A less volatile cryptocurency, what would it take to regulate its own market?

[bb113]

there will still be massive instability as everyone clamors to guess what the true price of an infinitely divisible non-physical non-backed currency is (hint: there isnt one).

Sounds like a hypothesis in need of an experiment.

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[pretendo]

there will still be massive instability as everyone clamors to guess what the true price of an infinitely divisible non-physical non-backed currency is (hint: there isnt one).

Sounds like a hypothesis in need of an experiment.

No such thing as an economic experiment

[bb113]

there will still be massive instability as everyone clamors to guess what the true price of an infinitely divisible non-physical non-backed currency is (hint: there isnt one).

Sounds like a hypothesis in need of an experiment.

No such thing as an economic experiment

Everything is an experiment, noone knows what their doing really.

[interfect]

Back to the original topic of a stable cryptocurrency.

I think it would help to tie the value of the currency to something, and that something might as well be hashrate. The cost of doing hashing or other sorts of computation doesn't fluctuate nearly as wildly. Especially if we're talking about hashing problems for which ASICS already exist.

So we could basically have Bitcoin with the difficulty and block reward fixed forever. If it's too hard to get coins by any other means, you start hashing. Instant price ceiling.

Alternatively, we could try and phrase the whole proof of work part of the system in terms of some NP-complete problem, to attempt to pin the value of a unit of the currency to, e.g. solving a 3-sat problem of a certain size. People could phrase useful work in terms of these problems, and offer a reward of coins that would clear only when someone found a valid solution to the problem, which would then be recorded in the blockchain for them to pick up. Miners would work on these problems, or some sort of network-generated problems that paid a lower rate if there was no real work available. Instant price floor.

Care would need to be taken to prevent people from computing answers and then problems to fit them and trying to use that to reap rewards from the network.

[Stampbit]

Back to the original topic of a stable cryptocurrency.

I think it would help to tie the value of the currency to something, and that something might as well be hashrate. The cost of doing hashing or other sorts of computation doesn't fluctuate nearly as wildly. Especially if we're talking about hashing problems for which ASICS already exist.

So we could basically have Bitcoin with the difficulty and block reward fixed forever. If it's too hard to get coins by any other means, you start hashing. Instant price ceiling.

Understandably you can always mine and the costs associated will validate against deflationary spirals, but in a fixed currency like bitcoin this is only a temporary measure.

Alternatively, we could try and phrase the whole proof of work part of the system in terms of some NP-complete problem, to attempt to pin the value of a unit of the currency to, e.g. solving a 3-sat problem of a certain size. People could phrase useful work in terms of these problems, and offer a reward of coins that would clear only when someone found a valid solution to the problem, which would then be recorded in the blockchain for them to pick up. Miners would work on these problems, or some sort of network-generated problems that paid a lower rate if there was no real work available. Instant price floor.

Care would need to be taken to prevent people from computing answers and then problems to fit them and trying to use that to reap rewards from the network.

How exactly does mining random problems provide an instant price floor? Please explain. I think with deflationary currencies price floors are not so much an issue.

[freedomno1]

Wow one heck of a volatile day wish I had more assets that spread!

[Muis]

I think a simple solution would be to embed some purchasing power index (Big Mac-index for example) into each block. Every client can verify on public sources (Wikipedia, etc.) that the number is correct, or alternatively it can even be hardcoded in the client, since most users upgrade at least once a year and the index will not change that fast.

Now this index can be used to control some of the coin's parameters (difficulty, block-reward, etc.). That way the value of the coin could be stabilized to grow exactly along with the global purchasing power.

The problem with a super-stable coin is that its not interesting for speculants, because they cannot make any profit on it because its non-volatile, and will not rise much in value in the future.

This sounds great, but it will mean the coin will have very few early-adopters, because there is no way to get rich quick, and nobody will be interested in jumping onboard.

[Adrian-x]

How could a cryptocurrency control volatility?

What is it that causes exchange rates to be volatile?

Volatility is sympathetic of uneven distribution, this resent crash has only redistributed coins into financially strong hands.
Once the strong hands have all the coins redistribution happens as a reword for contributing work. The balance is a fight between labour and capital, labour wins by saving.

[Razick]

Right now we are seeing a huge price jump and naturally people think that this means bitcoin is doing better than ever, but bitcoin first and foremost is a currency and a currency's greatest strength is its stability, which means at this moment bitcoin is doing worse than ever before. How could a cryptocurrency control volatility?

I agree that the volatility is not a good thing, but I also believe that the price will stabilize over time, especially as Bitcoin is used more for transactions instead of mostly trading.

[Adrian-x]

Right now we are seeing a huge price jump and naturally people think that this means bitcoin is doing better than ever, but bitcoin first and foremost is a currency and a currency's greatest strength is its stability, which means at this moment bitcoin is doing worse than ever before. How could a cryptocurrency control volatility?

I agree that the volatility is not a good thing, but I also believe that the price will stabilize over time, especially as Bitcoin is used more for transactions instead of mostly trading.

Think of it as stable somewhere between $2 and $10, as a currency. Bitcoins greatest strength is a finite quantity and a distributed p2p world network.

