Liquid Bitcoins (LBC) for stable prices

[ffe]

I wanted to take a stab at proposing a variant of the following proposal, but done right.

I came to think of a cool idea that maybe already has been discussed but the idea is to create a new digital currency backed by bitcoins. In the past, currencies were often backed by gold. Today, bitcoins can be seen as a digital version of gold or similar scarce resource. And it should be possible to create a new kind of digital currency that is backed by bitcoins.

What would the purpose of the new digital currency be? The main purpose would be to create a currency that was stable when it comes to inflation and deflation. So that prices for goods and services in the new digital currency would remain very stable over time. Another purpose would be to create a convenient level of the value of the new current. With bitcoins the price in the future for say a cup of coffee could be something like 0.0000032 BTC. That can be a bit unpractical. The price in the new currency, such as NDC (new digital currency) for the same cup of coffee could be 20 NDC, and remain fairly steady at that price.

The goal is to create a currency that merchants can use to price things that doesn’t fly all over the place yet constitutes trading with bitcoin rather than fiat money. The above topic comes close to accomplishing that but never nails the specifics.

I’ll call my new currency Liquid Bitcoins (LBC). It is centrally managed so issues of trust exist. It is convertible into bitcoin and holding it involves no risk of loosing buying power vs. bitcoin (I’ll explain how in a second). It also has a fixed purchasing power in the real world.  Let’s say 100 LBCs buy one big mac as in the referenced thread.
So you deposit bitcoin at the LBC exchange and you get a wallet with LBC.  Let say you deposit 1 BTC and a big mac costs 0.5 BTC at the moment. So 1 BTC <-> 200 LBC. You receive 200 LBCs allowing you to buy two big macs or you can cash out and get 1 BTC.

Here’s the magic sauce:

•   If BTC drops in value by a factor of 2 your wallet balance will be divided by that same factor of 2 (centrally managed, remember). The rate between BTC and LBC also changes. 1 BTC <-> 100 LBC.  Notice, you now have 100 LBCs and can buy only one big mac (due to the underlying drop in the backing currency, bitcoin) but you can still get your 1 BTC back because 100 LBC buys 1 BTC.

•   If instead, BTC rises in value by a factor of 2, your wallet balance will also go up by a factor of 2. Now 1 BTC <-> 400 LBC and you have 400 LBCs in your wallet. You can still only get 1 BTC for the 400 BTC in the market but you can now buy four big macs (due to the underlying rise in the backing currency, bitcoin)

LBC will always be worth 100 LBC to 1 big mac. A merchant can price his items in LBC and not worry about the changes in price of bitcoin. The 100 LBC he gets for a big mac will translate into the right amount of BTC no matter what the BTC market is doing. Yet he is receiving BTC for his merchandize (given he trusts the LBC market).

Why use LBCs? Because it is solid deflationary and tracks BTC value (through changes in wallet balance not buying power) . Because merchants can price things in it and not worry about changing the price as BTC swings in value. Because it is liquid and transactions are centrally cleared hence fast and secure   (given you trust the LBC market).

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[kjj]

You don't need a new currency to do this.  Just a being the third party and assuming the rollback risk in a transaction is all that is necessary.  Think Visa.

[ene]

I assume instead of a factor of 2, your currency works the same way for a factor of 3, or 1.04, or whatever.

Say I buy 3000 LBC and send you a message, "I want to buy two bags of coffee for 2000 LBC". Then you reply the next day and say that's OK with you. But since I sent the message my balance has been adjusted to 1500 LBC. So now I don't have enough money to pay you?

Similarly if I write a cheque how can I know my bank balance won't be adjusted before the payee cashes it in? I can have a bank account with 100 LBC in it and write a cheque for 100 LBC and then leave the account dormant. Later when the cheque gets cashed in, my bank account only has 80 LBC in it, even though I didn't buy or sell anything?


 

[ffe]

I assume instead of a factor of 2, your currency works the same way for a factor of 3, or 1.04, or whatever.

Say I buy 3000 LBC and send you a message, "I want to buy two bags of coffee for 2000 LBC". Then you reply the next day and say that's OK with you. But since I sent the message my balance has been adjusted to 1500 LBC. So now I don't have enough money to pay you?

Similarly if I write a cheque how can I know my bank balance won't be adjusted before the payee cashes it in? I can have a bank account with 100 LBC in it and write a cheque for 100 LBC and then leave the account dormant. Later when the cheque gets cashed in, my bank account only has 80 LBC in it, even though I didn't buy or sell anything?


 

Correct. And the reason is BTC went down in value. I'd have to buy more BTC and convert to LBC to honor my commitments. Coffee now costs more BTC. Still worth 2000 LBC though.

The market would not deal in checks. No reason for the market to assume the carrying risk. Just transfer the LBC directly since it's instant anyway.

[ffe]

You don't need a new currency to do this.  Just a being the third party and assuming the rollback risk in a transaction is all that is necessary.  Think Visa.

This doesn't solve any of the problems that the new currency tries to solve. Specifically a merchant would be constantly changing his prices to try to track the changes in BTC <-> dollar value.

[ene]

The market would not deal in checks. No reason for the market to assume the carrying risk. Just transfer the LBC directly since its instant anyway.

I didn't just mean checks but also any sort of future payment, for example a monthly subscription fee or any kind of contract whatsoever.

Have you actually thought of how you could possibly budget for your rent and groceries in a system like this?

[ffe]

The market would not deal in checks. No reason for the market to assume the carrying risk. Just transfer the LBC directly since its instant anyway.

