I have added "[PROPOSAL]" to my thread title. Hopefully nobody else will be disappointed


I agree that an argument that got the existing diverse user base to make a protocol change en-masse would have to be very compelling. If I can convince the community of my argument that this change would increase bitcoin values by about a million-fold, I think that would do the trick for most people.

Another possibility would be to split the block chain with people accepting the changes on one branch, and the old bitcoin protocol continuing on the other branch. That outcome would be much less desirable.


I think you make a very good point that the external exchange rate does not have to be perfectly exact. I would guess that the official description for oil-based coins (for instance) would say something like:

Oil-backed bitcoins are nominally pegged to the average movements of the following reference prices:

• Bloomberg's "WTI Cushing Spot" (http://www.bloomberg.com/energy/)
• CNN's current futures contract for Light Crude (http://money.cnn.com/data/commodities/)
• The United States Oil ETF as reported by Google (http://www.google.com/finance?q=NYSE:USO)
• The iPath Crude Oil Futures ETF as reported by Yahoo (http://finance.yahoo.com/q?s=OIL)
• . . . more sources . . .

If one source diverges significantly from the others, it will be ignored. Nodes will determine the appropriate price change by executing the following algorithm on the data sources above:

. . . .

Nodes will reject blocks reporting an oil exchange rate more than 0.5% different from their implementation of the above algorithm.

Something like that seems like it would work well enough, IMHO.


Miners already get to decide which transactions they include and which ones they don't include. I imagine that some or all of the small trading fees included in this plan would be paid to miners to give them a reason to implement the price tracking algorithms and include the extra transactions.

If they decide it isn't worth the work (or they are running an older version), they would just leave that hash out of their block entirely, and the fees would build up for the miner who was participating.


I imagine that "escrow" will be very much like any other bitcoin address, except only the protocol itself can control the coins there according to set rules which everyone agrees on. If somebody generated a block that said "the escrow fund paid all escrow coins to my address", the rest of the network would ignore that block because it didn't follow the rules.

I need you, and I need people like you, to do exactly what you are doing.

You point out possible problems, vulnerabilities, and things which just aren't quite clear. In response, I have to modify, clarify, and elaborate.

Maybe the final product will be a useful set of changes that allow bitcoin to change the world (again), or maybe it will just be a fun exercise.

Yes. I want derivatives which are an order of magnitude easier to use. So much easier that they are invisible and seemless to the average user.


I think I agree with those statements, if I understand them correctly, except that I think there is a HUGE advantage to holding oil-denominated bitcoins, whereas you say there is not much advantage.

Try creating a trading account to buy some oil futures. Go ahead, I'll wait . . . .

I bet your experience will be several orders of magnitude more complicated than clicking "value stored as" and choosing "oil" in your bitcoin client.


Well, resolving the conceptual issues is what this thread is for. I want to know if this idea has a fatal flaw.

I did not intend to pull a bait and switch. My intention is to discuss my proposal for what the second bitcoin whitepaper should cover. Would "My proposal for the second bitcoin whitepaper" be a better title?


Changing the protocol is quite possible. If more than 51% of users believe it is in their best interest to use the new protocol because it will increase the utility and value of bitcoins, then it will happen.

Trying to replace bitcoin with some wonderful new idea would be very difficult, but a proposal which extends the bitcoin protocol and adds value to existing bitcoins would go over quite well if people were convinced that it actually worked.

A change would probably take effect "after block #X" to give people time to switch to the new software before the change happens, similar to how Namecoin recently changed their protocol.

I believe my proposal would possibly even be backwards-compatible with the current bitcoin protocol.

What is not clear to me is what simulations or tests could be run on the protocol changes to ensure that they work as expected.


Most "let's change bitcoin" ideas DO suck. Maybe mine does to, but I'm digging as hard as I can to find valid counter-arguments.

Bitcoin currently relies on nodes to maintain a distributed timestamp, which is actually based on . . . an external authority! I don't think we can claim that bitcoin relies on no external authority at all. It relies on nodes to cooperate to make sure the data from the external authority is accurately imported into the block chain.

I see no reason why data from other external authorities (like the current price of oil) couldn't be tracked in the block chain as well.


My proposal does not require people to trade at the external exchange rate, it just nudges them in that direction by fee incentives to trade closer to that price. The actual price of oil-denominated bitcoins would be determined by good old-fashioned supply and demand.