The Bitcoin economy is transforming Bitcoin (by demand) into a store of wealth.

Volatility is a a result of uneven distribution (Bitcoins biggest weakness) on the up side volatility is a sign of good health and should be expected until we have around 2/3s of all total adopters uses Bitcoin.

[Snowfire]

Which likely would have worked out better:
a) the chaotic explosive growth internet based on the free market.
b) the centrally planned internet based on a stability plan to minimize volatility and manage growth.

 

The Internet was not intended to be a currency; the comparison is specious. A currency has needs the Internet does not.

[interfect]

How exactly does mining random problems provide an instant price floor? Please explain. I think with deflationary currencies price floors are not so much an issue.

The value of the currency would never go below the value of the solution to one of those random problems. Say I have an NP-complete problem to solve. I can solve it myself, or I can pay you to solve it for me. Or, I can (as is guaranteed by the definition of NP-completeness) translate it into an instance of the NP-complete problem that this cryptocurrency is based on, and post a special transaction that awards coins to the first person to provide a solution to this NP-complete problem. (Here's a possible weakness: when you go to announce your solution, what stops another node stealing it? In Bitcoin I think this is handled by having the address that generated/fee coins go to as part of the data being hashed, but it seems like it would be difficult to make the solution to e.g. the Traveling Salesman Problem depend sufficiently on these parameters and also be useful as a solution to the original problem. But assume we can solve this, for the sake of the economic argument.) Then, the value of your currency would never go below the value of having one of this class of NP-complete problems solved for you, because you could always bid above the auto-generated problems and have all rational miners work on your problem.

[Impaler]

I've thought of this stabilization problem extensively, and while I do not have a full solution I'm fairly confident in a few things.

First, none of the currently utilized first-order metrics from the block-chain such as hash-rates or transaction rates would be viable as an input to any kind of stabilization methodology, they are both too indirect, too volatile and too easily manipulated for financial gain.

Likewise no pegging to a real world physical commodity is possible because pegs require RESERVES, a central party to manage the reserve and trust in said central party, which entirely defeats the purpose of crypto-currency entirely.  Many painfully stupid proposals have been made along these lines that seem to thing a peg can just be stuck on a token and everyone would just "follow it".

The only way to make a peg is to make it INTERNAL, flat fees are probably the simplest internal peg.  If it cost X coins to send a transaction then it would set a cap on valuation because the cost of using the coin for its intended purpose would rise and this would drive out users and kill any upward price pressure.  But transaction fees are terribad from an economic stand-point (it causes a dead-weight-loss).  Were already seeing people complain about the minimum transaction is getting noticeable to people.  A better solution would be a flat per-time period fees, every wallet would need to pay this fee in order to be able to send coins.  This would give a cap but be far more fair and result in vastly less economic loss.

[edmundedgar]

One thing you could do if you wanted a payment system with a lot of the properties that Bitcoin has - fast, cheap, censorship-resistant - but wanted to peg it to a regular currency or asset (say USD) without a single central authority would be have Central Banks like a traditional currency, but allow lots of them.

A bunch of different people would set up organizations in different countries - probably charities although in theory they could be private businesses - with charters instructing them to buy up coins whenever the price dropped below 1 USD == 1 Coin, and issue coins whenever it went above. Central banks would issue coins by signing data with their private keys, and we'd have a list of acceptable public keys in our clients. If a central bank started misbehaving, we'd blacklist them by removing their key from our client, so they would no longer be able to create new money. If people disagreed about which central banks were trustworthy we'd get a blockchain fork, as we do when there's a change in the Bitcoin protocol, and the losing side would end up having to get with the program.

[rayt5]

According to this : http://www.quora.com/Economics/Why-are-bitcoins-more-unstable-than-fiat-currencies-like-the-USD
Bitcoins are volatile in part because they have no real futures market, so people can't easily short BTC.

According to me, it's because Bitcoins have been designed to increase greatly in value over time, which encourages hoarding. I can't believe people actually think that massive sustained deflation a good thing for a currency. Nobody can put prices in or truly conduct commerce in BTC. Merchants that use BTC now don't actually use it as a currency... they conduct the transaction in BTC and then immediately exchange it for USD. They shouldn't have to do that, but they do, and they will continue to have to do that for the forseeable future.

In my opinion, there will be another cryptocurrency that is designed to be more stable over the long term than Bitcoin. A Bitcoin killer. I do not think any of the existing alternative coins fulfill this goal, but I at least hope that it will happen someday. Something that takes what Bitcoin got right, and fixes several of the things it got wrong. This currency would be designed to be very nonvolatile in value, or to perhaps deflate at a slow and predictable rate over time.

[bb113]

According to this : http://www.quora.com/Economics/Why-are-bitcoins-more-unstable-than-fiat-currencies-like-the-USD
Bitcoins are volatile in part because they have no real futures market, so people can't easily short BTC.

According to me, it's because Bitcoins have been designed to increase greatly in value over time, which encourages hoarding. I can't believe people actually think that massive sustained deflation a good thing for a currency. Nobody can put prices in or truly conduct commerce in BTC. Merchants that use BTC now don't actually use it as a currency... they conduct the transaction in BTC and then immediately exchange it for USD. They shouldn't have to do that, but they do, and they will continue to have to do that for the forseeable future.

