Alternate Bitcoin generation rate

[clinton]

Hi

I've been keeping my eye on Bitcoin for a while, but I haven't myself bought in, besides the few fractions of Bitcoins I've generated over the last few weeks.

I've been looking at the recent price rises and then falls, and I've been thinking about how to make the price of Bitcoins more stable.

I suggest that the following are good features for a stable currency:

(1) A process for the release of new currency that formulaic, not arbitrary and can not manipulated by anyone other than the market as a whole.
(2) Negative feedback mechanisms which stablise the value.

Typical fiat currencies attempt to do (2) through the central bank controlling the money supply, though it is debatable how well they perform that option.

On the other hand, they do not meet (1), as the price of money (interest rates) is not controlled by the market, but by the central bank.

Bitcoin clearly on the other hand, meets (1). But it has no mechanism for slowing the supply of new currency when the price goes down, or raising it when the price goes up. Bitcoins are released at a constant rate.

I propose to address this by the following change:

"Change the difficulty of generating bitcoins to be proportional to the number of Bitcoins in existence"

This I believe has a number of advantages over the current system:

(1) Whilst there is an early adopter bonus, it would not be as strong as it is currently.
(2) The cost of mining Bitcoins is more predictable, particularly over the medium term.
(3) There is a negative feedback mechanism. When the cost of generating bitcoins falls below the price, new supply increases, and vica versa.

Bitcoin has been compared to gold, but even gold has this negative feedback mechanism, in that when the price is high, more is mined and less is mined when the opposite is true.

I think Bitcoin needs such a mechanism for it to be a stable currency in the future.

I realise this will mean forking the network, but if people think this is a better way of doing things, perhaps new adopters of bitcoin should go with this approach. I believe it would require minimal changes to the client, which I'm happy to look into myself if there is interest, or would appreciated if someone else does also.

If this has been discussed elsewhere in the past, please feel free to direct me to it.

Any thoughts/improvements would be appreciated.

Clinton

[mellowhead]

The wild fluctuations seen recently are a result of this currency being so new, and in many cases being owned in large chunks by a few people who decided to sell out and grab a huge payout. The price will stabilize once more people have more pieces of the pie - once it has "ripened" a bit. In a way, these people selling their huge amounts of btc is a good thing, as it will then be distributed to a greater number of people.

Also we should see more stability as more products and services are available and bight and sold.

Until then, enjoy the ride!

[enmaku]

No need to fork the network, just realize that the miners are essentially the same as anyone else doing a job and reserve the right to unionize like any other labor force:  http://forum.bitcoin.org/index.php?topic=15595.0

[clinton]

Also we should see more stability as more products and services are available and bight and sold.

Until then, enjoy the ride!

I'm not so sure. Like I said, unlike gold, bitcoin does not have a feedback mechanism where more gold is mined when the price is higher. This I believe stablises the price.

When the market doesn't control the supply side, you've only got half the equation. I feel this makes it harder for bitcoin to achieve stable prices, whereas I think my proposal will address that.

[mellowhead]

The market doesn't control the supply; the supply rate is fixed on a declining scale with a cap. The bitcoin system was not designed to be stable, but to be a deflationary currency. The more people use it, the more it is worth relative to other currencies. At least in the short to medium term, anyways.

[clinton]

The market doesn't control the supply; the supply rate is fixed on a declining scale with a cap. The bitcoin system was not designed to be stable, but to be a deflationary currency. The more people use it, the more it is worth relative to other currencies. At least in the short to medium term, anyways.

But it isn't necessarily deflationary. As evidenced over the past few days, bitcoins can be quite inflationary.

With gold, as it's price goes down, people stop mining it, and importantly, less of it is produced. With bitcoin, the network just keeps spitting out coins at a constant rate (at least for the first 4 years).

This means there is no reliable lower limit on the cost of mining bitcoins, besides difficulty 1. If the price of bitcoin goes down, quite perversely, it becomes cheaper to mine bitcoins. This causes the price to go down further.

The system I suggest is more like gold, which I think would result in steady long term deflation in real terms.

[mellowhead]

I disagree about the cost of btc. The  real cost of producing btc is relatively stable. There are hardware costs, electricity costs, personnel and maintenance. The changing value  and difficulty makes it either more or less profitable to do. So as price of btc goes up, it makes mining profitable for more people so more people do it. Although as more people mine, the difficulty rises to compensate and fewer btc are distributed per miner. The mining market I feel is quite immature right now though in that it's nowhere near the cost vs price threshold where people will stop mining because it's not profitable. Once that threshold is reached, the natural built in ecosystem will keep miners in check. The first miners mined based on speculation that btc would gain in value, and it did. Miners now are mining because it's immediately profitable. Mining in the future (i think) will always teeter on the edge of profitability.

And I wouldn't call a week long rise and fall "inflation". It's just market volatility for reasons described in post #2. In the same respect, I wouldn't call the rise to $32 deflation either.

[jcrubino]

I am curious if any of the voices from 2011 have solidified or changed their opinions on this now that it is 2013 and we have the same problems.

[markyminer]

No need to fork the network, just realize that the miners are essentially the same as anyone else doing a job and reserve the right to unionize like any other labor force:  http://forum.bitcoin.org/index.php?topic=15595.0

Interesting. didin't happen then!

M