Thanks for your response.

My worry is if the server will know which public addresses are derived from one another, and thus be able to link them all to a single pseudonym or identity.  Or if they are all linked to a single account on the server.

"A private information retrieval (PIR) protocol allows a user to retrieve an item from a server in possession of a database without revealing which item they are retrieving."

Edit: here's the link http://en.wikipedia.org/wiki/Private_information_retrieval

Edit: Also worried if addresses can be linked by the server because their balances might be queried in batches, or by the same IP address.

This is great!

I'm wondering how you plan to deal with requests from law enforcement for transaction history/identification?

Will you charge per request/is this part of your business model?

Not saying these are necessarily bad things, as it's pretty much the norm.

If it's not part of your business model, then do you have any plans, or know if it's possible to make your server unaware of transaction histories, and unable to map identities to transactions?

I'm not a developer, and have no idea how this would work, but PIR comes to mind.  Any thoughts on that?

Thanks for the great work!

jtimon,

I appreciate your response in post #110, but I'll respond to it in this thread only if people end up disagreeing that any long-run steady deflation problem should be tackled down the road.

If you reread your post #66, you'll see your only objection to steady deflation was volatility.  And then you even agreed that steady deflation, not volatility, was the problem later on:
It was only after that, and before jtimon's post that I asked for a direct refutation of my description of steady deflation, so I don't see what your hostility is all about.  I'll stop addressing you in this thread if I'm bothering you.

Sure.  The problems to be solved are the temporary hurdles of price volatility and merchant adoption, while effectively avoiding splitting the user base, and making the network effect - and thus reduction in price volatility - harder to achieve.  Any potential long run problems like steady deflation or lack of mining incentives should be looked at separately, and can be easily overcome later on if the time comes that they are relevant.  As I believe cunicula agrees, they should not be a consideration at this time.

Based on the conversations here, these problems appear to require human management to be most effectively solved, and any decentralized solutions have been admittedly lacking.  So to solve these problems while keeping the user base effectively contiguous, I proposed having all of the new currency be issued through a "distributed central bank".  By distributed, I mean that any transactions it engages in must be signed by some threshold number of the organizations that run it.  This is possible using the OP code CHECKMULTISIG which isn't currently enabled in Bitcoin.  The bank would uphold a promise to redeem its currency 1-1 for bitcoins, plus any variable fees.

It can credibly keep this promise, without any risk of a run, by using demurrage when it wants to devalue the currency instead of inflation.  Demurrage results in excess reserves being held by the bank, which can be used later on to pay interest to currency holders in order to fight undesirable currency devaluation, as well as to subsidize merchants and developers.  In this way, the price chart of the new currency could look more like a moving average of Bitcoin's if the bank does a good job.

Gresham's law would need to be enforced during times of deliberate currency devaluation, since otherwise people would just dump the currency on the bank 1-1 for bitcoins.  This can be done by deterring redemption at these times with fees.  Conversely, while the bank is supporting the currency with interest, arbitrageurs need to be deterred with fees from buying up a ton of the new currency from the bank 1-1 for bitcoins, and soaking up all the available excess reserves to be paid out.

Txn fees can also be used to devalue the currency, and collect revenue to be distributed as interest, or merchant and developer subsidies.

Despite the increased centralization, trust should not be an issue as it can be distributed over multiple organizations in the way described above.  Management can also be distributed over multiple jurisdictions, and because the backing is non-physical, it should be resistant to confiscation by states, unlike gold for example.  Also, because this is a measure designed to overcome the temporary hurdles described above, the arrangement doesn't have to last forever, or even very long, hopefully.  Afterward, the bank can stop issuing new currency, gradually redeem all of what remains in circulation, and then finally disband once it's achieved its purpose.

This solution effectively avoids splitting the user base since the relative valuation of the new currency and Bitcoin is completely determined by the bank's transparent monetary policy.  This means that added trading depth in one should lead to added stability in the other as well by the actions of arbitrageurs.

It also avoids having to solve the initial distribution problem and builds off of the work already done by Bitcoin toward solving the initial adoption and volatility smoothing problems.  People are incentivized to buy into and hold onto the new currency because it offers them improved stability, and out of the sense that by doing so, they're helping to aid the the adoption and development of Bitcoin, thereby increasing the value of their holdings in the long run.

If this is successful in giving us a widely adopted, steadily deflating currency, then at that point the protocol and blockchain can be forked to solve the steady deflation problem, if it is indeed a problem.  Or if human feedback is desired, then a new "distributed central bank" can form with this new purpose.  I'd prefer the latter solution, as it would be more effective, and the transition wouldn't be at all economically disruptive.  That, or a gradual transition to the former via the latter.  In the same way any potential future miner incentive problem can be addressed.

