Wow, so many thing to respond to. I want to write one coherent post so that is going to mean replying to several of you out of order. I tried to keep the quote references pointing back to their respective complete posts. In general this post reverences posts by.
@herzmeister, BubbleBoy, Impaler, Etlase2
BubbleBoy,
I can't stop MY MIND from jumping to conclusions, and it has jumped to generally the same conclusions as you. So DON'T consider any of this post an attempt to refute anything you are saying. My current best guess is that you are exactly correct. However, sometimes thinking about things that seem completely impractical leads to a certain clarity.
A long while back Etlase2 proposed what you call MordorCoin (EnCoin). He claimed you could get stability by requiring the generation of 1 EnCoin to REQUIRE expending 1 KWH of electricity. I thought I was misunderstanding him because that concept seemed stupid. There's clearly not enough information I thought at the time. Nobody would waste so many posts on so stupid an idea.
I decided he must be trying to say, "1 EnCoin is equal to the COST of 1 KWH of electricity." That still seemed impractical and stupid but at least the units of the equation matched. Both were measures of value at least. That had to be what Etlase2 meant. At least, that's what I thought.
So even though I thought it was impratical and stupid I decided to explore the concept. Surely Etlase2 wouldn't allow so many people to call him an idiot, over and over, if he wasn't on to something? It didn't take long before I had some plausible ideas so I posted them in the EnCoin thread. Etlase2 kept calling me an idiot who couldn't understand his most basic concepts. So I'd look at what I wrote, find a flaw and fix it...
After about a week, I found a solution that created a StableCoin. It used the cost of electricity to discourage over production of coins. But it didn't actually need to peg the price to the cost of electricity. Instead it used non-linear equations. The logic went,
1. When the system is in equilibrium, it should cost exactly as much in electricity cost to generate a coin as that coin is worth. Therefore ZERO people would rationally choose to generate a coin.
2. When external demand increases the value of a coin will move above equilibrium. Therefor EVERY rational person would choose to generate new coins. LET THEM! Then increase the difficulty of generating coins in proportion to the number of coins rational people chose to generate.
3. The speculators must then RACE to the exchanges to sell their coins before the exchange rate falls back to their personal cost of electricity. Otherwise they can't pay their electric bill.
4. Increasing the supply of coins AT THE EXCHANGE puts downward pressure on the price.
5. Increasing the difficulty, increases the cost of generating new coins, pushing the system back to equilibrium.
6. (Tired of typing. Pretend the logic for when the value falls below equilibrium is here.)
I thought it was genius. I'd proved that a StableCoin could theoretically be created. Etlase2, however, still thought I was an idiot. My presumption wasn't what he was saying at all. I had failed to understand his most basic premise. He was proposing that it always on average required 1 KWH to generate 1 Coin.
I thought the concept was silly, but just as an exercise I decided to see if I could make his concept work. I could! He was correct a stable coin could be created using his principles. So for the sake of having another concrete example of a potential StableCoin, I wrote it up for discussion as GEM. (the link is above in this thread somewhere.)
Now when I wrote it up, I still thought the MordorCoin concept was stupid. It SHOULD NOT require so much energy to create a stable currency. WTF! the Federal Reserve and Bureau of Engraving and Printing combined don't use that much energy!
But at least three people were discussing the concept so I decided not to derail the discussion. I figured that if I could convince 10 people that a StableCoin was plausible, then I'd work on convincing them we could make the whole system more electrically efficient.
Unfortunately, we never got more that 4 people to believe that StableCoins could be created without REQUIRING a central exchange to directly make monetary policy decisions. We had PROVED the opposite at least 3 separate ways, but we couldn't overcome everyone's preconceived notions.
That said...
The only way economists know how to that is by watching a certain basket of goods, compute the CPI and control the monetary variables to that effect. It's simply absurd to think a distributed currency could compute a distributed version of the CPI...
You are absolutely right, we couldn't write a program to do all that.
...And there's no way to design the currency to be intrinsically stable, because the value of money is entirely driven by external factors...
It's also pretty clear to me that someone or something has to have some relationship to the external reality in order to create any meaningful stability. The functions CANNOT be only self-referential.
Who observes the external world, and how they do so, are the open questions.
If you want to stabilize a ship on the open sea, you don't need a reference to stable land to do so. You don't need a reference wave height, period, or relative sea level. You need external information to "leak" into the system. In this case the information leaks in through MOMENTUM. A change in position requires movement. Movement has a velocity. A change in velocity requires acceleration. Acceleration of a known mass equals implies the external force applied. (Not a great explanation)
But the point is that while the inference chain may be long... computers calculate really fast! As long as we figure out where the appropriate information leaks into the system, we can stabilize it.
I think Impaler might be onto something in regards to exchange rate discovery using some internal tradeable commodity, but I can't quite put my finger on it. As I've said previously, blockchain transaction rate, "coin days destroyed" or other such folly are not good signals...
I think Impaler might be on to something to. Again I'm not exactly sure how the information "leaks" into the system, but it sure seams like it might.