I didn't just mean checks but also any sort of future payment, for example a monthly subscription fee or any kind of contract whatsoever.

Have you actually thought of how you could possibly budget for your rent and groceries in a system like this?

If you wanted to live in a BTC world where BTC changed in value by a lot on a regular basis you would have to deal with that by keeping your LBC balance high enough to pay your bills. Your bills are real world bills and as BTC went down in value you need to buy more BTC (and convert to LBC) to keep paying your bills. Otherwise step away from BTC and deal with fiat money.

I'm not sure what you were hoping LBC would solve. It will not solve your problems if BTC is loosing value relative to real goods. Thankfully BTC will probably rise in value (and so will your LBC balance) due to its design.

Note this is not a problem if your salary is in LBC.

[kjj]

You don't need a new currency to do this.  Just a being the third party and assuming the rollback risk in a transaction is all that is necessary.  Think Visa.

This doesn't solve any of the problems that the new currency tries to solve. Specifically a merchant would be constantly changing his prices to try to track the changes in BTC <-> dollar value.

There is already a currency that automatically adjusts to changes in the dollar/BTC exchange rate.  We call it the dollar.

All you are doing is moving the conversion from the seller to the buyer.  Oh, and adding another layer of complication, exchanges, and fees.

[ffe]

Note  that holding LBC can be accomplished without a BTC <-> LBC market as long as there was a trusted source for the conversion factor.

If our bitcoin wallets could go out and fetch the BTC/LBC conversion factor it could display your balance in LBC (while really holding BTC). When you wanted to transfer LBC to a merchant the wallet would really transfer the equivalent amount of BTC based on the current exchange rate.

Nobody is really holding LBC just pricing everything in LBC which has a fixed 100 LBC <-> big mac value.
The trusted source for the conversion factor could be a web site that gets the dollar value of 1 BTC from Mt Gox and has the price of 1 big mac in dollars entered once a day.

[ffe]

You don't need a new currency to do this.  Just a being the third party and assuming the rollback risk in a transaction is all that is necessary.  Think Visa.

This doesn't solve any of the problems that the new currency tries to solve. Specifically a merchant would be constantly changing his prices to try to track the changes in BTC <-> dollar value.

There is already a currency that automatically adjusts to changes in the dollar/BTC exchange rate.  We call it the dollar.

All you are doing is moving the conversion from the seller to the buyer.  Oh, and adding another layer of complication, exchanges, and fees.

No. Not at all. The dollars in your wallet will not go up if bitcoin doubles in value. The dollars in your wallet will buy less 10 years from now. I guarantee it.

Your LBC holdings will go up if bitcoin doubles in value and 100 LBC will still buy a big mac 10 years from now.

[ffe]

Note  that holding LBC can be accomplished without a BTC <-> LBC market as long as there was a trusted source for the conversion factor.

If our bitcoin wallets could go out and fetch the BTC/LBC conversion factor it could display your balance in LBC (while really holding BTC). When you wanted to transfer LBC to a merchant the wallet would really transfer the equivalent amount of BTC based on the current exchange rate.

Nobody is really holding LBC just pricing everything in LBC which has a fixed 100 LBC <-> big mac value.
The trusted source for the conversion factor could be a web site that gets the dollar value of 1 BTC from Mt Gox and has the price of 1 big mac in dollars entered once a day.

And of course we could anchor LBC to dollars rather than big macs. 1 LBC <-> 1 dollar. The conversion factor would come from Mt Gox and your wallet would still be holding BTC in reality with the LBC balance changing.

(You could just display the dollar balance and drop the LBC verbiage completely.    )

[Anders]

And of course we could anchor LBC to dollars rather than big macs. 1 LBC <-> 1 dollar. The conversion factor would come from Mt Gox and your wallet would still be holding BTC in reality with the LBC balance changing.

That's an interesting pegging. And then the currency could be called BitDollar. One BitDollar would always equal one USD. That would be very easy to use for buyers and sellers. But how would this kind of pegging be done? (I'm too lazy to think much about it at the moment  )

EDIT: Wait a minute. That could be done without the need for a new currency. It would be enough to just have a currency conversion calculation for ordinary bitcoins.

[Anders]

•   If BTC drops in value by a factor of 2 your wallet balance will be divided by that same factor of 2 (centrally managed, remember). The rate between BTC and LBC also changes. 1 BTC <-> 100 LBC.  Notice, you now have 100 LBCs and can buy only one big mac (due to the underlying drop in the backing currency, bitcoin) but you can still get your 1 BTC back because 100 LBC buys 1 BTC.

But then the amount of LBC in a person's wallet would go up and down like a yo-yo. That's not how a currency usually functions and it could be confusing to deal with.

[ffe]

•   If BTC drops in value by a factor of 2 your wallet balance will be divided by that same factor of 2 (centrally managed, remember). The rate between BTC and LBC also changes. 1 BTC <-> 100 LBC.  Notice, you now have 100 LBCs and can buy only one big mac (due to the underlying drop in the backing currency, bitcoin) but you can still get your 1 BTC back because 100 LBC buys 1 BTC.

But then the amount of LBC in a person's wallet would go up and down like a yo-yo. That's not how a currency usually functions and it could be confusing to deal with.

I agree. I think of this as a "whack a mole" problem. Something has to give. Today it's the price of a big mac in BTC.

Your wallet may not be showing the BTC balance going up and down like a yo-yo but what's less obvious is that what you can buy is going up and down. I'd rather have my buying power shown explicitly.

Best to show both I suppose.