Bitcoin Forum

[EDIT]Shortened and simplified a lot. Also removed reference to a central bank, because it was misleading.[/EDIT]

Currently the price has fallen more than 60% from the top (to around 12,5) and what I think happened with the bitcoin is that too many people were speculating too much in it. But when the value reached heights far above what it would have without speculators (meaning with only merchants use), a small sell off prompted other investors who had probably made money, to cash out. Thus a small dip would turn into a violent tumble. The bottom of the plunge is where most speculators have sold off the bitcoin and even some businesses who are not totally dependent on the bitcoin might have dropped using it. This is what characterizes a bubble.

What I suggest is to change the rules a bit. So instead of just having the miners create 50BTC ever 10 minutes, we set the creation rate based on the velocity of the money.

This year we are set to have around a 50% inflation rate of the money supply (HUGE). This is may be ok, when the value is shooting up, but it is hard to justify when the market is plunging (inflation) . Rright now, someone is generating 50 bitcoins every 10 minutes, then probably selling them at mtgox driving down the price when everyone is loosing money, why do we want this to happen? This is only ok, when the price is NOT falling.

To explain how the velocity of money is related to the price at mtgox, lets say the price in dollars per bitcoin fell from 15 to 10. Now people have to spend more bitcoins to pay people and buy their goods. Maybe the price of a cake before was 2BTC (30$ before) but a cake now is 3BTC (30$ now), thus more money is transferred when people buy stuff or transact. The total sum of transactions is called the velocity and with a small change, it could be calculated.
When the bitcoin prices rise on mtgox (deflation), the opposite will happen, now people have to spend less bitcoin to buy the same stuff and this can also be seen on the velocity in the same way. So instead of the system just spitting out 50BTC every 10 minutes, the amount could be depend on the velocity of transactions.
(The amount of bitcoin days destroyed should also count so that no one could manipulate the velocity too much by transacting quickly to himself, I will can write a lot about that if people like the general idea.)

In order to be able to correctly establish the velocity we would need an additional small change though. Today all the bitcoin in a block that was not meant for transfer will be transferred back to a new address of the sender, which means we cant really calculate the real velocity. Because people can use block explorer, this doesn't really add any stealth though, is there some purpose for this that I am missing?

So lets say we could perfectly control the inflation/deflation rate, what rate should we aim for? 2% inflation like most developed countries? No. I think 1-3% deflation would be better for the bitcoin. In our economy, we don't really care if people hold our money, as long as there isn't any speculation bubble (everyone buying just because they want to sell off and profit shorty after, driving the price to unsustainable heights). I would rather buy German government bonds for a 2% or 3% return so there is no reason for me to speculate in bitcoin at that level.
But on the other hand I would be comfortable storing my long term savings in bitcoins, with this healthy return rate. Also merchants would be comfortable knowing that they got a healthy and steady interest on the bitcoins they hold in mid transactions. Lastly 1-3% deflation sets a safety margin, because we can easily slow down the appreciation of the bitcoin (deflation) by creating more money, but it is much harder to control the depreciation of the bitcoins (inflation) by taking out money from the system. This means that we can easily control deflation bubbles, but the inflation spiral into hyper inflation is much more dangerous and harder to control, so better be on the safe side and have a bit of deflation instead of a bit of inflation.

Sometimes we will inevitably have a little bit of inflation though and when the amount of bitcoin that gets generated per 10 minutes approaches 0 I suggest that we destroy some percentage of the transaction fees (proportional to the level of inflation of course) when people transact, which would also increase transaction costs further, thereby encouraging less transactions. Still not as effective and easy as controlling deflation, where we can just increase the amount created every 10 minutes.
But I think we would have to always give those computing a minimum wage to keep the system running though (With the current system the miners will get zero per block created). Under the new rules, they would sometimes earn almost nothing and other times earn a lot of money, in effect they would "take" the volatility from the bitcoin price, only they cannot really loose money (though electricity costs money, so maybe a little bit).