The goal is to eliminate external dependencies and statistical noise and to come to faithful predictions about actual adoption and use by internal metrics alone, like amount and volume of transactions. Maybe more metrics can be found. Of course people move wallets around, but this should also even out in the long term. Transaction fees may be able to discourage all too much manipulation. They will have to be fixed to a reasonable level. The exchange rate is intended to be boring and not attract speculators.
I think you are saying the same thing. But just to be clear we need to understand where EXTERNAL REALITY leaks into our system, before anyone or anything can determine the proper forces to stabilize it.
A direct way to incorporate the price information is to use a vote and I tend to believe all other schemes can be reduced to this - it they form a majority users would just fork the chain and modify the inflation rate algorithm.
Sounds interesting; I originally did not intend a voting mechanism, but if metrics cannot be discovered automatically, why not let money supply growth be voted upon somewhat democratically. I don't understand why old miners would vote for no new coins for themselves though.
Speculating through futures IS VOTING. Importantly it is voting by people who are ACTUALLY OBSERVING the external world rationally. Voting by people who are thinking "philosophically" like fixed-coin bitcoin fanboys doesn't leak any useful information into the system.
You really need access to some real currency market. Like the built in market in Ripple for example...
It seems that real world central banks have a pretty good grip on this problem and regular currencies are more or less stable, so pegging to a real world currency, be it USD, EUR, GBP, or a basket like SDR, is probably the best we can practically achieve. It's also a single number that we need to discover or be told, so it seems a reliable distributed algorithm, be it a vote from the users or an internal market, can agree to it's value.
I agree that SOMEONE somewhere needs access to this information before it can "leak" into our system. However, I'm not ready to jump to conclusions that it must be measured by a trusted authority or deliberately injected. In fact, as with my ship stabilization example, and my initial StableCoin example it might already be measurable based upon a derivative value. In both cases observation is done by measuring "acceleration". In my StableCoin example, I measured the change in coin generation velocity. From that I could infer what speculators had observed in the external market.
And yes I agree, using a reference point we don't have to calculate makes this conversation and system design easier and faster. It might make the conversation much less fascinating!
1. A StableCoin needs to maintain it's value in reference to a basket of common goods, otherwise it's unstable by definition; speculation, bubbles, etc.
2. We have no chance to compute the value of that basket with a distributed algorithm
3. There is no monetary law that can guarantee intrinsic price stability, it's an economic impossibility
4. Therefore we need to find some proxy of SC's CPI, and peg it's long term value to it; if the long term value is credible, the market will do the short term and price stickiness will appear
5. What CPI proxy to use ?
I agree with this logic, but I'm not ready to commit to a decision yet. I'm reasonably convinced that if we can prove we can stabilize to any CPI particular proxy, we could just as easily stabilize to any of the others as well. While the choice of with CPI proxy to use makes an interesting debate. I don't think that choice is on our "critical path" at the moment.
"If a loaf of bread costs 1 DCR in 2012, then a loaf of broad will cost 1 DCR in 2050, assuming the production costs of bread and money have not changed." This idea has been my cornerstone.
Yes, that's a restatement of the stability problem....
We'll probably have to standardize on some terms. I propose the following definitions for discussion:
StableCoin - An abstract class of COINS which have the shared property that their monetary policy (coin creation/destruction bounding algorithms) will never allow the coin's future value to "tend toward infinity" or "tend toward zero" given the case of unbounded adoption and unbounded increase in external value traded.
GrailCoin - sub-class of StableCoin whose value attempts to always tend toward the value it had on the day the coin was first launched. It should retain long term value stability even if every reference its value can be measured against varies independently.
InertiaCoin - a subclass of StableCoin whose value is intended to deliberately resist change. InertiaCoin may be pushed off its initial price by extreme external conditions. But it will always re-stabilize to some appropriate value. (non zero, non infinite) Any coin with infinite inertia IS A GrailCoin. But not all GrailCoins need be InertiaCoins. Grail coins always move back to their initial value when pushed off. InfiniteInertia means the value can never be pushed off.
MordorCoin - a sub-class of StableCoin requiring a fixed expenditure of electricity to mine.
CPICoin - a specific StableCoin whose value tends toward a particular measurable consumer price index.
FiatCoin - a specific StableCoin whose exchange rate value tends toward a particular fiat currency.
DollarCoin, EuroCoin, YenCoin, etc. - A FiatCoin intended to always trade 1 to 1 with USD, Euro, Yen, etc.
For reverence, my initial coin (described above) was an InertiaCoin.
GEM was a MordorCoin.
On the other hand, pegging to energy or hardware costs is not an optimal idea because energy is relatively volatile. Energy should be just a component of SC's CPI. I don't want to sound patronizing towards your proposal, I just think it's an objectively worse CPI than simply leveraging the USD rate. Nor is it possible to find out the energy costs without external information. So if we need external information either way, why not use the best CPI proxy we can find, the exchange rate ?
Einstein talked about standing in a free-falling elevator. It helped him visualize what was truly necessary and what was superfluous to the problem at hand. I don't think he ever intended that people actually stand in free-falling elevators because it would facilitate their epiphany.
:-)
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Can this process be done WITHOUT directly referencing an exchange and WITHOUT transferring fiat between parties? 
