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

[rayt5]

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.

I don't think it's worth doing if it can't be done on a P2P basis. I don't think anyone will use it if it has any centralized authority, and besides it creates a weakness that can be shut down or dismantled.

Personally I think it would be enough to just prevent the price from rising too quickly. Some way to preempt speculative bubbles by decreasing mining difficulty at the right time, then gradually increase the difficulty back to where it was, such that the net effect is that supply increases in sync with its increase in market capitalization, aka demand. But you're right, that doesn't solve the problem of decreases in demand. I don't think people would be willing to bear any demurrage or fees, but perhaps mining difficulty could be increased to very high or infinity in the event of inflation? This would temporarily cap the supply, which would raise the value, but it would be a lot slower than the other direction. Still, if it could be done I think it would work pretty well.

The problem is, how does one measure a currency's value (or change in value) without comparing it to anything else? Are there any measurable, intrinsic monetary indicators that correlate with a currency's value?

[1714006294]

1714006294

[1714006294]

1714006294

[1714006294]

1714006294

[1714006294]

1714006294

[1714006294]

1714006294

[edmundedgar]

Personally I think it would be enough to just prevent the price from rising too quickly.
Some way to preempt speculative bubbles by decreasing mining difficulty at the right time, then gradually increase the difficulty back to where it was, such that the net effect is that supply increases in sync with its increase in market capitalization, aka demand.

Messing with the mining difficulty with the intention of cancelling out what you were doing later wouldn't do much to deter speculation, because speculators would price in the fact that the difficulty change was going to get cancelled out.

[rayt5]

Messing with the mining difficulty with the intention of cancelling out what you were doing later wouldn't do much to deter speculation, because speculators would price in the fact that the difficulty change was going to get cancelled out.

The difficulty change would get cancelled out when the price went back to target levels. So if speculators priced in this fact, there would be no bubble in the first place and the price would remain stable. Ideally the difficulty would correlate with the rate of change of price: the faster the price (or leading indicator) is rising, the easier it is to mine coins. The faster the price (or leading indicator) is falling, the harder it is to mine coins.

[edmundedgar]

The difficulty change would get cancelled out when the price went back to target levels.

OK, I get you. But yeah, you've then taken away all the upside, but have no way to intervene on the downside, so inevitably the value of your coins is going to drop, possibly fast.

Maybe there's a middle way where you only take away _some_ of the upside by printing money but not enough to stop it rising too much, but it sounds like it would be hard to figure out what that was in advance, which you'd have to do if you hoped to specify this stuff in an algorithm rather than having somebody driving.

[glendall]

I think Bitcoin needs to be the crypto gold standard. Ideally it would be used as a safe place to put money, and to make large transactions.

Whereas a second coin, such as Litecoin or what-have you, would be set to a much smaller fiat value. This coin would be used for your everyday online purchases.

I think about it this way: if each *coin was worth, say 10 cents , or even pegged to USD 0.01, then it would be far less volatile in price, making it a much more a usable currency.  Instead of the fiat-worth price of the coin fluctuating a great deal, instead, it should just be traded according to how many *coins  = a bitcoin.

The problem with Bitcoin (or any coin) changing value so fast is a definitely a problem. Not that BTC doesn't have its uses, but when your currency changes +/- 30% value a day on the regular that's an issue. Yet I don't think we could or would want to get rid of speculators; they play an important role.

[Snowfire]

The way a currency peg works is that the pegged currency is backed by some supply of the currency to which it is being pegged, and for which it can be in principle redeemed. I can not see that model being easily implemented for any cryptocurrency. It would be possible to peg a fiat currency to a cryptocurrency in principle, but I can see few reasons anyone would wish to attempt this.

[Beetle559]

Time and participation. There's nothing you can do about the volatility, the BTC market, like all other markets, is driven by the subjective valuations of its participants. There's no way you can manage other peoples valuations.

[Impaler]

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.