Under something approaching hyper inflation over a longer period (will hopefully never happen) to save the future of the bitcoin, an emergency fee of transactions (in percentage, calculated by severity) could be imposed and destroyed, which would stop the hyper inflation very quickly and effectively.

But think about what this would create, a currency that was very stable and normally with a healthy return. In the financial crisis in 2060 big banks and financial firms would store their money sagely in bitcoins, because it would be as stable as gold, but yield a fine interest none the less. We can calculate and control the money supply more efficiently than can any central bank. When the euro and the dollar is falling, some people might even prefer to be paid in bitcoin.

Why only have the advantages of anonymity and decentralization, when we can add stability to the list, without any disadvantages as far as I can see?

Please add your opinion :)

Hyper inflation is only a serious risk for currencies that can have their supply arbitrarily expanded. This is not the case for bitcoin.


The Great Depression was due to FDR and Hoover preventing wages from decreasing in nominal terms to adjust to the decrease in the money supply, which led to artificially high wages, but high unemployment.

A horrible idea. Money transfered between accounts does not mean that people is spending money. Miners that want more money created would just transfer money between their accounts so more money is created and they can get some. And there is no way to change this without radically changing Bitcoin and loosing some of its basic characteristics.

And then its also a bad idea for the economics behid it.


A regulated market means a market rigged in favour of the bit players (see Goldman Sachs, JP Morgan, etc...). I much rather deal with stupid kids trying to play the free market (and most of them loosing at it) than knowing that the system is completely rigged in favour of a few by regulations.

Just remember how a Chicago trader approached the SEC several times warning the regulators about Madoff. The SEC did 3 investigations on Madoff and decided not to act. Madoff was very well connected. And this is not an exception, its the norm. For example, recently a judge retiring from the CFTC, the commodity regulators, admitted that they had been covering market manipulations (http://www.thedailybell.com/1461/Retiring-CFTC-Judge-We-Covered-Up-Market-Manipulation.html). His own words:

"There are two administrative law judges at the Commodity Futures Trading Commission: myself and the Honorable Bruce Levine. On Judge Levine's first week on the job, nearly twenty years ago, he came into my office and stated that he had promised Wendy Gramm, then Chairwoman of the Commission, that we would never rule in a complainant's favor. A review of his rulings will confirm that he has fulfilled his vow. Judge Levine, in the cynical guise of enforcing the rules, forces pro se complaints to run a hostile procedural gauntlet until they lose hope, and either withdraw their complaint or settle for a pittance, regardless of the merits of the case"

See how regulations and regulators work? They only serve the big players. Its not something you want in Bitcoin, unless you are a cheater and want to make use of them.

Money supply is not only influenced by the nominal supply, the real supply has a lot to do with the velocity of money. Do you not believe in the Quantity theory of money?


I agree that those were some of the causes, but none the less there was a high degree of deflation http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression


I know this is a problem. That is why I said bitcoin days destroyed should factor in (quickly transferring the same money will not destroy much bitcoin days). I think this problem can be fixed.


I agree with you to some extend, but when I used the word "regulting", I simply meant to say "lets change the rules a bit". There will be NO regulator. NO central authority. Only different set of rules. The hashing power of the combined network will still be the only "authority", the only difference is that the rule set will be different.

Thanks for your comments though, I hope we can get a discussion going about this.

Im all eyes and actually curious. Tell us how this can be solved.

As I said bitcoin days destroyed would have to be a part of the function. So that transactions of money that just been transacted recently would weigh a lot less. Only when the last transaction of the money was older than some barrier would the transaction weigh in 100% on the total velocity. The time barrier could be set to something like 3 hours, but it would be better to set it dynamically based on the last total velocity. I know the number would not be completely precise, but I think it would still be more so than the velocity when calculated in the real world.

Also a single dude cheating would mean less and less, as more and more people get a hold of money.

What is your definition of stability?  1% intra-day moves? 1% intra-weekly?

Volatility/stability is meant to reflect shifting sentiment.

No, that wouldn't. It would reduce the number of coins out there, but it would reduce the value of each one even more since it would become nearly useless for its only purpose, spending.

