Bitcoin Forum

Economy => Economics => Topic started by: kwhcoin on June 19, 2011, 01:05:54 AM



Title: How we could "back" bitcoins with something of value
Post by: kwhcoin on June 19, 2011, 01:05:54 AM
Although the Bitcoin concept, software, and community are valuable, the actual bitcoins people own are not backed by anything of value like gold, silver, rice, gasoline, kilowatt-hours, or even dollars. I have noticed myself pointing this out quite a bit so I wanted to propose a potential solution to this perceived problem so I am not just being critical.

My approach in this post to "back" bitcoins with something of value is guided by a desire make Bitcoin a better currency without really changing the existing Bitcoin system. In particular, the approach presented keeps the total Bitcoins over time curve unchanged. Unfortunately, preserving this curve makes it difficult to back the currency in the classical sense, but it is still possible to "back" bitcoins by giving each bitcoin a guaranteed minimum value.

The one change I find necessary to make would be to make it so miners don't get all the newly created bitcoins. I would still have a portion of the new bitcoins go to miners, but I would have the other portion auctioned off with the proceeds going towards backing bitcoins. I am assuming it would be possible to offer less incentive to mining without compromising the security of the network, but if I am incorrect in my assumption then the existing Bitcoin transaction fee system can be used to help incentivize mining to fulfill their key role of securing the network while still allowing some of the new bitcoins to be auctioned.

Here is an example of what this backing might look like if bitcoins were to be “backed” by dollars. In the total bitcoins over time graph, bitcoins are currently being created at a rate of 2,625,000 per year. Suppose over the course of the next year it were decided that half of these 2,625,000 bitcoins needed to keep being given to miners to keep the network secure, and that the other half could be sold at auction. If the average market price received at auction for the year were $20, then the amount of revenue added to the backing fund during the course of that year would be $26,250,000. Since at the end of that year the total number of bitcoins would be around 9,200,000 bitcoins, then the amount of guaranteed backing per bitcoin at the end of that one year would be $2.83. Note: This isn't the market value of bitcoins, but rather the guaranteed minimum value of each bitcoin promised by the backing account. Over time this guaranteed backing amount would keep increasing with each new bitcoin sold at auction until all 21,000,000 bitcoins were created.

Here is an example of how this backing might be implemented in practice. The backing account could be an mtgox account where each day the newly created bitcoins designated for auction would be sold on mtgox and the proceeds from the sales go to the bitcoin backing fund. The guarantee part of the backing could take the form of an open buy order by this mtgox account at the guaranteed bitcoin backing amount which is calculated by taking the total amount of value in the bitcoin backing fund and dividing by the current total number of bitcoins. In the example from the paragraph above, the guaranteed value after one year was $2.83 per bitcoin. Of course, if the current market value of bitcoins were $20 and the guaranteed price was $2.83 then nobody is going to try and sell their bitcoins at the guaranteed amount of $2.83. However, market conditions may change for various reasons and the market price for bitcoins may become the guaranteed price. The reassurance of a guaranteed minimum value is helpful to users, merchants, and developers.

In the example above I backed bitcoins with dollars, but the same approach could be used to back bitcoins with other thing such as gold or silver.

There are still some issues and details that need to be worked out, but I wanted to put the idea out there as a potential solution to a problem I see with the current Bitcoin system.

Even if you think "backing" bitcoins with something of value is pointless, you have to admit that many people desire this feature in a currency so providing a guaranteed minimum can only increase the demand for bitcoins.


Title: Re: How we could "back" bitcoins with something of value
Post by: evoorhees on June 19, 2011, 01:26:06 AM
You propose backing Bitcoins with something of value, and then suggest the USD as that backing? One of the primary draws of Bitcoin is that it's an alternative to the dollar, which is manipulated at whim by the Federal Reserve System. The dollar is fiat - it's mandated to have value by the coercion of government. Bitcoin is not fiat, because it is chosen openly in a free market as money.

Further, your proposal is not actually backing Bitcoin in the meaningful sense of the term. For something to be "backed" it means there is a guarantor of another good for the one in question. When the dollar was backed by gold, the US government guaranteed to hand you a fixed amount of gold for your dollar. Unless I misread your proposal, no party is guaranteeing payment of dollars in return for Bitcoins.

Further still, the notion of "backing" is silly, unless you're using something like paper as a substitute for another good that has "real" value. Bitcoins has "real" value by itself, because it offers a revolutionary distributed payment system, and is allegedy secure, and is fast, and almost free to use, etc.

Further still again, gold is not backed by anything, and yet remains a great and valuable money commodity.

A great money doesn't need backing, because it IS valuable in its own right. Bitcoin is indeed valuable, for the distributed payment mechanism (among other features) mentioned above.