If the concern is bank runs, then as I mentioned above, full-reserves can be maintained while achieving any desired inflationary effects using demurrage.  The excess reserves created by demurrage can then be used to pay interest later on when inflation needs to be controlled.

To enforce Gresham's Law while engaging in demurrage, appropriate fees must be charged as deterrents to redemption.  And new issuance fees must be charged while paying interest in order to prevent speculators from immediately coming in and soaking up all of the bank's excess reserves.

Could you be a little more specific though on what you see the problem to be?

You're absolutely right.  OTOH, since the relative valuation of the new currency and Bitcoin is completely determined by the bank's transparent monetary policy, added trading depth in one should lead to added stability in the other as well by the actions of arbitrage seekers.

From that link:
I believe my post #58 in this thread addresses this.  It shows that it's not only the very best investments, but also any approximately average or better ones will get funded during deflation.  Furthermore, the money that would have otherwise gotten loaned instead gets hoarded, but it still provides a benefit to the economy, albeit less directly, and in ways that you can't see; it prevents the bidding up of the prices of goods in the economy that the borrower would have otherwise purchased.

In your example, the baker wouldn't take out the loan because his investment isn't at least as profitable as the average in the economy.  He would not be buying the flour that he otherwise would have, and so more efficient bakeries can now benefit from lower flour prices due to not having to compete with the would-be baker to buy it.  You might say that farmers would eventually just compensate for this increased demand, and increase supplies, but remember that this diversion of their resources would be occurring to accommodate an investment that is producing a below average return, and should perhaps not be seen as beneficial to the economy.

I guess I wasn't clear, but I'm referring to splitting trading depth among separate currencies, so that the price volatility problem is harder to overcome.

My worry is that splitting the user base between two (or more) separate block chains could be enough to doom both to failure, since this would make the price volatility hurdle that much harder to overcome.  This is one reason why I proposed in post #61 to roll out any new ones via a "distributed central bank", so that it both benefits from and reinforces Bitcoin, while at the same time competing for its users.

Does this worry you as well?

Remember, Gresham's Law only applies when the bad money is overvalued by fiat.  Otherwise, expect the exact opposite outcome.  (Bitcoin is the "good" money.)

I get the feeling that achieving the desired results from these alternative currencies is going to turn out to be a lot like herding cats.

While I'll reserve any agreement with Milton Friedman on this until my views of deflation given in post #58 and the second half of #60 are addressed, here's his idea on this:

Then I'd be much better convinced if you would directly address what is wrong with the description I gave of steady deflation in post #58.

If you agree that volatility is a temporary hurdle, then do you believe that it's clear at this point that it will not be overcome by Bitcoin, and now requires a new attempt?

We're trying to create a brand new currency here, without bootstrapping it off an existing measure of value.  This has happened very rarely throughout history, and the odds are vastly against us being successful with even one.  What this requires is widespread adoption and trading depth such that volatility is sufficiently smoothed out, and the currency is usable for accounting with.

Convincing those that don't understand this to spread their value among multiple cryptocurrencies meant for the exact same purpose so obviously goes against the goal of gaining sufficient trading depth of one.

This doesn't make sense to me.  A flight from the currency exerts inflationary pressure on it, doesn't it?

Even if volatility is self-correcting in this way, then this mechanism exists with or without your proposed constant 10% monetary inflation, right?

So if volatility is the problem, and not steady deflation, as you explained in your response to me above (reposted below), then what's the point of the constant 10% monetary inflation if it does nothing to address volatility?

Maybe I'm just stupid, but it seems to me that it might be a bad thing to attempt to divide the cryptocurrency user base among many different block chains in these early stages when a much greater market depth in one single one is so necessary to smooth out volatility, and make it usable.

Not to mention if people actually get on board with these, the collective cryptocurrency inflation rate will skyrocket, since they will be drawing primarily from users that would otherwise be using Bitcoin.

It's funny - dumping a whole bunch of very similar block chains onto the market was a potential attack I thought about a few months ago.  Just never thought people would take them seriously.

Perhaps this attack could be defended against by flooding the market with so many similar alternatives that people are overwhelmed, and just ignore them.  So... keep em coming?

(Monetary) Inflation and demurrage are not equivalent.  Inflation creates liabilities for the central bank.  With demurrage the currency can remain fully backed, and avoid any risk of a need to suspend redeemability.

