Ex. I mine a Contingent Block today. The Coins in the Contingent Block become a bitcoin Block on August 1st 0:00 UTC or Block xxxx if difficulty is less than X, and disappear otherwise. In the meantime, I can trade the contingent coins on an electronic exchange similar to bitparking. 

Now note that (barring changes to mining tech) difficulty on August 1st [or block xxxx] proxies for the USD/BTC exchange rate on August 1st. The difficulty price relationship will only become stronger over time, once the mining business is more mature. Thus if I trade some bitcoin for some contingent coins, I could remove a considerable fraction (probably the majority) of the variance in the USD value of my BTC holdings as of August 1st. The insurance relies on a p2p system with block chain integrity as the only counterparty. It would be much, much cheaper to use this system for insurance rather than a traditional market which exposes users to counterparty risk.

Difficulty of regular and contingent Blocks can be pegged so that the total number of coins and contingent coins generated at block time t is fixed in all future states of the world. Fixing the generation rate would make contingent claims a scarce resource, i.e. contingent claims would not affect long-term money supply trends. Relative difficulty for each coin type would be adjusted according to a system of linear equations that related past difficulty levels to current difficulty and which incorporated the constraint that expected total supply generation remained constant (i.e. solution of a system of linear equations)

Alternatively, a p2p contracting system could be implemented which allows bitcoins to be held in escrow by a blockchain and then distributes bitcoins at expiration according to difficulty information in the bitcoin block chain. The block chain would need to be secured using a proof of work system that rewarded individuals performing the work with contract fees. Contracts would need to be standardized (for example you can only contract on ln difficulty >= 0, 0.1, 0.2, .... and only on realization on the first day of each month or week). It is important that each side of the contract could be freely traded to other peers, so that holdings in these contracts would remain liquid.

I am not a programmer, so I don't know which type of system would be easier to implement. Combining everything in one blockchain seems more secure.

Either of these systems would make it much easier for merchants to adopt bitcoin without subjecting themselves to large risks or the considerable expense of exchanging BTC for USD after every transaction. The value of bitcoin is inversely proportional to its velocity. If merchants are constantly exchanging BTC for USD after every transaction, the velocity will be high and BTC value will be low. Instead Merchants could hold BTC and a bundle of BTC contingent claims aka BTC derivatives. If unwilling to bear the residual risks, they could purchase supplementary USD-denominated insurance on futures markets. The value of BTC would still be higher because much of the insurance market could be denominated in BTC.

"Bitcoin is technically sophisticated. As a monetary system, it looks primitive." - The Economist
I think this is a correct assessment. If bitcoin doesn't eventually introduce more sophisticated p2p monetary instruments, some other digital currency will. This currency will be much easier for merchants to adopt. If bitcoin hasn't achieved world domination before this happens, bitcoin will disappear and the new currency will take over.

For a simpler proposal for more basic monetary instruments (bonds), see my post here:
http://forum.bitcoin.org/index.php?topic=18288.0

Captain, extrapolating difficulty increases without accounting for profitability is stupid. There is no way that difficulty will continue to increase at 30% every 10 days unless the price goes back up to 30 or more. Notice how many people are selling used 5830s now in the forum. This is a strong indication that people are reluctant to add to capacity now and that difficulty growth will almost certainly slow. I think the real threat (and reason that I wouldn't invest) is that price could stagnate or fall somewhat, leaving people with big new investments in the lurch.

I wish someone would come up with a better use for GLBSE than mining. If someone trustworthy listed a somewhat professional sexcam or gambling site there, I would be eager to invest my coin. Bitcoin users almost all young men -> porn/gambling are perfect target markets.

  Is the OP a agent-provocateur purposefully discrediting bitcoin by making bitcoin users look like idiots? Who sent you here?

I'm concerned that negative comments directed at people whose money has been stolen are driven by self-interested concern about their effects on the exchange rate. Of course thefts affect the exchange rate, but it is much better to have hacking problems exposed, so that Mt. Gox can be fixed or abandoned instead of shutting everyone up and waiting for something really serious to happen (again Allinvain counts as serious in my book). Some of you people are like listening to directives from the CCP Ministry of Truth. 'This is all a conspiracy of the imperialist bankers seeking to discredit bitcoin' Covering up problems until they explode is not a good approach. Thanks to everyone who is reporting thefts and vulnerabilities for helping to improve security.