Title: Re: How we could "back" bitcoins with something of value
Post by: 5grainsilver on June 19, 2011, 01:33:59 AM
Gold has unique physical properties.  It "backs" itself. 

Backing btc requires a central organization to implement, which defeats the purpose of btc.


Title: Re: How we could "back" bitcoins with something of value
Post by: vector76 on June 19, 2011, 01:41:11 AM
I agree that bitcoins need to be backed by something.

To me this means that bitcoins need to be readily convertible into the thing backing them.

The problem I see is making it decentralized.  With a single choke point a government can shut the whole thing down, which defeats the purpose.  Physical metal is excellent in terms of decentralization because it's impossible to track and impractical to confiscate, but it doesn't travel over the internet very well.

Here is a wacky outline of an idea:  A trusted party buries an ounce of gold at a random location in the Nevada desert and records and encrypts and digitally signs the location into a token.  Then through some cryptographic magic, this information is passed along in encrypted form as the token is spent.  To redeem the digital currency for gold, some other cryptographic magic allows the token to be decrypted and there is a public registry of redeemed tokens to prevent spending a redeemed token as if it were not redeemed.  And as with bitcoin, also a registry of transfers to prevent multiple spending.

You would have to trust the initial burying/certifying party, just as you would have to trust the backing account holder or the reserve against which a note is written.  But if they are out of the loop when the redemption occurs then it is not feasible for a government to kill the currency by holding the backing hostage.

I don't know if cryptographic protocols exist that would enable the magic as I outlined it.  Maybe we'll have to invent one.


Title: Re: How we could "back" bitcoins with something of value
Post by: evoorhees on June 19, 2011, 01:52:20 AM
Gold has unique physical properties.  It "backs" itself. 


True. And similarly, Bitcoin has unique properties. It shares some of these properties with gold (divisibility, homogeneity, scarcity, etc) and has unique ones additionally (instant transfer across thousands of miles, a billion dollars-worth can be put in your shoe, it's not subject to supply fluctuations, etc.).

Both gold and btc are valuable as money precisely because of their unique properties. Neither needs to be, or ought to be, or even can be, backed by another commodity.


Title: Re: How we could "back" bitcoins with something of value
Post by: 5grainsilver on June 19, 2011, 01:56:47 AM
Gold has unique physical properties.  It "backs" itself. 


True. And similarly, Bitcoin has unique properties. It shares some of these properties with gold (divisibility, homogeneity, scarcity, etc) and has unique ones additionally (instant transfer across thousands of miles, a billion dollars-worth can be put in your shoe, it's not subject to supply fluctuations, etc.).

Both gold and btc are valuable as money precisely because of their unique properties. Neither needs to be, or ought to be, or even can be, backed by another commodity.

I wish this was true.  But the bitcoin system can be duplicated.  In a week you could have namecoins, and a week later funcoins.  Gold can't be reproduced like that. 


Title: Re: How we could "back" bitcoins with something of value
Post by: imperi on June 19, 2011, 02:00:33 AM
Gold has unique physical properties.  It "backs" itself.  


True. And similarly, Bitcoin has unique properties. It shares some of these properties with gold (divisibility, homogeneity, scarcity, etc) and has unique ones additionally (instant transfer across thousands of miles, a billion dollars-worth can be put in your shoe, it's not subject to supply fluctuations, etc.).

Both gold and btc are valuable as money precisely because of their unique properties. Neither needs to be, or ought to be, or even can be, backed by another commodity.

I wish this was true.  But the bitcoin system can be duplicated.  In a week you could have namecoins, and a week later funcoins.  Gold can't be reproduced like that.  

It's only "replicated" if a massive amount of people choose to use the other versions, which aren't connected to all the trading websites, don't have thousands of machines mining, and a worse development team. It's very inconclusive whether people would want to use two different P2P currencies.


Title: Re: How we could "back" bitcoins with something of value
Post by: kwhcoin on June 19, 2011, 02:04:04 AM
You propose backing Bitcoins with something of value, and then suggest the USD as that backing? One of the primary draws of Bitcoin is that it's an alternative to the dollar, which is manipulated at whim by the Federal Reserve System. The dollar is fiat - it's mandated to have value by the coercion of government. Bitcoin is not fiat, because it is chosen openly in a free market as money.
I used dollars because it was a simple way to illustrate a concept but I mentioned you could use gold, silver and other things as well.