It is possible to store oil transaction data only on nodes that care about oil, gold transaction data only on nodes that care about gold, etc. The only thing that must be added to the bitcoin block chain is one additional hash of all the transactions being tracked in these other data stores. Clients that care only about bitcoin would just see this one additional hash. If they later decided to mess around with gold, they could download the gold transactions, hash them, then add that hash to the published hashes for oil transactions, euro transactions, etc, then hash that, then verify that hash matches the latest master hash in the bitcoin block chain. I may not have described this perfectly, but you can read more in the official write up (not by me) of how this would work here: https://en.bitcoin.it/wiki/Alternative_Chains

Of course it is possible that all the data could just be put into the block chain, especially once the official client starts downloading only the headers of old blocks for new users.

My proposal may indeed have a fatal flaw (I am searching for it), but if it doesn't, I don't think anyone can deny the massive increase in bitcoin utility and value this would bring.

Hyperbitcoin vs bitcoin trading and exchange rates would be handled without an external exchange, so determining the exchange rate would be easy. All the other commodities and currencies would have their external exchange rates decided by voting, which would drive fees for the internal exchange rates, which would be driven by supply/demand (not voting). There would be very little motivation that I can see for anyone to mess with the external exchange rate voting. You might be able to annoy people by increasing fees a bit at the external spot price, but the vast majority of traders are going to vote for the correct external rate.


You are correct that a big drop in bitcoin prices would be the biggest test of this system. I imagine that the bitcoin protocol would have a target margin of safety for handling this. For instance, the target might be to maintain bitcoins in escrow worth 200% of the value of outstanding commodity/currency tokens if they were all redeemed at once for bitcoins. If the value of bitcoins in escrow fell, hyperbitcoins would be sold to speculators until the target was reached again. If the value of bitcoins in escrow rose, hyperbitcoins would be bought from speculators until the target was reached again. I THINK this would be plenty conservative, since an escrow system like this could easily hold LESS than the value of the tokens it owes if people trusted it (similar to a bank loaning more money than it has).

What is wrong with contracts, PGP keys, and webs of trust? The problem with them is they are hard to explain to Grandma. It's much easier to tell Grandma, "See, you bought some bitcoins, but you can store them as USD, Euros, gold, oil, . . . "


I hope you are right that bitcoin will eventually stabilize. However, price volatility favors speculators at the expense of people who just want to use bitcoin to engage in commerce or store value. The assertion that bitcoin will stabilize may be true, but it can't be proven. I'd rather have the protocol provide stability for the people that want it, and transfer the volatility to the speculators who want it.


Please don't be insulted if I offer to pay you for your post

The payments are kind of a gimmick to spur conversation on a topic that I am really really interested in.

I think perhaps you misunderstand what I am proposing. I am NOT suggesting that the protocol would change the number of blocks generated for bitcoins. I have no desire to change the way bitcoins are generated, which is an algorithm that many people have accepted and are already invested in.

Instead, I propose that people be given the option to transfer risk for bitcoin price fluctuations through the protocol in a way that can guarantee them a stable store of value as long as bitcoin remains a viable currency. The risk would be transferred to speculators.

The only thing the distributed exchange rates would be used for in my proposal would be to set trading fees. The closer people trade to the external exchange rate, the lower their trading fees. This is my proposed mechanism for ensuring that prices eventually converge with the exchange rates outside the network. See the example above for details: http://forum.bitcoin.org/index.php?topic=31645.msg400477#msg400477


I will watch your scheme unfold with great interest.

I personally prefer the "hold a barrel of oil" model too. Take a look at this post I made describing how it could work for buying and selling "U.S. dollar" denominated bitcoins, which is exactly how I imagine it could work for oil, gold, and anything else you can think of: http://forum.bitcoin.org/index.php?topic=31645.msg400477#msg400477

The idea DOES feel magical to me, which is why I'm pushing it so hard. There's no reason that binary contracts couldn't be built into the system too, but I really like the idea of something your kid brother or Grandma could use to buy/sell oil, gold, Euros, or anything else without understanding anything more than "buy a barrel of oil", "sell an ounce of gold", etc. No paperwork, no money trail, no proof of identification, no trying to grasp the difference between a put and a call or a futures contract. All you do is download bitcoin, get some bitcoins, and then start buying/selling whatever you want to hold.

I would personally hold the hyperbitcoins over any currency or commodity, allowing my bitcoins to be added to escrow as insurance against a crash in bitcoin prices in exchange for massive leveraged exposure to bitcoin price increases.