@MeSarah
The redomination you suggest (which I think is a good one though though USD like terms might be better than WOW currency like terms) could be achieved by developing an improved GUI. I think that developers will do this in the near future. I don't think that creating new currencies from scratch is a good idea, however. For the reasons described below:

Eventually a digital currency will emerge (call it Bettercoin) which allows for more p2p contracting possibilities than are currently possible with Bitcoin. If bitcoin is widely used before Bettercoin emerges, than bitcoin will likely remain dominant despite its manifest technological inferiority (think QWERTY keyboards vs. superior alternative key arrangements, or Paypal vs. Bitcoin, or Windows vs. Linux). This is what current holders of bitcoin would like to see happen. If Bettercoin emerges before bitcoin becomes widely used, Bettercoin will gather a larger user base and bitcoin will collapse in value. Bitcoin holders would not be happy about that. The issue with creating new currencies from scratch (ones that don't grandfather in existing holdings) is that these currencies would fragment bitcoin in to several smaller interest groups each of which would like to see their currency take off. Collectively, the currencies would lose value due to uncertainty over which one would eventually take over. Bettercoin would be better positioned to step in and take over the market, and existing asset holders would be wiped out. 

I am doubtful that they will pursue options like the one I am suggesting precisely because of this fragmentation issue, but think that this is misguided. What I am suggesting would require significant modifications to the underlying currency generation rules. Most likely it would entail a splitting bitcoin into two currencies. However, provided that
1) one branch had superior features (for example was faster, more secure, or allowed for more contracting possibilities) 
2) this branch protected the value of incumbent bitcoin holders by grandfathering in their holdings within a certain time frame.
Then everyone would rapidly convert to the superior currency branch and fragmentation would be short-lived. I am worried that a reluctance to experiment with more radical modifications will leave bitcoin in a weaker position relative to future competitors. If everyone is too fixated on preserving Satoshi's original plan, then bitcoin will be unable to adopt features offered by superior p2p platforms. If bitcoin experiments with new features now, then bitcoin will be ready to copy features offered by competitors, effectively killing them off before they became threatening.

I would be happy if someone could come up with a technical solution that didn't involve mining and forking the block chain. However, using a contract where a third party holds collateral does not accomplish what I want done. The idea is to reduce the cost of contracting and make bitcoin a more efficient medium of exchange.  This should be the primary goal of bitcoin developers.

I think the main problem is that the post readers aren't sufficiently intelligent and/or ignorant of economics.  I understand that almost no one here understands economics well, but the computer scientists are at least intelligent. As far as me writing the code, I am an economics professor, not a computer programmer.

This doesn't appear to be generating much well-reasoned discussion here. Could someone help me move this to Project Development and Technical Discussion?

Nice site!

Jessy Kang is right on. There are perhaps four useful parts of the forum.

1) Dissemination of news.

2) Discussion of Project Development [Development]

3) Answering users/vendors questions about bitcoin [newbies forum maybe renamed to users forum to avoid being pejorative]

4) Advertising bitcoin services and archiving feedback from users who have utilized the service or have questions about the service. [Marketplace]

Most everything else has a negative impact (willing to debate exceptions). In particular, reading the forum makes me worry that an exciting technology
may have fallen into the hands of idiots and fanatics who will fail to realize its potential. The discussions about market trends are particularly unhelpful.  

Would be better to have a forum that depended subscriptions to operate; that is a forum run like a business. Posting privileges would be restricted
to the marketplace feedback and the newbie/users sections for individuals who did not pay the fee. Abuse of news dissemination, project development, and service advertisement could result in
a warning and then membership termination.

That electricity will jump to 135% of revenue seems absurd to me.  How much of mining is conducted below ~$0.12 KwH with no other costs in terms of hardware depreciation? It would have to be a large fraction for a near-term movement like this where electricity cost > revenue at $0.16 per KwH. I think it will take about a year for mining to move to low cost locations, so they might have a timing window though I agree that it is dodgy.

People who set up ops in areas where electricity is heavily subsidized such as the Ukraine [$0.03 per KwH] have the best investment prospects.
http://en.wikipedia.org/wiki/Electricity_pricing

Note: I am not suggesting that anyone send coins to Ukrainian scammers who set themselves up on GLBSE. Just that if you live in the Ukraine, investing in mining is probably still a good idea.

Seems to me they should take the market offline until this is fixed.

Pretty sure Mt. Gox would have legal responsibility for coins/funds lost due to the exploit.

Allowing users who haven't read this thread to lose funds is negligent.

Why not just solicit shares for plan B if it is more profitable?

@ relative

Very glad you are not on the FED reserve board. Of course, cash dominates bonds if the bonds offer a zero percent or negative interest rate. This is the FED's 0% lower bound on nominal interest rates that is often referred to in the popular press. Bonds would not sell at a zero percent interest rate because other people (not me) would rather spend their bitcoins now.  

@Stefan. I really appreciate your question. The short answer is that the miners would observe prices on markets and their consequent mining decisions would determine difficulty. Here are some algebraic details of how it might work.

