari clone except it's pulled by a horse?

There are just so many potential problems with this idea:

• You want to have a central authority distribute goldcoins and have them store gold as backing?
• Is the central authority going to pay to store the actual gold needed for backing.
• Where does that money come from?
• Who is this central authority and why would they do this for free?
• Why would they not steal your gold?
• Where do the goldcoins come from if not mined?
• Does the central authority just mine the goldcoins themselves and then sell it for gold?
• If mining does not create goldcoins, then there would be no miners. If there are no miners, who keeps the blockchain secure?
• Where does the initial trust for goldcoins come from? Why would I use real money/gold to buy goldcoins?

I think anyone can mine the goldcoins, and then redeem them at the exchanges for gold.

I don't think that's the OP's idea.

Why would any exchange back goldcoins with physical gold when anyone can mine for goldcoins? Exchanges like mtgox have traders on both the buy side and the sell side and that's how they come to the USD/BTC exchange rate. You don't just start an exchange and permanently set the exchange price yourself. If you do that, you will find that people will trade the worthless goldcoins to you for real gold and no one will trade away real gold for these goldcoins.

Only governments can really pull this off. That's because governments have a lot of gold, they have an incentive to make fiat currency successful, and they can force their citizens to pay tax in fiat currency. Tax forces people to have to trade in their gold for fiat currency. None of this is true for goldcoins.

It would be rather a cheap and reliable service to convert directly BTC to gold and silver on Goldmoney.

You know mate, there is nothing like having a physical gold bar or coin. Financial institutions have been trying to play around selling all kinds of gold certificates, futures, etc. It is all paper and in the end it can be invalidated with a single strike of a pen.

Unfortunately, the same holds with goldcoin. I would never prefer it over a piece of physical metal. Sorry mate.