I looked over your proposal. It looks very interesting. Allowing people to vote on how many coins are generated is very different than having them vote on what they think the USD/bitcoin exchange rate is. If I'm understanding your proposal correctly, early adopters would vote for less coins generated, and would use their CPU/GPU power simply to prevent other people from getting coins. Newcomers would vote for lots of coins to be generated. That doesn't sound like a recipe for price stability to me, but maybe I am missing something.

You are quite right that trades cannot be made between users and escrow. The protocol would have to match users to each other directly. That is what I mean by the exchange rate fluctuating separately from real life.

Here is the example I would use:

User converts his bitcoins to USDcoins
Behind the scenes, his bitcoin client puts his bitcoins into the escrow fund. In return he gets USDCoins. The protocol gets those USDCoins by either 1) Buying them from another user who is selling them OR 2) Creating them out of thin air, and also creating balancing AntiUSDCoins, which it sells to another user. One of those options will be a net win for the escrow fund, and that will be the option chosen.

User later converts his USDCoins back to bitcoins
Behind the scenes, his bitcoin client either 1) Sells his USDCoins to another user, or 2) Buys AntiUSDCoins from another user and destroys both the USDCoins and the AntiUSDCoins. One of those options will be a net win for the escrow fund, and that will be the option chosen. The resulting bitcoins are then credited to the user.

In order to converge prices on reality, the protocol could charge a slightly higher fee the further you trade from the current external exchange rate.

Obviously the example above is more of a "market order" type of trade. Limit orders would also be needed to provide liquidity.

9 posts made my favorite list so far. Should be easy to get more than 10. The hard part will be narrowing them down to which ones I will pay for when the time comes . . .

Any idea why the tradehill gadget shows volume of 60k+ (twice as much as MtGox)?

BitcoinCharts.com shows a very different number!

Here's something weird. The google gadgets for these sites (got them here: http://forum.bitcoin.org/index.php?topic=10689.0) show Tradehill with twice as much volume as mtgox:

MtGox:
Last Price: 14.023
Buy: 14.023
Sell: 14.0499
High: 14.72299
Low: 13.76
Volume: 32014

TradeHill:
Last Price: 14.2
Buy: 14.01
Sell: 14.1998999998
High: 14.7399
Low: 13.75
Volume: 60613.4925944293

Probably the Google gadget is getting data from the wrong source . . . .

I LOVE the tradehill one. Now I can see both at once in igoogle or gmail!

I had to send another donation.

I think that the intrade idea was suggested as an alternative to holding "barrel of oil" type contracts. If speculation worked using binary options like intrade uses, you probably wouldn't be buying and selling bitcoin-backed contracts.

I agree that a perfectly stabilized currency is not possible. What is possible (in my opinion) is to let people choose who experiences the instability. The instability is there (risk), but with risk comes reward. I wish to give bitcoin users (at least) two additional choices beyond holding bitcoins: a low-risk low-reward extrapolation, and a high-risk high-reward extrapolation which takes on both the risk and reward from the people who chose low-risk low-reward.

I should add that the price of oil-denominated bitcoin, gold-denominated bitcoins, etc would have to be allowed to fluctuate somewhat separately from the official exchange rate. That way, bitcoin traders of those commodities could affect the real-life prices, and vice versa.

I created a separate thread for "The Second Bitcoin Whitepaper":

http://forum.bitcoin.org/index.php?topic=31645.0

I am officially extending my offer to pay for intelligent posts to include posts made in that thread as well.

This thread is now locked!

I have decided that I like morpheus' idea better than my own, so I am locking my threads about this stuff, and I encourage anyone interested in concepts like this to check out his thread:

https://bitcointalk.org/index.php?topic=29135.0

==============================================================


Imagine:

You download the latest bitcoin client, and upon opening it, you see that while your wallet is still enumerated in bitcoins, you now have the option (in a drop-down menu) to store that value at a guaranteed constant value pegged to your choice of USD, Euros, ounces of gold, ounces of silver, barrels of oil, and a couple dozen other currencies and commodities. You can also peg your value to fluctuate with the inverse of any of these. Finally, you have the option to continue to hold your value in bitcoins or in something called "hyperbitcoins". You can convert your holdings between any of these, or hold a combination of them, and each conversion costs you only the current bitcoin transaction fee.

Is this possible? I believe it is, and I believe it is the next step for bitcoin, and will lead to a million-fold increase in bitcoin prices (I describe my logic for the latter claim here: http://forum.bitcoin.org/?topic=7985.0)

This is not the "white paper" referenced in the title of this post, but I'm calling out for such a white paper to be created, and I'm describing some protocol changes the white paper could describe.