BitCoin already HAS a Central Bank, but no one seems to want to call it that.  Their is a entity with total control over the money supply and far from rebelling against this overlord the BTC community practically worships it as a demi-god.  It is Satoshi himself or more accurately his protocol rules that he acts through which control the mining rate and caps the supply at 21 million, everyone agrees that the decisions of this entity are ESSENTIAL to maintaining BitCoin, and when it comes to predictability and trust I must admit it beats the conventional bank hands down, you can look at some code and be sure what the protocol will do, heck we can GRAPH it out to 2140.  But the protocol is thus completely blind to the valuation of BTC and makes no attempt to stabilize that value, being blind and non-responsive dose not make an entity powerless or not a Central Bank, it simply replaces human fickleness with the human fallibility of the initial economic design of Satoshi, a design which is clearly failing at the very important job of stability.

Now oddly enough their is another part of the protocol that we can't predict in the future but which we also have a reasonably good faith in, the difficulty adjustment with hash-rate.  We can be confident that it will take roughly 10 minutes to find a block far far into the future without having any idea of what the hash-rate will be, how can that be?  Because this part of the protocol is an ongoing feedback mechanism that continually adjusts.  This principle must be applied to money supply if we want to be remotely confident of future valuation.

[Impaler]

I don't think it's worth doing if it can't be done on a P2P basis. I don't think anyone will use it if it has any centralized authority, and besides it creates a weakness that can be shut down or dismantled.

Personally I think it would be enough to just prevent the price from rising too quickly. Some way to preempt speculative bubbles by decreasing mining difficulty at the right time, then gradually increase the difficulty back to where it was, such that the net effect is that supply increases in sync with its increase in market capitalization, aka demand. But you're right, that doesn't solve the problem of decreases in demand. I don't think people would be willing to bear any demurrage or fees, but perhaps mining difficulty could be increased to very high or infinity in the event of inflation? This would temporarily cap the supply, which would raise the value, but it would be a lot slower than the other direction. Still, if it could be done I think it would work pretty well.

The problem is, how does one measure a currency's value (or change in value) without comparing it to anything else? Are there any measurable, intrinsic monetary indicators that correlate with a currency's value?

I agree that the value-stabilization mechanism needs to be a part of the protocol and be entirely distributed in nature and not rely on any individual or group to function as a unilateral decision maker.  Rather it would be a bit as you describe a counter-cyclical feedback mechanism that expands or contracts money supply as necessary.

In Freicoin we have implemented Demurrage of 5% per anum, with the equivalent amount mined by miners to maintain a stable monetary base after the initial distribution is completed.  If the miners rewards were raised above or below the amount removed by demurrage it would effectively increase or decrease the monetary base.  We believe this demurrage fee to be beneficial entirely for its effects on velocity and interest rates and we don't use it too adjust monetary base, though its the logical mechanism to use when the base needs to shrink.

I do not believe that hash-rate would be an adequate mechanism, while their is strong indication that hashing establishes a floor to BTC valuation it's dose not reflect well the upward speculative swings.  I think the only way to get a handle on the problem is to run a distributed prediction market for the future value of coins inside the block-chain itself.  If the market predicts inflation less coins are made, if it predicts deflation then more are made.  All users would be able to place bets on either side putting their coins on the line and profiting if they are correct, thus by putting 'skin in the game' we can expect the predictions to be accurate.

Unfortunately I have not been able to come up with a reward structure that works, because all bets and rewards need to be in the the coins of the chain and need to be enforced by the block-chain such that the rewards are correct without any outside verification of the purchasing power.  In essence I need a transaction or financial instrument that can be bid upon and then 'won' by a party such that if their inflation/deflation prediction is correct they profit automatically and the person taking the contrary view loses automatically without any central authority deciding arbitrarily.

[edmundedgar]

But you're right, that doesn't solve the problem of decreases in demand.

Thinking about it, I guess if you could somehow solve the problem of the network knowing whether coins are too high or too low, you could incentivize people to destroy coins by giving them an option to create them in the future when the value was too high. So you'd have a protocol-level operation that changed a spendable output into an unspendable licence-to-print-money-when-needed, at a greater value than the value of the coins you'd destroyed. As long as it was likely that you'd need more money in the future to match new demand and make up for coins that were lost and destroyed, people would be incentivized to take coins out of circulation in the expectation of future profits.

[edmundedgar]

Bringing the above together, here's how you could peg an alt-chain to the USD:

1) Clients have a list of public keys of exchanges that we trust to be honest about the exchange rate. (This is the most centralized part - people could make their decision about who to trust individually, but the network would reach a consensus.)