Further, your proposal is not actually backing Bitcoin in the meaningful sense of the term. For something to be "backed" it means there is a guarantor of another good for the one in question. When the dollar was backed by gold, the US government guaranteed to hand you a fixed amount of gold for your dollar. Unless I misread your proposal, no party is guaranteeing payment of dollars in return for Bitcoins.
I mentioned I couldn't find a way to "back" the bitcoins in the classical sense like the gold for dollar example you bring up because I wanted to preserve the total bitcoins over time graph. However, I have another topic where I do talk about backing a Bitcoin-like currency in the classical sense.

Further still, the notion of "backing" is silly, unless you're using something like paper as a substitute for another good that has "real" value. Bitcoins has "real" value by itself, because it offers a revolutionary distributed payment system, and is allegedy secure, and is fast, and almost free to use, etc.
Whatever value bitcoins have have would be increased if they were backed by something with proven long term value.


Title: Re: How we could "back" bitcoins with something of value
Post by: kwhcoin on June 19, 2011, 02:07:03 AM
Gold has unique physical properties.  It "backs" itself. 

Backing btc requires a central organization to implement, which defeats the purpose of btc.
Bitcoins can be backed and still be decentralised just like it is now. Nothing would have to change with the transactions. The only thing centralized would be the backing and that could also be decentralized to some degree. Anyway, if the backing worked your better off with it than without it, and if the backing failed it would be the same as if you didn't have it.


Title: Re: How we could "back" bitcoins with something of value
Post by: evoorhees on June 19, 2011, 02:11:21 AM

I wish this was true.  But the bitcoin system can be duplicated.  In a week you could have namecoins, and a week later funcoins.  Gold can't be reproduced like that. 

That is not duplication of Bitcoin. Namecoins and funcoins are different commodities with different properties. Just like silver and copper are alternatives to gold, but are not the same. The marketplace will observe all alternatives and value them as it wishes.

Unless there is some bug in the code of Bitcoin, and coins can be "printed" at whim, then it is a valid, scarce commodity. Similarly with gold, unless some chemist creates a way to cheaply produce artificial gold (which would be no different than real gold since both are the same element) then gold will remain a valid, scarce commodity.  Both gold and bitcoins are limited, and both have alternative substitutes in the marketplace.


Title: Re: How we could "back" bitcoins with something of value
Post by: kwhcoin on June 19, 2011, 02:11:56 AM
Gold has unique physical properties.  It "backs" itself. 


True. And similarly, Bitcoin has unique properties. It shares some of these properties with gold (divisibility, homogeneity, scarcity, etc) and has unique ones additionally (instant transfer across thousands of miles, a billion dollars-worth can be put in your shoe, it's not subject to supply fluctuations, etc.).

Both gold and btc are valuable as money precisely because of their unique properties. Neither needs to be, or ought to be, or even can be, backed by another commodity.

I wish this was true.  But the bitcoin system can be duplicated.  In a week you could have namecoins, and a week later funcoins.  Gold can't be reproduced like that. 
I agree it can be duplicated and it will and I think many of them will be backed by something and at least one will be backed by gold.


Title: Re: How we could "back" bitcoins with something of value
Post by: vector76 on June 19, 2011, 02:14:23 AM
Bitcoins do have cool features, but the features serve no purpose other than in the role of a medium of exchange.  Silver is useful for making mirrors and photographic film and wires and so on.  So the non-medium-of-exchange value of silver or any other commodity "backs" its use as currency.  Bitcoins have no non-medium-of-exchange value.

Because bitcoins have no usefulness other than as a medium of exchange, the value exchange ratio relative to goods and services is completely arbitrary.  For currencies that can be converted into commodities, the non-financial utility gives it some tether to stable price levels.

For fiat currencies with no tether at all, active manipulation is required to achieve stable price levels, but with bitcoins this is impossible by design.


Title: Re: How we could "back" bitcoins with something of value
Post by: Mageant on June 19, 2011, 02:16:44 AM
The best way to "back" bitcoins is to make it more widely used.
The more goods and services you can buy with bitcoins the more valuable and stable it will be.


Title: Re: How we could "back" bitcoins with something of value
Post by: kwhcoin on June 19, 2011, 02:37:41 AM
The best way to "back" bitcoins is to make it more widely used.
The more goods and services you can buy with bitcoins the more valuable and stable it will be.
The more people sell things in bitcoins the better. However, these goods for sale are not really backing bitcoins. For example, earlier today went to the alpaca sock website linked to from the Bitcoin wiki's alpaca page and here is what it said:

“Each pair of socks is 2.5 BTC delivered to your door, no extra fees for shipping within the U.S. This price may fluctuate in the future depending on the current BTC exchange rate.”

The fact that the “price may fluctuate” means bitcoins are not backed by alpaca socks. There is not a promise but only a temporary promise to exchange alpaca socks for 2.5 BTC and that temporary promise can change at any time. There is no guarantee for any meaningful duration of time.