Here's how it would work:

People holding bitcoins denominated in USD, Euros, gold, oil, etc, deposit their bitcoins into an escrow fund held by the network. In exchange, they get a token guaranteed to be redeemable for bitcoins from the escrow fund at the pegged value at any point in the future. These tokens could be bought, sold, used in commerce, etc, just like bitcoins. You could send them to any bitcoin address, and that person would receive them as bitcoins. In this way, somebody could buy a t-shirt using oil-denominated bitcoins which they pay to the bitcoin address of a vendor who holds gold-denominated bitcoins. This would be completely transparent to both of them.

The key to making this possible without ever completely depleting the escrow fund is holding additional bitcoins in that fund by the protocol selling hyperbitcoins, which are a big bet on the rise of bitcoins versus ALL the other possible stores of value listed.

You can think of buying hyperbitcoins as buying shares in a company. If you convert a bitcoin to a hyperbitcoin, you are depositing that bitcoin (forever!) in the escrow fund described above to ensure its solvency.

In exchange, when bitcoin prices quadruple (and everything else indexed does not), there is now a surplus of bitcoins held in escrow. Some or all of that surplus value would be distributed to existing hyperbitcoin holders similar to how a company distributes profits to shareholders.

Hyperbitcoins would also be bought, sold, traded, etc, just like bitcoins or any of the currency/commodity tokens described above.

As an example, imagine you believe big-time in the future of bitcoins, so you convert your one bitcoin (worth $15) to a hyperbitcoin. Let's imagine that the escrow fund consists of 1M bitcoins, 250k of which came from hyperbitcoin sales to people like you.

Later, the value of bitcoins rises 100x versus the other currencies and commodities tracked. The escrow fund now holds 100x as much value as before. It only needs 5k bitcoins to cover its liabilities to the token-holders, but it has 1M bitcoins. Consequently, the escrow fund slowly starts distributing bitcoins to hyperbitcoin holders. To be conservative, the escrow fund makes these payments over many months, to protect itself in case the rise was only temporary.

Excess bitcoins could be distributed either by paying "dividends" in bitcoins, or by buying back hyperbitcoins on the open market. In the former case, once all excess bitcoins were distributed, you (the hyperbitcoin holder) now still have your hyperbitcoin (which you can always sell if you want) plus nearly 4 new bitcoins worth $1500 each (You did a lot better than if you had just held onto that one bitcoin). I believe the hypercoin buyback scenario would drive up hyperbitcoin prices, yielding a similar or possibly even greater profit.

The counter-example is if bitcoin prices crash, Now we run into the possibility that there aren't enough bitcoins in escrow to cover all the tokens being held if they were cashed out at once. Perhaps this would trigger a run on the escrow fund by people holding the tokens. I used to think that this scenario must be avoided at all costs, but after contemplating a doomsday scenario thought experiment (http://forum.bitcoin.org/index.php?topic=31645.msg403514#msg403514) I decided that the protocol will probably have to give up supporting the currency/commodity values when there aren't enough hyperbitcoin holders to absorb volatility.

There are several technological hurdles, including how to do a distributed exchange rate (the same way bitcoin currently does a distributed timestamp), and how to create a distributed exchange between bitcoins/hyperbitcoins, GoldCoins/AntiGoldCoins, OilCoins/AntiOilCoins, etc, that the protocol could run and use.

I first introduced the concept of hyperbitcoins in this thread: http://forum.bitcoin.org/index.php?topic=30741.0
The concept was extrapolated in this thread: http://forum.bitcoin.org/index.php?topic=31032.0

I believe this concept is so important to bitcoin's future that I am currently PAYING BITCOINS for intelligent posts in the latter thread, and I'm officially extending those payments so that posts in this thread are eligible as well. See this thread for details on the payments: http://forum.bitcoin.org/index.php?topic=31057.0

I have given a lot of thought as to how the bitcoin protocol could be extended to provide a stabilized currency, backed by bitcoin values.

The key is to transfer the risk of price fluctuations from merchants and other people wanting a stable store of value to speculators wanting leveraged exposure to bitcoins.

My first proposal on how this could be done was here: http://forum.bitcoin.org/index.php?topic=30741.0
I extrapolated that a bit, and it is being discussed further here: http://forum.bitcoin.org/index.php?topic=31032.0

This topic is so important for bitcoin's future (IMHO), that I am actually paying bitcoins for intelligent posts in the latter thread. See the thread for a link to the rules.