[January 03, 2018]

(Since January 03, 2018, the paper has a new version including the pseudocode for block validation.)

An alternative consensus algorithm to both proof-of-work and proof-of-stake, proof-of-loss addresses all their deficiencies, including the lack of an organic block size limit, the risks of mining centralization, and the "nothing at stake" problem:

https://proof-of-loss.money/

[Keeping Ownership Decentralized]

https://medium.com/@mideava/metarepresented-money-759cfe446d84

Keeping Ownership Decentralized

Money represents a future commodity ownership. However, the only way of keeping this ownership rightful, hence decentralized, is to price commodities in metarepresented money. Any otherwise priced future ownership will not remain rightfully decentralized. This article explains why, by deriving the concepts, first of generic money, then of privately concrete money, and finally of metarepresented money from direct commodity exchange.

Transaction rights as the sellable reward for chaining blocks:

https://medium.com/money-versus-metamoney/5cf840491cba

I gave much thought to the problem of transaction fees in the last few days and concluded that, confirming a post by Vitalik Buterin^[1], it has no market-based solution. The ultimate reason is that a market requires buyers and sellers while mining cannot become decentralized and still have sellers. Total decentralization turns mining into a public service, and sellers must be private: with only buyers left, transaction fees tend to zero.

Fortunately, I also found a protocol-based solution to the problem, which goes a step further from Peercoin:

1. The reward for chaining proof-of-stake blocks comes from newly minted currency, like in Peercoin—which mints 1% new coins a year.

2. Based on information from the block chain, an algorithm constantly adjusts destructive fees just to offset the newly minted coins.

This way we have both a stable money supply and self-adjusted fees. The newly minted coins transfer value to block miners—from those who skip minting—partially via inflation while destructive fees constantly offset that inflation, leaving a value transfer equivalent to formal payments.

Yet such a value transfer is impossible with formal payments: instead of going directly to miners, its destructive fees go to the whole network as deflation, and only then to miners according to their contribution to the same inflation offset by those deflationary fees.

^[1] http://blog.ethereum.org/2014/02/01/on-transaction-fees-market-based-solutions/

Here is a proposal for achieving consensus on transaction fees, based on the Slasher^[1] algorithm:

1. Fees would come from proof-of-stake blocks but would be voted for in each proof-of-work block.
2. Miners voting for lower fees in their proof-of-work blocks would have a higher probability of mining a proof-of-stake block.
3. Mined proof-of-stake blocks would select the fees voted for in the proof-of-work blocks providing their signing privileges.

This would create two opposite incentives for miners when voting for fees:

1. Higher fees would increase their profit when mining a proof-of-stake block that included those fees.
2. Lower fees would increase their chances of mining a proof-of-stake block.

So transaction fees should remain within a reasonable interval.

^[1] http://blog.ethereum.org/2014/01/15/slasher-a-punitive-proof-of-stake-algorithm/


EDIT: There is a flaw in this proposal: miners with no long-term commitment would have an incentive to vote on arbitrarily lower fees merely to increase their mining probability while still enjoying the current, higher fees.

Unless money gets decentralized and stays fungible, the authority on public money steals an increasing part of its value by controlling its representation. This article introduces the reasons for that: it explains the advent of governments along with their central banks, then why only the decentralization and fungibility of money can consistently preserve the ownership of monetary value.

https://medium.com/money-versus-metamoney/8e7b9fbefd94

https://medium.com/money-versus-metamoney/e354a8d980c7

A representation of debt is an object representing "I owe (money to) you": an IOU.

Money can itself be an IOU. For example, when a commercial bank loans money deposited with it, this bank does not withdraw that money from the borrowed account. So the loaned money must belong to both its borrower and its loaner. Then:

1. To the borrower, an IOU becomes the loaner's money.

2. To the loaner, the borrower's money becomes an IOU.

This way, whether loaner and borrower are aware of that or not, their money has become an IOU. Thus, if I am the borrower and you are the loaner, this IOU is an object representing "I owe you" that money. So even as an IOU, our money remains what IOU.

Then, "I owe you" an... IOU: as long as we mistake debt for money, I owe you... the circumstance that I owe you... the circumstance that I owe you...

[Publicly Private Money]

We must consider public versus private money to learn how money can either be privately public, as in bank notes, or just publicly private, as in Bitcoin.


Publicly Private Money

In my pocket, I have an old leather wallet. It contains enough bank notes to buy a brand new wallet of a better model I saw in a magazine. This buying power exclusively belongs to me: I am the only one who can use those notes to buy anything. Likewise, if I handle them to another person, then instead of me, that person alone can use them to buy anything.

Still, although handling my bank notes to others can always transfer them their control, it will never transfer them their property: the notes themselves do not exclusively belong to me. For example, I have no right to destroy them: they are public. What exclusively belongs to me or to whoever else controls any such notes is rather their buying power, which hence must be private.

Indeed, if my bank notes were themselves exclusively mine, then I could transfer their control by selling them to others. However, this at least temporarily would prevent those notes from having any actual buying power. Then, by calling such a lost buying power monetary value, and whatever still has it its representation, we can conclude:

1. Monetary value must be private.

2. Its representation must be public.


Privately Public Money

Then, mistaking a representation of money for its represented monetary value makes that representation privately public. So any control of such a representational monetary value,¹ whether centralized or decentralized, must also be privately public.