Title: Re: How we could "back" bitcoins with something of value
Post by: evoorhees on June 19, 2011, 02:42:15 AM
Bitcoins do have cool features, but the features serve no purpose other than in the role of a medium of exchange. 

False. You're forgetting that Bitcoin is also a software system that allows ledger transactions to be sent and validated with no central authority. THAT in itself is a huge achievement, and provides a great deal of that "purpose" you seek.  It's easy to confuse these things, of course, because Bitcoin is the name for both the software system and the currency used in that software system. The two should be understood separately, and the latter derives its original value from the former, and it's long-term value from the supply and demand of that original value. Make sense? =)

Gold and silver have use as jewlery and in industrial purposes. Bitcoin has use as a recording and validation mechanism for transactions.  Gold, silver, and Bitcoin all additionally have value as monetary instruments due to their properties.


Title: Re: How we could "back" bitcoins with something of value
Post by: billyjoeallen on June 19, 2011, 02:44:33 AM
If YOU want to back Bitcoins, offer to sell some commodity at a fixed rate. Why make it more complicated than that?


Title: Re: How we could "back" bitcoins with something of value
Post by: Jaime Frontero on June 19, 2011, 02:52:52 AM
i propose backing Bitcoin with:

AssCoins!

i mean, as long as you're going to be pulling stuff out of it...

Quote
but it is still possible to "back" bitcoins by giving each bitcoin a guaranteed minimum value

which decentralized entity would do this?  oh wait.  you?

Quote
but I would have the other portion auctioned off with the proceeds going towards backing bitcoins

let me guess - by the government?

Quote
In the total bitcoins over time graph, bitcoins are currently being created at a rate of 2,625,000 per year.

well, no.

Quote
The guarantee part of the backing could take the form of an open buy order by this mtgox account at the guaranteed bitcoin backing amount which is calculated by taking the total amount of value in the bitcoin backing fund and dividing by the current total number of bitcoins.

and who would be...

ah, never mind.  i'm bored now.


Title: Re: How we could "back" bitcoins with something of value
Post by: bitcredit on June 19, 2011, 03:18:09 AM
I'm John Kerry and I approve this message.


Title: Re: How we could "back" bitcoins with something of value
Post by: FreeMoney on June 19, 2011, 03:21:19 AM
How about instead of one 'trusted' backer we all just offer to back to whatever extent we can and want and let that determine the value?


Title: Re: How we could "back" bitcoins with something of value
Post by: vector76 on June 19, 2011, 03:22:32 AM
Bitcoins do have cool features, but the features serve no purpose other than in the role of a medium of exchange. 

False. You're forgetting that Bitcoin is also a software system that allows ledger transactions to be sent and validated with no central authority. THAT in itself is a huge achievement, and provides a great deal of that "purpose" you seek.  It's easy to confuse these things, of course, because Bitcoin is the name for both the software system and the currency used in that software system. The two should be understood separately, and the latter derives its original value from the former, and it's long-term value from the supply and demand of that original value. Make sense? =)

Gold and silver have use as jewlery and in industrial purposes. Bitcoin has use as a recording and validation mechanism for transactions.  Gold, silver, and Bitcoin all additionally have value as monetary instruments due to their properties.

To me this seems to reaffirm what I said, yet draw the opposite conclusion.  With regard to the distinction between software vs currency, I could envision the software having utility outside of the bitcoin universe, but the software is not what is being exchanged or priced.  I think the key thing is what you called original value of the currency, which I am interpreting as utility in some role other than as a medium of exchange, like jewelry or industrial purposes.  But I'm not seeing how the units of currency have any such utility.

I will grant that the software does have value and does add utility to the currency.  And I will grant that the currency derives all its value from the software, but I maintain that the software only adds utility to the currency in its role as a medium of exchange.

A security strip in a Federal Reserve Note improves its usefulness as an exchange medium but it does not give the currency any industrial value.


Title: Re: How we could "back" bitcoins with something of value
Post by: Shuffle on June 19, 2011, 03:40:15 AM
1 bitcoin should be worth 1 gram of high quality weed


Title: Re: How we could "back" bitcoins with something of value
Post by: Richard Andreassen on June 19, 2011, 04:00:35 AM
I agree that bitcoins need to be backed by something.

To me this means that bitcoins need to be readily convertible into the thing backing them.

Not necessarily. The idea of "backing" a currency is actually a bit of a misconception. All that is needed is to regulate the supply of the currency so that the price is at par with the value of the commodity you are using as the standard of value.

The problem I see is making it decentralized.  With a single choke point a government can shut the whole thing down, which defeats the purpose.  Physical metal is excellent in terms of decentralization because it's impossible to track and impractical to confiscate, but it doesn't travel over the internet very well.