In my opinion, there will be another cryptocurrency that is designed to be more stable over the long term than Bitcoin. A Bitcoin killer. I do not think any of the existing alternative coins fulfill this goal, but I at least hope that it will happen someday. Something that takes what Bitcoin got right, and fixes several of the things it got wrong. This currency would be designed to be very nonvolatile in value, or to perhaps deflate at a slow and predictable rate over time.

As any new currency becomes more utilized would it not increase in value? How do you suggest dealing with this issue?

[edmundedgar]

According to me, it's because Bitcoins have been designed to increase greatly in value over time, which encourages hoarding... This currency would be designed to be very nonvolatile in value, or to perhaps deflate at a slow and predictable rate over time.

The fixed supply may be making things worse, but I don't think it's the only problem. If it was you could solve it with an alt chain designed to keep on issuing money forever, but you can't. The core of it is that the value of all the Bitcoins in the world is just incredibly uncertain, depending on the extent of adoption and all kinds of other assumptions. So even if Bitcoin had a formula where the block reward gradually increased, there would still be a huge variation in plausible valuations of any single Bitcoin. And combined with speculative greed / fear, that's going to mean bubbles and crashes.

In theory there may be a possible world where the extent of Bitcoin use has leveled out and become predictable, and we all have contracts and salary expectations denominated in Bitcoins, so it behaves more like a regular currency even without a central bank, but it's hard to see how we get from here to there, and there's a lot of instability in between.

In practice if you want price stability you need information about prices (whether denominated in another currency or in terms of stuff we buy) to somehow feed back into the money supply, so that if prices drop you get more money put into circulation and if they rise you get money taken out. That in turn requires some information about the real world - you can't just capture it in advance in an algorithm. And once you need information about the real world, you get into issues of how to trust whoever is providing that information and prevent them from gaming it.

[Adrian-x]

As any new currency becomes more utilized would it not increase in value? How do you suggest dealing with this issue?

In a free market where the practical value as a medium of exchange is set by the protocol and the supply is fixed the only variable is demand, so the price is a reflection of demand.

You can stay with the central bank model if you want to sacrifice savings for price stability.

[rayt5]

The fixed supply may be making things worse, but I don't think it's the only problem. If it was you could solve it with an alt chain designed to keep on issuing money forever, but you can't. The core of it is that the value of all the Bitcoins in the world is just incredibly uncertain, depending on the extent of adoption and all kinds of other assumptions. So even if Bitcoin had a formula where the block reward gradually increased, there would still be a huge variation in plausible valuations of any single Bitcoin. And combined with speculative greed / fear, that's going to mean bubbles and crashes.

Also I think I agree somewhat with the idea that the inability to speculate on Bitcoin's future price makes its price discovery less efficient than it should be. Right now if all people think the BTC price will be $200 tomorrow, it will be about $200 today. But the opposite is not as true... if all people thought BTC would be $1 tomorrow, it will take time to fall because people can't short BTC or buy BTC options. At least not easily.

In theory there may be a possible world where the extent of Bitcoin use has leveled out and become predictable, and we all have contracts and salary expectations denominated in Bitcoins, so it behaves more like a regular currency even without a central bank, but it's hard to see how we get from here to there, and there's a lot of instability in between.

A larger market cap will help the problem but not fix it. In my opinion, the high deflation of Bitcoin is part of the cause of its speculative bubbles... If people thought it would retain its approximate value over the long term, or gain value slightly, they wouldn't speculate on it and hoard it to make more dollars. They would use it like money directly. Think about how much more useful a very liquid instrument that gets at or above US security rates would be. It would be amazing.

In practice if you want price stability you need information about prices (whether denominated in another currency or in terms of stuff we buy) to somehow feed back into the money supply, so that if prices drop you get more money put into circulation and if they rise you get money taken out. That in turn requires some information about the real world - you can't just capture it in advance in an algorithm. And once you need information about the real world, you get into issues of how to trust whoever is providing that information and prevent them from gaming it.

I have an idea to tie the price to the generation difficulty... but I can't figure out how to measure BTC value in a decentralized way that could be captured in an algorithm. The closest I can think of is bitcoin days, but I suspect that's a lagging indicator of price, and what we'd really need is a leading indicator.

[edmundedgar]

but I can't figure out how to measure BTC value in a decentralized way that could be captured in an algorithm.

Right, that's half the problem. If you could figure out a reliable way to capture the value of your coins you could hook up the money supply (in Bitcoin's case the block reward) to it, but that seems to be impossible (?) without some trusted authority somewhere.

The other half of the problem is that you probably need a way to actually take coins out of circulation if the value of your coins drops. This is particularly true if you've just taken away the upside to holding your coins by making a protocol that prints money to stop it appreciating.

And once we've done those two things, we seem to have reinvented the Central Bank. Which is why the best we could do as far as I can see is to still have multiple Central Banks, and the ability for the community to make a decentralized consensus decision to blacklist any that might misbehave.