All I am saying is we could have more stability, how much exactly would only be a guess.
Volatility/stability DOES reflect shifting sentiment. What I am saying is simply that we can control the supply side.


You might actually be right about that. Scratch that then, it is not really important anyway (since that emergency scenario will probably never happen).

Also here's the full quote:

Also it seems that no one really likes this type of idea, so never mind (although I think the most important part of my arguments are still solid).

The way I'm defining it, money supply is nominal supply. I'm using the terms synonymously. Inflation is not nominal supply, but it is influenced by it.

As for velocity, that is just one contributor to inflation. Nominal price is determined by the formula: P= MV/Y, with M representing money supply, V representing money velocity, and Y the GDP.

Velocity accelerates when money supply starts increasing rapidly and/or unexpectedly and people lose their trust in a currency as a store of value. This is very unlikely to be a problem for a currency with a supply that is guaranteed to be fixed over its lifetime.


In an unobstructed market, the market adjusts to the deflation quickly, and people return to being productive and contributing to economic growth. That is what happened after the 1920 crash, and what was prevented from happening after the 1929 crash.

Bitcoin is getting more and more stable all the time ... just another non-problem.

Wider adoption will introduce more stability will introduce wider adoption will ....

(see chodpaba time series analysis, the waves are getting broader and longer with each cycle => percentage-wise the volatility will decrease)

The main reason bitcoin is unstable I think is from what I can see the exchanges don't reflect any kind of reality. Seems like everyone, myself included, is just riding a speculative bubble trying to get rich quick. You need to expand the market to actually buy useful goods with it. Trying to be a central banker and control the supply doesn't change those facts. I think the market would still be very volatile.  Also, with Bitcoin exchanges when compared to tradional financial exchanges, how many are invested long-term?

What reality did you have in mind for the exchanges exactly?

... noone "needs" to DO anything ... people are using bitcoin for whatever they see fit and the price reflects that.

Confusing an historically anomalous monetisation event for a speculative bubble could be dangerous for your financial well-being.

Not sure what you are referring to here exactly, clarify if you could.

I could, but I can't be bothered. I'll leave it as an exercise for the interested reader.

Such a proposal would be subject to manipulation, which disqualifies it for consideration.  However, if you insist that your idea is better, start your own blockchain and change the name of your currency.  We will let the market decide.

humbug

whatever?

He is saying that, should you mistake the self bootstrapping of a new currency for a speculative bubble (or vice versa) you are likely to make a serious error in investment choices.

As I type, MtGox, Low: 13.51  High: 16.5

That's a change of 22.1% IN ONE DAY.  This is stability?  For perspective, the Dollar moved against the Euro by 0.8% today.  The dollar has fallen against the Euro by about the same 22% margin.... it just took EIGHT YEARS rather than a day.

Ehh.. I would argue they're one in the same. Either way you're speculating. Could pay off, might not.

"more stability" implies relative stability, no? 40% movements have been recorded not so long ago.

For some real perspective, the dollar is 200 hundred years old, bitcoin is 2 years old.

If the dollar was moving 22% in a day against anything after 200 years it would be time to get the hell out.

wrong, "speculative bubble" implies a bursting ...

a boot-strapping currency is a bubble that doesn't burst (on a human economic finite time scale)

No, relative stability doesn't work.  By that logic I could declare I'm starting to dig the next grand canyon.  I dug a 10ft hole in my backyard in 1 day.  Grand canyon took thousands of years of erosion to create.  Relatively speaking, I'm on good pace!

Sorry, but this is very very poor. There is no way this is tracking the velocity of money. You are missing all the microtransactions that could be real, and suddenly a guy moves his saved bitcoins (lots of them) to another address and your function would give you a big velocity of money when the guy could be sending it to himself. You are not tracking the velocity of money. The pseudo-anonimity of Bitcoin makes it impossible to track.

Hint:  when you are in a hole stop digging ... you appear to be out of your depth here.