I think this is possible, since we don't need any actual physical metal. All we need is the exchange rate between the metal and bitcoins. I have some ideas about how this exchange rate can be used to adjust the supply of bitcoins in a completely decentralized manner.


Title: Re: How we could "back" bitcoins with something of value
Post by: blogospheroid on June 19, 2011, 04:07:55 AM
If you truly want to setup an awesome post nation state backing, you would buy up a small amount of land everywhere in the world and setup warehouses holding any material that you want to back up bicoins with. You can divide the total amount by 21 million and publish the amount.


Title: Re: How we could "back" bitcoins with something of value
Post by: 5grainsilver on June 19, 2011, 04:35:49 AM
The ONLY value bitcoin has is whatever nominal figure a large group of people can agree on.  If they decided tomorrow that it was zero, that would be that.  Precious metals on the other hand have real uses and properties that can't be replicated by another "system".  If silver dropped to low prices tomorrow it would be hoarded by companies with legit commercial use for it.  Bitcoin is completely different.    

Don't get me wrong I think bitcoins are a great idea and as a merchant I would love it if everyone paid me in it.   I think bitcoins as a payment method is its biggest strong point and the angle the bitcoin community should really be focusing on.  The whole store of wealth idea just isn't based in reality.  Its entire value IMHO will come from its use as a payment method.  


Title: Re: How we could "back" bitcoins with something of value
Post by: hugolp on June 19, 2011, 05:37:23 AM
1. Backing Bitcoin would require a central authority and being decentralized is one of the key characterisitcs of Bitcoin. Without decentralization Bitcoin would loose value, not gain it.

2. If you still think its a good idea, you can go and start goldcoins, silvercoins, ricecoins or dollarcoins. Let the market decide which one it prefers. But I would take a good look at what happened to Liberty Dollars.

Gold has unique physical properties.  It "backs" itself. 

Backing btc requires a central organization to implement, which defeats the purpose of btc.

Bitcoins also have some physical unique properties. It "backs" itself, as its price its showing.


Title: Re: How we could "back" bitcoins with something of value
Post by: royalecraig on June 19, 2011, 12:23:11 PM
bitcoin backs itself, the only reason why the USD ought to be backed by Gold is to stop Gov and central bankers cheating, by printing more money.
Since no one can print more bitcoins, it doesn't need backing, total transparency is what backs it and that is as good as gold.


Title: Re: How we could "back" bitcoins with something of value
Post by: Richard Andreassen on June 19, 2011, 12:47:06 PM
1. Backing Bitcoin would require a central authority and being decentralized is one of the key characterisitcs of Bitcoin. Without decentralization Bitcoin would loose value, not gain it.

2. If you still think its a good idea, you can go and start goldcoins, silvercoins, ricecoins or dollarcoins. Let the market decide which one it prefers. But I would take a good look at what happened to Liberty Dollars.

I think it would be a great idea to start something like goldcoins, that keeps their value stable against gold. It wouldn't be necessary to have any physical backing or central authority to do this.

Let me suggest a very crude way to do this:

Instead of having a predefined rate of growth in the number of coins, the difficulty of mining coins could depend on the exchange rate between goldcoins and gold. So let's say we set the target exchange rate at 1 gold coin for 1 gold gram. When the price of goldcoins rises above 1 gram mining becomes easier, increasing the supply of goldcoins until the price comes back down to the parity level. When the price of goldcoins are at 1 gram of gold or lower, mining new coins should be virtually impossible so that no new coins are mined until demand picks up.

Whenever the price falls below parity speculators could make a profit by hoarding goldcoins at the reduced price and then selling them again when the price comes back up. This would increase the demand for goldcoins and drive the price back up to the parity level.

This should basically be enough to keep the value of goldcoins stable against gold. I do also have some ideas that I am working on about how to make the mechanisms for keeping the value stable more efficient and less likely to fail. 


Title: Re: How we could "back" bitcoins with something of value
Post by: GideonGono on June 19, 2011, 01:37:03 PM
While I am sympathetic to ideas of wanting to "back" btc with something, it is impossible to do without some degree of centralization which is unacceptable. For instance, if your proposal were to be adopted it would effectively mean that miners have to pay for your backing plan. So essentially miners are supposed to pay into a "when sh*t hits the fan" fund that will benefit everyone at their expense.

Furthermore, your plan gives an unfair advantage to Mt Gox. Why should they benefit from the guaranteed volume as a result of processing the "back btc auction"? Can we even trust Mt Gox since they came out the other day saying they will hand over details of peaceful people who freely exchanged goods to the thugs who call themselves the DEA.