Here is the approximate existing system which provides a starting point and is left basically intact:

A(t) is the actual total coins of all maturities per hour during period t
H is the  target number of aggregate coins of all types per hour. This decreases according to those strange discontinuities introduced in Satoshi's system, but I'll just pretend it is constant for simplicity.
D(t) = aggregate difficulty needed to approximate H at time A(t)

D(t)= [D(t-1)A(t-1)]/H   Note that this is determined without knowing anything about the past difficulties of specific maturity bonds.
    
Now I graft some bonds on to the existing system. Incorporating multiple bond types should be easy.

Ab(t) is the number of coins of one year maturity per hour during period t.
Ac(t) is the number of coins of instant maturity per hour during period t.
A(t) = Ab(t) + Ac(t) (by definition)

Db(t) is the difficulty for coins of one year maturity
Db(t) = [Db(t-1)Ab(t-1)] / D(t)  

Dc(t) is the difficulty for coins of instant maturity
Dc(t) = [Dc(t-1)Ac(t-1)] / D(t)

Rearranging the equations the ratio of the two difficulties is:

Dc(t)/Db(t)= Dc(t-1)Ac(t-1) /  Db(t-1)Ab(t-1)

Bounds on one period maximum upwards and downwards movements in the difficulty ratio would prevent sudden movements across maturities from screwing with the aggregate generation rate A(t).
e.g. Dc(t)/Db(t) = 0.8 [Dc(t-1)/Db(t-1)]           if       [Dc(t-1)Ac(t-1) /  Db(t-1)Ab(t-1)]   <=    0.8 [Dc(t-1)/Db(t-1)]
                       = [Dc(t-1)/Db(t-1)]               if       1.2 [Dc(t-1)/Db(t-1)] >  [Dc(t-1)Ac(t-1) /  Db(t-1)Ab(t-1)]   >    0.8 [Dc(t-1)/Db(t-1)]
                       = 1.2 [Dc(t-1)/Db(t-1)]          if       [Dc(t-1)Ac(t-1) /  Db(t-1)Ab(t-1)]   >    1.2 [Dc(t-1)/Db(t-1)]  
 
Initially the two difficulties should just be seeded as equal, Dc(t)/Db(t)=1. Over time Dc(t)/Db(t) would increase until it reaches a price that clears the mining market (i.e. miners are indifferent between maturities).
In the medium to long-term, Dc(t)/Db(t) would fall (increase) if markets became more (less) confident about the future of bitcoin.
  

Based on the poll and the probable number of wallets stored on Windows, Linux, and Mac OS among voters, Windows is the most secure OS to hold your wallet.

Should update the poll so that people can also select I was not hacked and indicate their OS. Current version not so useful.

How much US$ per KwH in your location? In the long-run, this will be a deciding factor on who is driven out of the business.

Mining the bonds is just an efficient way of organizing the bond market. Establishing this market should appeal to hoarders. This is the core proposal. The semantics are irrelevant and a waste of time to debate.  

Perhaps it will help to think of the bonds as bitcoin-denominated treasury bonds issued by the bitcoin software. Trading current bitcoin for bonds of identical bitcoin value is equivalent to borrowing money using
your bitcoin as collateral.

For example, I would like to hold bitcoin on the chance it is successful in a few years time. Since I plan to hoard, I would like to convert my bitcoin holdings into bonds. I don't want to invest in a company that might rip me off.  A bond-holding agent who needs to buy things with BTC would want to sell their bond holdings to me in exchange for current bitcoins. I can't transact with this agent because the market doesn't exist at present. The proposal would establish exceptionally low cost markets for this transaction. I doubt that a more efficient solution than embedding the market in the bitcoin client exists.

Establishing a BTC bond market would allow a portion speculation to be diverted to completely BTC denominated exchanges. This would reduce fluctuations vis-a-vis the USD by opening a lower transaction cost venue for speculators to establish long and short positions.

@ Stefan

Transacting with you (or anyone else) creates default risks that radically drive up the cost of transaction. Negotiating terms with you increases the costs of transactions, evaluating your rep and monitoring changes increases the costs of transaction. Profit you earn from creating one side of a market increases the costs of transactions. Transferring a contract with you to a third party is difficult and this increases the cost of transaction. Transaction costs are so high that at present the bond market is so illiquid that it almost doesn't exist.

My proposal solves all of the above problems in their entirety. Allowing private parties or exchanges to handle this trade is an extremely inefficient alternative. The current lack of a bond market suggests that it is not a viable option.

Schemes to stabilize prices by closing/taxing markets almost always end up by destabilize prices. Mahatir's exchange controls might be a rare exception.
The best way to reduce volatility is to create more efficient market mechanisms.


See my proposal for one such mechanism:

http://forum.bitcoin.org/index.php?topic=18288.0