Witty  :D

When you stated, "more and more stable all the time," it implies some sort of linear progression towards stability.  At Bitcoin's current volatility, I don't see how you can come to that conclusion.  Just my opinion. 

This would be a change away from one of the basic concepts bitcoin is founded on.  However you could take the sourcecode and make your own velocitycoin, or whatever, that works in this way.

Just saw this proposal today.  My reaction: NO, NO, NO, NO, NO.

Even if everything you say about your idea is true, that doesn't change the fact that it would be, as you seem to accept, changing the rules.  It would be breaking the promise made to every single user that there would be no money creation beyond that specified by the protocol.  Not acceptable.  So, at most, you've justified starting a *different* bitcoin-like currency, and I wish you the best of luck in getting such an inflationary currency off the ground, though that will be kinda difficult.

But please, only impose this inflation on people who have accepted it; don't change horses midstream on a currency that only has its current popularity because of a promise that it would pull stunts like yours.

Setting all that aside: as others have mentioned, such a system can be gamed through fake transactions, and your time-money system does not prevent this, it just delays it, and encourages the earliest-possible overloading of the block-chain with pointless transactions.

In your defense, this is not an error on your part, but an error of all the economists who advocate NGDP targeting, and its shortcomings here are a direct implication of the unappreciated shortcomigns of NGDP targeting in regular money.

If you want to stabilize the value of Bitcoin, there's only one way: widespread agreement regarding exactly how useful Bitcoin will be.  And to do that, you need to remove uncertainty.  The protocol itself does a lot already to accomplish this: by having a predictable money supply (appropriately defined).  Introducing a new source of uncertainty -- how many more will be produced by your new scheme -- only increases volatility.

Before central banks most currencies in Europe were bound to gold or silver. The currencies were mainly used for trade (as opposed to speculation), like you foresee the bitcoin in the future. But the currencies were certainly not stable. I recently read about the influx of gold when the america was discovered and how the price of gold fell to 1/3 of its prior value. Extreme case, but I think you get the point. Bitcoin will get more stable, but will never really be stable.


Really good point, it will help to stabilize, but surely it wont be enough. Do you really think so and why?


There are ways which you could make this more or less manipulation immune.


The dollar is stable because it is more or less based on the system I am proposing.

.

While not precise, the velocity would be calculated far more precise than that which is used to control the inflation of say, the dollar. They calculate it using a consumer price index, which is itself just a survey of goods and services and how they change. Not very precise, but it works pretty ok.

Which concept exactly? Instability?


First of, it will NOT be an inflationary coin, as I wrote, I am suggesting stable deflation. That said, I understand your point that it is changing the rules and some people are not comfortable with that. As for the fake transactions, the time can be adjusted. Still with three hours, you would need to have a very substantial amount of the total amount of bitcoins to be able to make any real impact. Also that impact would be negated the second you stop transacting every 3 hours. Not a real problem.
NGDP targeting? This is a currency, "Bitcoin land" is not really real, thus it has no National Gross Domestic Product. I am actually proposing inflation/deflation targeting.

build it Stuffe,  the source code is there.  If it is actually better than bitcoin it will replace it.

Would love to, but unfortunately im not a coder, just an economist. :(

I don't like aspects of the idea (e.g. the hypothesized voluntarily mining at a loss is absurd), but I hate responses like MoonShadow's one hundred times more.

The bitcoin status quo will have an advantage due to network effects. To say let the market decide is akin to saying let the market decide if microsoft makes the world's best OS. What the market really decides is whether some other OS is so much better than Windows that that it can overcome microsoft's network effect. This is a much much bigger hurdle than simply delivering a better OS. The long-run inefficiency associated with these hurdles is one of the main reasons we have antitrust laws in place.

Not necessarily an insurmountable problem. What exactly is the formula to be used to determine the number of coins a specified block number should mint? This must of course be a figure that can be computed by a client that is downloading the blockchain for the first time, checking each block as it goes to make sure the cirrect number of coins were minted in that block.