Who is going to take the role of uncle sam and redistribute wealth from miners to Mt Gox & "society"?

I think this post is a great insight into how socialism begins. The reason you are able to make such a proposal is that you don't have to pay for it. Otherwise you'd just "back" btc yourself at your price with your money.


Title: Re: How we could "back" bitcoins with something of value
Post by: alexbasasa on June 19, 2011, 01:52:09 PM
I propose backing BitCoins with their own awesomeness.


Title: Re: How we could "back" bitcoins with something of value
Post by: vector76 on June 19, 2011, 08:31:00 PM
There is a difference between backing and pegging.

Backing means that the holder is guaranteed something of hard value, which traditionally requires a promise by a central authority in the case of paper money.  The guarantee of hard value is only as good as the word of the central authority, which may or may not be good depending who that is.  Coins that contain metal themselves, such as silver dollars, are guaranteed value because if the value AS CURRENCY falls, then they still have the metal which they could melt down and use as bullion.  The holders of silver dollars do not need to depend on anyone's promise.  The backing is decentralized.

Bitcoins do not back themselves because they have no use other than currency.  You cannot use them except to spend them, and you cannot spend them without someone else accepting them.  Silver dollars and copper pennies have non-monetary value because you can melt them down and you have metal which has industrial uses.  Bitcoins do NOT have this type of value.

Pegging a currency means manipulating the market to maintain a certain exchange ratio.  Traditionally it's been governments who buy or sell currency to maintain the desired exchange ratio.  Governments LOSE MONEY when they peg a currency.  But they deem it worthwhile to maintain confidence and stability.  Because it's a money-losing proposition, market participants are not in a position to peg a currency.  Hoping that speculators will effectively peg a currency at a certain ratio is the same as hoping that the market in general will peg a currency.  Not going to happen.

Through mining, you can flood the market with new currency if its value rises above a certain level, but there is no mechanism to contract the quantity of money if its value falls.

Protection against rising value is not really protection (except for borrowers I suppose).  Falling values are really what you need to protect against, to give people confidence that their currency holdings won't be wiped out.


Title: Re: How we could "back" bitcoins with something of value
Post by: Richard Andreassen on June 19, 2011, 09:53:31 PM
There is a difference between backing and pegging.

Not Really. The market value of a currency is merely a function of the supply and demand of that currency. The "backing" only really comes into play when the demand for the currency falls, so that the price can be supported. The classical gold standard was basically a currency peg to gold.

Bitcoins do not back themselves because they have no use other than currency.  You cannot use them except to spend them, and you cannot spend them without someone else accepting them.  Silver dollars and copper pennies have non-monetary value because you can melt them down and you have metal which has industrial uses.  Bitcoins do NOT have this type of value.

Agreed.

Pegging a currency means manipulating the market to maintain a certain exchange ratio. 

I don't think pegging a currency is a matter of manipulating the market. It's just a matter of managing the supply. The price is at all times set by the market.

If you are issuing a currency, there must be some supply of it. To say that a fixed supply, or a supply growing at a constant rate is somehow more "free market" than a supply that varies with demand is just silly.

Because it's a money-losing proposition, market participants are not in a position to peg a currency.  Hoping that speculators will effectively peg a currency at a certain ratio is the same as hoping that the market in general will peg a currency.  Not going to happen.

How exactly, is it a money-losing proposition? You buy when the price is low, and sell when the price is high. Sounds to me like a way to make money.

Through mining, you can flood the market with new currency if its value rises above a certain level, but there is no mechanism to contract the quantity of money if its value falls.

Protection against rising value is not really protection (except for borrowers I suppose).  Falling values are really what you need to protect against, to give people confidence that their currency holdings won't be wiped out.

I agree that this is a challenge, but if no new currency can enter the market while the price is suppressed, and you expect demand to pick up in the future, there is an incentive to buy more of the currency when it is low. I have a few ideas that I am working on about how to make this mechanism more reliable.

Also, when there is an effective ceiling on the price of the currency, no one would hoard the currency in order to profit from appreciation above this level. Only people who actually wanted the currency as a medium of exchange would want to buy the currency at its parity price. So there could never be a speculative bubble in the currency. This would make sudden falls in demand less likely.


Title: Re: How we could "back" bitcoins with something of value
Post by: bustaballs on June 19, 2011, 10:03:37 PM
Bitcoins could be "backed" by someone voluntarily.  I could, for example, say that no matter what happens, I'll always offer at least at least 5lbs of coal per BTC.

Something that isn't being manipulated by a central authority has no need for a backing. But it "could" be backed without any government or central bank so long as the volunteer follows through with his promise.


