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.

Yeah, before Adam Smith wrote the Wealth of Nations and showed everyone what a dumb idea mercantilism was.

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.



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. 

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.


Agreed.


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.


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.


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.

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. 

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.


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.

Bitcoins aren't illegal 

First of all; I do not believe in the conspiracy theory about the Fed that it was somehow created to enrich bankers or some nonsense like that. The original purpose was merely to be an insurance policy against bank runs. A lender of last resort.

I do however think that "power corrupts" and that creating such an entity inevitably leads to the abuse of the power it has been given. This is what happened to the Fed (and I do think it should be abolished).


That is true, but I believe it is possible to make it stable in value without any form of central authority. If this is the case then it would not be possible to manipulate the mechanism.


It might become stable eventually within some broad range, like +/- 10-20%, but I don't think that is good enough to have a viable currency. Long term planning based on the value of bitcoins would be impossible.

The solution to this is to peg the value of the coins to something with stable value like gold. I think this should be possible without introducing any form of centralized authority.

That is a good thing. Governments only makes recessions worse!

The thing that really needs to be done in order to make Bitcoin viable as a currency is to make it stable in value. Currently Bitcoin is almost exclusively used for speculation because of the violent price swings.