How many servers can you deploy to listen on a port for people running a client for your new currency? Or what bounty will be py people to set these up for you? (Unthinkingbit offered one bitcoin each for five miners to do so, and has not yet five miners doing so I don't think, so you might like to offer a little more than that?)

Once we have at least a small network running your new coin, I can also add it to the repertoire of my trading bots, the more blockchain-based currencies they are able to deal in the better.

-MarkM-

The objection to the transaction tax is that it would decrease the value of bitcoin and could thus augment rather than counter inflationary pressure.. This is easy to solve. Keep the tax rate on transactions constant., but change tax revenue distribution rules. If there is inflation destroy the tax revenue. If there is deflation distribute the tax revenue to miners.

Thank you cunicula, I too very much dislike those counterproductive comments.

But I am not suggesting that anyone would be mining at a direct loss ever (no one would ever have their bitcoins destroyed for mining.) Of course the loss will be real in that electricity costs money and miners might just turn off their rigs to save energy if transaction fees are not high enough. That is indeed a problem, but that same problem will also arise with the current bitcoin when no more coins can be mined. Actually that sounds like a real danger for today's bitcoin, since a lot of rigs will be turned off, leaving the network so much more vulnerable to the "51% attack".
As for a solution (under my system) maybe miners could be promised some of their returns to be delivered in the future, at what ever the rate is at that time? Like, you will get 25% of what the rate is today right now, then you will get 25% of what the rate is next month, at next months rate, then you will get 25% in two months at that times rate and finally the last 25% in three months at whatever the rate is at that time. It will take some time to get all the coins (length of time can of course be adjusted and should be decided by the miners themselves).

I think you raised a valid concern there, if you see other problems or things you dislike, please post them :)


Are you saying you would help me build it? I would be willing to write a very thorough specification if yes :)


Another good point. I don't really like the idea of a forced tax though, it is hard to say if it would have enough impact, but the transaction fees could be taxed. And as inflation causes more and larger transactions, the amount of total transaction fees would therefore also increase. Still as transaction fees are voluntary that means people can always transact for free if they want to. What do you think?

I think the tax is highly desirable. As with bitcoin why would anyone want to accept payment in a currency that has a substantial risk of inflating. Most people are not speculators by nature. The protection from inflation offered by a tax is worthwhile. Without a tax, pegging generation to velocity would reduce volatility, but it could not stop inflation due to a fall in demand.

A few points:
1 ) voluntary transaction fees make no sense to me. Transactions add information to the blockchain permanently. They impose costs on everyone using the sytem (storage costs, bandwidth costs). This should not be free.
2) a big problem is measurement of velocity. A side benefit of transaction fees is that they will make velocity measures more reliable.
3) Currently miners are paid through seignorage (issuing coins), this is equivalent to a tax on the rest of the user base. Replacing a part of the seignorag tax with a transaction fee tax would not make users worse off in general. (the incidence of the two taxes is different but they are both taxes. more on this later.)
3) Miners will always need to be rewarded. Therefore any velocity based system could never drop the coin generation rate to zero.
4)the ability of the transaction tax to prop up value depends on being able to destroy more coins than you create each period. If you can consistently destroy more coins than you create, you would be able to support the price of a currency unit even if demand for the currency falls. Of course if demand falls to zero then you are shit out of luck.
5 ) pegging generation to velocity would enable such a system. The tax revenue per period is the product of velocity and the tax rate. As long as currency generation is less than tax revenue the system can destroy more coins than it creates each period.
6) the tax rate would have to be very low to keep the currency useful and prevent evasion (e.g. Sending wallet files as email attatchments). I would suggest a 0.1% levy on all sends. There should be a very small fee per kb as well which would only apply to microtransactions.
7) currency generation would be smaller than potential destruction (currency generation <  velocity *tax rate).
8) Miners would earn most of their income from the tax. In the case of inflation, mining income would fall by more than half because the tax would be devoted to coin destruction. In the case of deflation, the tax would be used to pay miners.
9) coin creation and destruction would continue indefinately.
10) the tax incidence of a transaction tax and seignorage are different. Seignorage is born by people who hoard their coins. Transaction taxes are born by people who spend coins.
11) rolling out a coin generation mechanism based on velocity is tricky. One option is to set a minimum coin generation rate. This would be set extremely low, so that hopefully it would only be binding in the currencies initial month or so.

