Colored-bitcoins / Bitcoins 2.X and monetary base resizing.

[dpc]

Hi,

(EDIT: Could someone with right permissions move/re-post/link this post to some more advanced place of the forum. I belive the question is worth discussion, and really not a "newbie" one).

I have a question regarding Colored-bitcoins / Bitcoins 2.X concept.

From what I know the economy requires resizing (usualy expanding, but sometimes shrinking too) of monetary base according to underlying economy size.

The monetary economy needs a notion of credit to expand the monetary base. If one want to build a factory, that would benefit everyone, it's beneficial for all if funding this is easy and people have an incentive to seek for promising investments like this to lends their saved assets (abstracted by the currency they have).

The Fractional-Reserve Banking has this covered quite good, but with two big problems. First, the money creation and creding is centralized: ruled by greedy banksters and stupid politicians. Second, the economy can not easily sustain periods of shrinking economy as whole centralized currency falls into credit crunch.
 
Bitcoin removes the power of diluting money value from the hands of politicians, but it currently does not cover the democratized ability to create your own money by backing it with whatever you find worth to be used as backing-good.

The point of this posts is not to argue if Bitcoin has a problem of deflationary spiral etc.  What I want to ask is if Colored-bitcoins / Bitcoins 2.X concept solves this potential problem and if the above scenario is supported or not.

So, can you tell me if and how exactly would following scenario work with Colored-bitcoins / Bitcoins 2.X concept?

Let's say I'm a entrepreneur and I want to build a factory producing X. I want to emit sort of my own currency backed by future good that my factory will produce. I find people willing to invest that buy the new currency from me, using existing currencies. I use this existing currencies and my newly created one to self-credit myself: I buy machines, rent workers, etc.

Once my company starts producing goods, I'm obligated (by law, contracts, honor, trust) to fulfill my promises to honor currency I've introduced to sell goods I'm producing. With rising production of goods in my factory, I also should be able to emit more money to pay my obligations to a people trusting the value of my self-emitted currency. The market valuation of the backing goods and reputation of my company will drive the exchange value of my currency.

As in Bitcoin the amount of currency units is public, it would be always known how much currency have been emitted by my company in relation to the amount of goods it's able to produce. And in case of my company stop being useful for an economy and going broke, only my one particular currency would loose all value, leaving the whole reset of economy intact and by that shrinking monetary base of whole economy just like it's existence expanded it before.

In the above example, you can substitute the entrepreneur with small community, country or a city. I belive this is the way that future Bitcoin should work, which would democratize credit and money creation, distribute it among many local entities and by resizing monetery base, preventing deflationary spiral, credit shortage, etc.

The question is: are we heading there yet, or is Colored-bitcoins / Bitcoins 2.X something completely different?

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[ShireSilver]

From what I know the economy requires resizing (usualy expanding, but sometimes shrinking too) of monetary base according to underlying economy size.

No, it doesn't. Very simply, the valuation of the monetary unit can account for any flexibility needed as the economy grows or shrinks. You only need to change the size of the monetary base to account for the size of the economy if you attempt to fix the price of the monetary unit.

Of course, as Hayek has shown, no one can possibly know with certainty what the price of anything should be, so attempting to fix the price of the monetary unit is foolish.

[dpc]

From what I know the economy requires resizing (usualy expanding, but sometimes shrinking too) of monetary base according to underlying economy size.

No, it doesn't. Very simply, (...)

Let's stop the discussion about this particular point as this is not a subject of my post.

[DeathAndTaxes]

It seems you want to pretend all your assumptions are accurate (which they aren't) but lets pretend.

How would Joe Consumer know company ABC is only producing X coins backed by its production of widgets worth x?  He can't and that will lead to rampant debasement as companies (and other entities) simply print at will.   You have essentially decentralized the FED. The currency is still open to manipulation and debasement.  All the problems inherent in the FED are now manifested in a decentralized system where accountability is essentially impossible.  

Still I think you are missing the larger point.  cryto-currency (with the cost and complexity of the blockchain) is necessary in a model where you don't wan't/need to trust any third party.  In your scenario you need to trust the issuer.  If you need to trust the issuer you might as well centralize issuance of coins.  Transactions can be done more securely and with much lower overhead than a decentralized blockchain.

Take MtGox for example.  You could consider MtGox codes a form of decentralized currency.  Now the way they are designed now they aren't very fungible but imagine a system where via an API you could generate a code and break a code into smaller codes or combine multiple codes into a single code.   There would be no need for a blockchain.  If I sell you a widget and owe you $1 my wallet simply queries MtGox server taking an existing $100 code turning it into a $1 code & $99 code.  I safely store the $99 code and send you the $1 code.  You take that code query MtGox server and get a new $1 code.

There is no risk of reversibility or double spends.  Moving all that to a blockchain accomplishes nothing except a huge amount of cost/work. You have combined all the worst aspects of centralized currency with all the worst aspects of a cryptocurrency.