No commodity money can inherently distinguish between itself and its represented monetary value. Hence, all commodity money must be privately public. With directly monetary commodities (like sheer monetary gold), private control of public monetary representations is individual, or decentralized. However, with proxy representations of commodity money (like receipts for deposited gold), private control of public money becomes institutional, or centralized. Hence the privately public nature of central banks: any monetary authority must be as privately public as the monetary representations it depends on controlling. While conversely, any monetary representation controlled by a central authority must be privately public.


Purely Public Monetary Privacy

The Bitcoin monetary system represents any monetary value as a private key, then metarepresents it as the corresponding public key. Never before a monetary representation was inherently distinct from its represented monetary value: for the first time in monetary history, controlling a private monetary value does not require any control of its public representation. With Bitcoin, a public object can represent a private monetary value without ever becoming itself private -- which makes its private control by any central monetary authority not only unnecessary, but also impossible.


Privacy Versus Anonymity

Monetary privacy means monetary control exclusiveness: the exclusive control of a monetary value and possibly of its public representation. It does not necessarily mean anonymity. Anonymous monetary control remains different from exclusive monetary control, even if helping protect it. This way, we can have monetary privacy without having monetary anonymity, despite not conversely.

1.  See http://omniequivalence.com/representational-monetary-identity/.

Let us analyze what happens in commercial banking (from http://omniequivalence.com/fractional-reserve-banking/ and http://omniequivalence.com/representational-monetary-identity/):

First, we have a deposit. Then, we have a loan of up to a fraction (of 90%) of this deposit. Finally, the borrower can deposit the borrowed money into another bank account, in the same bank or not. Suddenly, the trillion dollar question emerges: is the borrowed money in these two bank accounts the same?

• On the one hand, the answer is yes: all borrowed money came from the original deposit---so it is that same original money.
  
• On the other hand, the answer is no: all money deposited into the borrower's account possibly stays in the original depositor's account---so it is not that same original money.
  

How can that be?

Have you ever wondered why gold have been and ceased to be money so many times in history? Many talk about returning to gold, but if gold was that much better than fiat money, then why has fiat money recurrently replaced it? The supporters of Bitcoin would say centralization is to blame, since it allows the manipulation of the monetary system in favor of the wealthy. However, since most gold monetary systems were also centralized, how could centralization explain fiat monetary systems, especially debt-based ones? Clearly, centralization is not enough to explain our current monetary system.

Here I will present an alternative explanation that, despite recognizing the role of centralization, does not rely on it as a primary source of understanding.

Let us begin with money itself.

If a commodity has the same value of whatever has the same price, then these two values are neither of those objects for being the same, just like two numbers three are the same. And because this value common to both commodities is neither of them, it cannot have any of their utilities or material qualities, which derive from their material beings: their common value is the social abstraction of their utilities or material qualities for the sake of their common monetary value. This is money itself: an actual equivalent of all possible equivalents.

But commodity money--like gold--is also a merchandise, with its own economic value. This is clearly seen just by choosing another commodity to represent money, making money as concrete as gold, with all its utilities or material qualities.

Therefore, money has two dimensions: an abstract one, which is money itself, and a concrete one, which is its representation.

A representation can itself be represented: we already have replaced gold by many representations of it, like paper notes. However, most of these representations have one thing in common: just like gold, they make no inherent distinction between money itself and its representation--hence the following problem.

Lately, monetary representations have become ever cheaper to produce. Our last such representation is the cheapest so far: magnetic records readable by computers. Yet still, any confusion between money itself and its representation requires its value--the actual equivalence to all possible equivalents--to be the same as that of its representation, then decreasing with it. So preserving that value--hence money--requires delaying its most valuable representation, while keeping it also present as debt.

This is the origin of debt money: the confusion between money itself and its representation, which continuously depreciates money, forcing its original (more valuable) representation into the future as debt.

And here is the originality of Bitcoin: it is a form of money that, for the first time in history, inherently distinguishes between money itself (a private key) and its representation (the corresponding public key), eliminating the root of debt money.

Which is also why Bitcoin is incompatible with fractional reserve banking: in order to loan a fraction of any deposit, banks must confuse the identity of deposit money with its different representations in different bank accounts. This is what money creation in a debt monetary system actually means: cloning money identity by mistaking its different representations for it.

So, despite inspired by gold, Bitcoin is a fundamental departure from it: this cryptocurrency not only restores a valuable representation of money, but further enforces a permanent distinction between that representation and money itself--which neither gold nor bank accounts can do.

Hi,

Here is a way of restoring lost bitcoins.

By design, it is impossible to tell idle bitcoins from lost ones. However, with time, there will be an increasing number of lost bitcoins, which will further increase Bitcoin's inherent deflation unnecessarily. How to avoid that? The solution is to define an expiration period for bitcoins, after which any public key that does not reappear in the block chain will expire. Then the Bitcoin client must have functionality to resend those bitcoins to their current wallet (or to any other wallet) before they expire (the client could periodically verify and warn the user, asking what to do). The expiration interval could be a very comfortable one, say, 10 years. After their expiration, the network nodes can mine those expired bitcoins again, so mining remains residually alive.

Please comment on that one.