Title: Re: How we could "back" bitcoins with something of value
Post by: vector76 on June 19, 2011, 10:33:35 PM
Backing and pegging are similar in that they both influence the price.

Backing protects the value from falling but it does not prevent the price from rising.  Pegging stabilizes the value in both directions.  Backing also does not require active intervention in the market, as demonstrated with silver dollars.  The backing is connected to the currency when it is created.  Pegging requires active management over the lifetime of the currency.  Whether this is manipulation or "free market" is somewhat beside the point.  What matters is if it's practical and trustworthy.

As I said, a ceiling is fairly straightforward to implement to prevent the price from rising.  You could instill great confidence that the value will not rise above a certain level.  But this is not the purpose of backing, and it is only half the purpose of a peg.

How to provide a price floor?  Preventing bubbles will reduce volatility but it will not provide a minimum value.

if no new currency can enter the market while the price is suppressed, and you expect demand to pick up in the future, there is an incentive to buy more of the currency when it is low.

The problem is precisely falling value when there is not an expectation that demand will pick up.

There is also a confusion between supply as interpreted as the rate of money creation, and the supply as interpreted as the amount of existing money.  The rate of money creation can be curtailed to zero, but the amount of money in existence won't shrink.  If the amount of currency that people want to hold is less than the amount that exists, then the value will fall.  Stabilizing the value with variable creation only works when the demand for existing money is growing.

If the demand for money is shrinking and there is not an expectation that the value will go up, then there is not money to be made by gobbling up all the excess currency at an above-market rate, holding it until the price exceeds parity which is expected to be never.  Markets do not peg currencies automatically because currency peg must by nature oppose the market.


Title: Re: How we could "back" bitcoins with something of value
Post by: Richard Andreassen on June 19, 2011, 11:28:51 PM
Backing and pegging are similar in that they both influence the price.

Backing protects the value from falling but it does not prevent the price from rising.  Pegging stabilizes the value in both directions.  Backing also does not require active intervention in the market, as demonstrated with silver dollars.  The backing is connected to the currency when it is created.  Pegging requires active management over the lifetime of the currency.  Whether this is manipulation or "free market" is somewhat beside the point.  What matters is if it's practical and trustworthy.

Under a system of backing the price is usually prevented from rising by people bringing gold or some other asset to the issuer in exchange for new money.

The difference between backing and pegging is only whether the supply of currency is managed actively or passively.


The problem is precisely falling value when there is not an expectation that demand will pick up.

I agree that this is a potential problem. The assumption would have to be that the demand for currency tends to grow over time. This is generally true, but not guaranteed.

A potential solution I have been thinking about is that exchanges would provide special accounts for arbitraging the dips in the currency. The buying and selling on these accounts would be automated and not subject to discretion, so that they would always buy below parity and sell at or above parity. Also the money would have to be unaccessible for a while (say 30 days at a time) to prevent people from panicking and closing their account on a drop in demand.

There would of course have to be some special benefits to having such accounts if anyone should be expected to take the risk. This could be priority in the bidding process, so that these accounts would be first in line to buy whenever the price drops below parity, and lower or no transaction fees. Transaction fees on the buying and selling of others could perhaps even be awarded these accounts as a payment for their risk taking if a larger incentive is needed.

Generally speaking such an account would generate profits, but you would risk losing the money if the currency still fails.

I must stress that this is still just an idea that I am playing with, and I am not yet certain whether this would be viable or not. 


Title: Re: How we could "back" bitcoins with something of value
Post by: BitCoinsForGold on June 20, 2011, 02:21:52 AM
I am doing my best to back bitcoins with gold and silver, check out my post

http://forum.bitcoin.org/index.php?topic=19763.0

I know that it may take a while, but i think over the next few months I will be able to establish myself greatly here and give people a real and viable alternative use for their bitcoins in a real world environment. I'm also able to answer any gold and silver questions anyone may have


Title: Re: How we could "back" bitcoins with something of value
Post by: iya on June 20, 2011, 12:31:53 PM
@Richard Andreassen

The problem with modifying supply based on an exchange rate is:
Which exchange rate to use? For example, when Bitcoin was created, there were no exchanges around.
It would introduce a lot of uncertainty in the design.

@BitCoinsForGold

Unfortunately you are in no position to control a peg. I can guarantee that you either won't sell anything or make a heavy loss.


Title: Re: How we could "back" bitcoins with something of value
Post by: BitCoinsForGold on June 20, 2011, 12:48:18 PM
I've already sold some tyvm.

And on top of it, what I was saying, is that whenever you're...

buying something
selling something
or even trading currency

... for bitcoins, your backing it.