I didn't say it discourages a run to the exit, and I also wouldn't want to hold onto these coins as long as hypothetical steadily deflating bitcoins are available as an alternative.  But if my above description of lending deflationary currencies is wrong, then the market might end up requiring such a currency to be available for the purposes of lending.

This does bring up the point that the inflating currency would require redemption fees to deter people from just cashing in to bitcoins as a safe store of value, and making the lending-currency effectively useless.

I agree, it's an ugly solution (to a problem I doubt is even real).  But it's the best that I can imagine.

Lastly I want to add that if my above characterization of lending deflationary currencies is wrong, and it is a problem even once Bitcoin's user base stabilizes, then a fractionally bitcoin-backed Bitcoin-like currency could always be launched that has whatever desired inflation rates you like.  This can be done using a low trust "distributed central bank" (the trust can be distributed over multiple organizations in multiple jurisdiction using the CHECKMULTISIG OP code) that issues all new currency, and offers redemption back to bitcoins.

This also allows for human feedback, so it's not so limited in its design as Bitcoin had to be.

It solves the initial distribution/adoption problems.

It also avoids to some extent competing for Bitcoin's existing and potential user base - something that should be seen as very undesirable in these early stages - since this isn't currently necessary due to the fact that the user base hasn't even come close to stabilizing, and because some proportion of bitcoins must back the new currency.

Because the specie that backs the currency (bitcoins) is likely impossible to confiscate in this scenario, I doubt this added centralization would be a problem.

Also, demurrage is much easier to implement with Bitcoin-like currencies than with traditional ones, so it can be used instead of inflation, with the same result, in order to avoid any risk of a bank run on the "distributed central bank".

Just a couple of quick points on this: the daily Forex turnover is $4T, so $1T does not seem like such a big deal when viewed this way.  Many markets have been much more cornered than this in the past, and every single fiat currency in existence now are good examples.  Plus, unlike the central banks that control these, once Satoshi's money is spent, it's gone.  No more can be conjured up.  Plus, it's highly doubtful that all or most of it would be held on to during an extremely unlikely rise to $14T market cap, unless Satoshi has some serious Scrooge McDuck syndrome, or is dead.

While there was a correlation between deflation and depression during the great depression, based on the broader data this is not generally true: http://www.google.ca/url?sa=t&source=web&cd=1&ved=0CBcQFjAA&url=http%3A%2F%2Fciteseerx.ist.psu.edu%2Fviewdoc%2Fdownload%3Fdoi%3D10.1.1.147.6290%26rep%3Drep1%26type%3Dpdf&ei=9-lJTq_JH4HeiALqqMiTBw&usg=AFQjCNHyeqoF52JQhW83o9O-FDXdSQHJxA

Furthermore, is it really clear that deflation was the cause, and not the result of the depression?  It makes more sense to me that you need a wave of bankruptcies first in order to destroy the debt based money in the fractional reserve system before you can get falling prices.

I'm no economist though, just pointing out what seems logical to me.

JohnDoe,

This is how I view the deflationary property of Bitcoin, and how it pertains to lending.  It's contrary to yours and many others' views of it, but it seems so clear to me, so I'm interested in hearing what you and others think about it here.

First of all, I'll consider the case if/when a steady user base has formed and the adoption rate has levelled off, as this is the only case where your perpetually fixed 10% annual bitcoin supply increase might make sense.  Otherwise, you're probably going to need human feedback in your system.

Because the bitcoin supply will at this time be roughly fixed/very slowly increasing, any deflation will be caused by overall growth in the bitcoin economy.  Thus, the deflation rate and overall growth rate are equal, modulo lost coins and short-term fluctuations in velocity.

So if the deflation rate is steady and predictable enough (true by the above assumption), then people will only borrow to invest if they are sure their investment can at least keep up with the overall growth rate of the bitcoin economy, plus the usual premium paid for risk/time value of money/lender profit.

And if the loan is thus not made, and the money hoarded instead, then the deferred consumption that the hoarded money represents results in concomitant price decreases in the bitcoin economy that would not have occurred if the loan had been made.  So the overall bitcoin economy is the beneficiary of the deferred consumption, rather than the borrower whose investment couldn't keep up with its growth rate.  And this should be the case, should it not?

When viewed this way, the deflation rate is seen as a valuable measure of something like the average ROI in the bitcoin economy, and loans that are made uneconomical due to it are revealed clearly by it to be just that.  And there are clearly still beneficiaries of deferred consumption in the event that bitcoins are hoarded instead of lent - they are instead the bitcoin users who would have otherwise been competing to buy the goods that the borrower would have bought.  They're Bastiat's "unseen", whereas the borrower would have been the "seen".