There is a voluntary transaction fee being used at the moment. The higher the fee you pay, the faster miners will serve your transfer.


Velocity should not be hard at all to calculate, its all in the block chain. If you are talking about bogus transfers, then your point is correct, but I really don't think those are that big of a problem (and the voluntary transaction fee was introduced exactly to fight this in the first place).

Well, it sounds really bad to "tax" and if this was ever to be adopted, it would need to be accepted by a majority of anarchists and liberal types on this board and they don't generally know that mining is the same as inflating, which is the same as tax. Also people would have a slightly lower incentive to transact, so it wouldn't have exactly the same effect, but yea, almost.

Did you see my comment on spreading out the mining profit over time? The idea is, profit now at current rate and a promise of profit at later dates at future rates. Regardless of whether the rate is 0 now, the promise of return on a later date will still be worth something. If you did see this proposal but don't like it, please elaborate.

I expect to see a lot huge increase in the velocity over the next couple of years so I don't think controlling inflation will be a big problem long term. Also it is generally excepted that the coin is deflationary by nature. Short term inflation (sudden price drops) will quickly be eliminated by speculators (especially since they have the source code and can very accurately calculate the probable mining rate at the next period, in real time).

Another tool to further be able to fight inflation would be to calculate a "deflation margin" based on the volatility of the velocity. This just means if the money velocity was volatile last period (prices were volatile), we would allow for more deflation in this period. This would be to ensure that we don't pump out a lot of money this period to hit our deflation target, just to find out that next period the coin is very inflationary and we wish we could take all those coins back we just pumped out.

Ultimately, whether or not your idea is good comes down to whether or not taxing the already existing transaction fees and the "deflation margin" will be enough to cope with inflation or not. And to be honest I am not sure that it is.

Actually I love the idea of delayed rewards for miners. Of course these are also inflationary, they  just add less to the money supply than their face value. If you search my posting history (click on my name) you will see that i am the official forum fanatic on this topic. Delayed rewards have many applications above and beyond managing money supply growth. I think control over the money supply will be much much weaker if the system cant destroy coins.

As far as libertarians and their views go, i very much doubt that they are the future cryptocurrency user base. They dominate the forum, but if cryptocurrency succeeds they will be a tiny minority of the user base. Much better IMO to appeal to finance types and regular merchants. These are the people who can make decisions that cause cryptocurrency to take off.

However, I dont have to get my way 100% to get behind a project. Give me a system with tradeable claims to delayed rewards and I'll become a fanatic proponent.

This is why bitcoin should never be confused with an investment asset, commodity or even a collector's item. It's only a currency (a medium of exchange, or an accounting ledger, if you will). It can only exist if the number/volume of transactions is high enough to compensate miners for running their rigs. Hoarding bitcoin (either by miners or users) would only lead to its demise.

Measuring bitcoin in how many (or how much) fiat currencies it can buy is as useless as measuring it in how many bananas it can buy: at the end, it's all about whether the supply of those goods (services) is increasing or decreasing with time.



Miners should realize they hold the key to bitcoin's success.
They are the central banks of bitcoin economy.
It's time they start acting like it.

Update:
For more, see http://forum.bitcoin.org/index.php?topic=29565.msg373207#msg373207

cunicula I think you are the first person I am very close to agreeing with here!
Right now a transaction fee is paid voluntarily to speed up things, my proposal was to tax that fee.
So it WOULD be able to destroy (some) coins!
But thinking about it, more and more I think your idea is good, but instead of a tax, call it a minimum transaction fee, that a lot sounds better to most people :)

As for the "deflation margin", did I explain it properly? What do you think about it?

Trade able claims is an awesome idea! But you wont know the value of the kind of claims I am proposing before the maturity date is up. And yea you are right about the libertarians :)