There's only a few things that make things "money"

Widespread acceptance (bitcoins working on it. But between all current available options your getting basics covered)
The inability to spend the same unit 2x at once (done)
That each unit is divisible equally, and that all equal parts total to original part with no loss (bitcoins do this, diamonds for example, dont)

The more things you can buy and sell and trade with bitcoins the better.
And everything from cash, to gold, to silver, to atm cards, to bdsm clubs in ny, to raman noodles, id say bits are doing a good job.


Title: Re: How we could "back" bitcoins with something of value
Post by: kwhcoin on June 20, 2011, 03:02:09 PM
...It's easy to confuse these things, of course, because Bitcoin is the name for both the software system and the currency used in that software system. The two should be understood separately, and the latter derives its original value from the former, and it's long-term value from the supply and demand of that original value...

Bitcoins also have some physical unique properties. It "backs" itself, as its price its showing.

I propose backing BitCoins with their own awesomeness.

Bitcoin as a concept/software brings value to people, and a lot of this value is currently reflected in the market price of bitcoins because there are currently no other Bitcoin-like currencies. In other words, there is a demand for the valuable Bitcoin concept/software in a currency and bitcoins are currently the only supply. However, many other Bitcoin-like currencies will come along and effectively increase the supply of currencies that can deliver the value of the Bitcoin concept/software. I believe the growth in supply of currencies offering Bitcoin-like properties will be able to greatly out pace the growth in demand for currencies offering Bitcoin-like properties. This is why I proposed this backing solution because I believe it is desirable to back the actual bitcoins with something of long term value rather than depend on the Bitcoin concept/software as the only foundation for the value of bitcoins.


Title: Re: How we could "back" bitcoins with something of value
Post by: kwhcoin on June 20, 2011, 03:09:00 PM
Backing btc requires a central organization to implement, which defeats the purpose of btc.

The problem I see is making it decentralized.  With a single choke point a government can shut the whole thing down, which defeats the purpose.

which decentralized entity would do this?  oh wait.  you?

1. Backing Bitcoin would require a central authority and being decentralized is one of the key characterisitcs of Bitcoin. Without decentralization Bitcoin would loose value, not gain it.

While I am sympathetic to ideas of wanting to "back" btc with something, it is impossible to do without some degree of centralization which is unacceptable...

I am under the impression that a team of open source developers already have the ability to modify the Bitcoin code to make the small coding changes necessary to implement my backing proposal, and if this is correct, then the “central authority is bad argument” can't be used against my proposal to modify Bitcoin because the “central authority” necessary to enact my changes already exists.


Title: Re: How we could "back" bitcoins with something of value
Post by: Vinnie on June 20, 2011, 04:40:00 PM
If YOU want to back Bitcoins, offer to sell some commodity at a fixed rate. Why make it more complicated than that?

I've advocated someone take this approach to a physical "bitcoin." Produce a hard to replicate token and make the market for it at a small percentage under and over spot.


Title: Re: How we could "back" bitcoins with something of value
Post by: Synaesthesia on June 20, 2011, 04:56:05 PM
SD card with wallet.dat file?


Title: Re: How we could "back" bitcoins with something of value
Post by: Richard Andreassen on June 20, 2011, 10:32:25 PM
@Richard Andreassen

The problem with modifying supply based on an exchange rate is:
Which exchange rate to use? For example, when Bitcoin was created, there were no exchanges around.
It would introduce a lot of uncertainty in the design.

People could just use whatever exchange rate they wanted by putting a url to a service that provided an exchange rate into their client. Then the network would have to agree by majority rule or something.

I think there are bigger challenges to my suggestion than this.


Title: Re: How we could "back" bitcoins with something of value
Post by: vector76 on June 20, 2011, 10:52:25 PM
A voluntary association of people could agree on a price and simply place large standing buy orders in a major exchange.

I am skeptical as to whether it would be to someone's advantage to do this, and I don't believe it will have nearly the strength of guarantee that backing or pegging implies.  The association could run out of funds in a falling market, or they could change their mind on the price level or the quantity of backing that they want to provide.  Either way I'd say the "guarantee" is far too weak to qualify as a backing or peg, but it would be a step in the right direction.


Title: Re: How we could "back" bitcoins with something of value
Post by: iya on June 20, 2011, 11:35:18 PM
@Richard Andreassen

The problem with modifying supply based on an exchange rate is:
Which exchange rate to use? For example, when Bitcoin was created, there were no exchanges around.
It would introduce a lot of uncertainty in the design.

People could just use whatever exchange rate they wanted by putting a url to a service that provided an exchange rate into their client. Then the network would have to agree by majority rule or something.

I think there are bigger challenges to my suggestion than this.

You do realize that means, at least theoretically, complete user discretion over inflation?
It may even work, but it does feel kind of fragile.