[dpc]

It seems you want to pretend all your assumptions are accurate (which they aren't) but lets pretend.

Yes. For not going into discussion, let's assume I'm right because this is not a point.

You now have to trust the issuer(s) defeating the purpose.

No. You don't have to. You can always use more secure "flavor of Bitcoin". No goverment or company is forcing you to use their own currency.


Please, I don't want to debate about my reasons. I want to know if this is technically possible with Colored-bitcoins / Bitcoins 2.X or what is the closest thing to it. Your response is out of topic.

[DeathAndTaxes]

How would Joe Consumer know company X is only producing X coins at the rate of its production?  He can't and that will lead to rampant debasement as companies (and other entities) simply print at will.   You have essentially decentralized the FED. The currency is still open to manipulation and debasement.  All the problems inherent in the FED are now manifested in a decentralized system where accountability is essentially impossible.

I am not debating your reasons.  You have no mechanism of validating the rate of production AND IF YOU COULD there is no need to use a crypto-currency.

If you know company X will always produce the proper amount of coins you can simply send and receive coins directly from company X and at a much lower transactional cost than using a blockchain.  If the issuer is trusted then you don't need a crypto-currency.  The ONLY PURPOSE of a crypto-currency is to replace a trusted issuer with a p2p network.

If the issuer is trust = no need for p2p network.
If the issuer is not trusted = no value in the worthless tokens it produces.

[dpc]

I am not debating your reasons.

Yes, you are doing exactly just this. I'm not asking how to validate the currency emission and company production. This is separate problem out of scope of this discussion. I'm asking if the described model of self-crediting is possible to achieve with Colored-bitcoins / Bitcoins 2.X or not and how exactly. And if not, what's the closes thing I could get. My reasons are there only to explain what I'm up to. The reasons behind them can be right or wrong, it's irrelevant.

[dpc]

Could anyone do me a favor and ask to look into this post in following thread: https://bitcointalk.org/index.php?topic=106373.100 ?

[Rudd-O]

From what I know the economy requires resizing (usualy expanding, but sometimes shrinking too) of monetary base according to underlying economy size.

If by "economy" you mean the money available and circulating, then whoever told you that it "requires resizing" lied to you.  In my experience, they lied because they (a) either profit from robbing you through currency inflation, or (b) they support these robbers (whether knowingly, or out of good-natured ignorance).

Accordingly, there is no need for a "Bitcoin 2.X" that will accommodate such perverse theft.  It is not being contemplated by the developers, and I wager it will not be contemplated in the near or far future.  Of course, anyone who wants to develop such a beast is more than welcome to fork Bitcoin and implement it.  Because no one likes to be robbed by currency debasement, most likely no one will shoot themselves in the foot by adopting such a beast, but at least it will be an option.

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In any case, that's not what I understand from the word "economy".  The economy, to me, is the sum total of all voluntary trade interactions.  Money is just a medium to facilitate trade -- so is barter, and so is credit, and so is a promise.

[dpc]

An insult and another out of topic answer. Bitcoin community is kind to me.

[Rudd-O]

An insult and another out of topic answer. Bitcoin community is kind to me.

If it helps: I don't think it was fair to call you "derp" either.

[dpc]

I did some analysis and it seems that at least colored bitcoin allows to achieve scenario I describe. The company would just take a smallest number (possibly near zero, or even zero if the extension ever allows it) of "vanilla" (non-colored) bitcoins and divide them into any arbitrary "cap-limit" of colored-bitcoins of this company. As both the number of created colored-bitcoins and number of colored-bitcoins that've left the original account is known, it will server as verification of emission promises of the company.

Like: I could create my personal "dpc-colored bitcoin" and ask to pay me in it for my IT services. With liquid and versatile p2p interchange market and software doing enough smart automation, obtaining dpc-colored bitcoins could be no different than buying any flavor of bitcoin and the people buying my services would easily know the price of my services in their own preferred vanilla / colored bitcoins. Obviously, as an emitter I can't over-commit (over-emit) my "dpc-colored bitcoin" because it would give me nothing: the abundance of it, would just make it cheaper to get on exchange markets.

As long as the original emitter is providing services and real goods backing for it's colored bitcoins the colored bitcoin will maintain it's value, while enjoying all the benefit of vanilla-bitcoin (anonymous transactions, no need to thrust third party when doing transaction, etc.).

I think the future of crypto-currency could be a diverse market of interchangeable colored-bitcoins emitted by any community/enterprise/individuals for which it makes sense. An individual could be too small in practice, but it's impossible to predict really. The vanilla bitcoin would serve only as a transmission lube (probably just for fees, to keep the miners happy and busy, securing all the transactions).

I suspected that people lured by idea that they can get infinitely rich being "early adopters" can't get over the fact that it's not going to happen and will introduce a lot of tension. But if BTC won't provide this model, I know something else will. One have to remember, that adopting existing Bitcoin software to use a little different, but backward-compatible Bitcoin fork will not be a big problem.