2) If the exchange rate drops below 1 *Coin = 1 USD, any node can start converting *Coins into future-money-printing vouchers. This works as follows:
- Create a request based on an existing set of outputs (ie some existing *Coins that they own) which the node is volunteering to take out of circulation.
- Contact a minimum number of exchanges and get them to sign it to prove that the rate has really dropped, for which the exchanges would charge a fee.
- Broadcast the signed request to the network.

3) If the exchange rate goes above 1 *Coin = 1 USD, people with money-printing vouchers can start printing money:
- Create a request based on a set of money-printing vouchers that they hold, created in step (2)
- Contact a minimum number of exchanges and get them to sign it to prove that the rate has really risen, for which they would charge a fee.
- Broadcast the signed request to the network.

4) If an exchange misbehaved - people reported that they weren't getting the rates that the exchange reported, or its key was compromised - nodes (especially miners) would remove their keys from their list of trusted exchanges. People would then be unable to use those exchanges to prove that their money-printing and money-destroying operations were legit. You might also build in a delay between creating new money and being able to spend it, to give people time to detect that an exchange was giving out misleading information and revoke their key.

Obviously the need to have these trusted keys for trusted exchanges is hideously nasty compared to the elegance of the original, free-floating Bitcoin, but note that in practice people transacting in Bitcoins are mostly relying on the exchanges' self-reported prices already, because the stuff they're buying is originally priced in USD and they need to convert it.

[maxxoccupancy]

To stop inflation, just stop--or greatly slow--the printing presses.  When there's a price drop below the lowest 24 hour high, you reduce the block reward as long as necessary until buy orders catch up with sell orders.  In an extreme selloff, the low reward rate would continue for while.  Mining difficulty would not increase again for the time because the ASIC miners would use that downtime to mine altcoins on SHA256.

For an altcoin, you build a small reserve of bitcoins encrypted within your own blockchain.  Allow miners to accept either newly generated coins or receive 90% of that value in bitcoins. 

ScamLock, similar to multi-sig's 2-of-2 system, would allow scammed buyers to take recently spent coins out of speculation by leaving them locked (unspendable) permanently.  Scammers and disreputable companies would have less incentive to target buyers because a scorned buyer could always destroy their coins within 24 hours.

A mechanism that is designed to take coins out of circulation does not necessarily reduce its total market capitalization.  Just the opposite.  A coin that is much less likely to lose its value suddenly draws in far more investment from those who have more risk averse savings--which, in my mind, is the whole point of having a cryptocoin.

[Adrian-x]

To stop inflation, just stop--or greatly slow--the printing presses.  When there's a price drop below the lowest 24 hour high, you reduce the block reward as long as necessary until buy orders catch up with sell orders.  In an extreme selloff, the low reward rate would continue for while.  Mining difficulty would not increase again for the time because the ASIC miners would use that downtime to mine altcoins on SHA256.

For an altcoin, you build a small reserve of bitcoins encrypted within your own blockchain.  Allow miners to accept either newly generated coins or receive 90% of that value in bitcoins. 

ScamLock, similar to multi-sig's 2-of-2 system, would allow scammed buyers to take recently spent coins out of speculation by leaving them locked (unspendable) permanently.  Scammers and disreputable companies would have less incentive to target buyers because a scorned buyer could always destroy their coins within 24 hours.

A mechanism that is designed to take coins out of circulation does not necessarily reduce its total market capitalization.  Just the opposite.  A coin that is much less likely to lose its value suddenly draws in far more investment from those who have more risk averse savings--which, in my mind, is the whole point of having a cryptocoin.

Bitcoin algorithm seems very stable and reliable to me, the volatility we seek to mitigate is an emotional reaction to how stable Bitcoin is. One minute we beleve it isn't worth anything and dump it and the next day it's revolutionary and we go all in, we could use drug therapy to reduce volatility quite effectively.

It's funny to see the alt. Stablecoin that came from this thread exhibiting more volitility than Bitcoin. 

[maxxoccupancy]

Do you recall what mechanism Stablecoin uses to address rapid drops?  Is there a reserve built in?

As far as the price is concerned, Bitcoin's price is far from stable.  Viewed from the worst realistic case, someone who'd bought in at 1200 a few months ago has now lost almost half of their investment.  Most people have savings that cannot be exposed to this kind of risk.  In the marketplace, you offer as many alternatives as you can, and different people pursue different solutions and products.

[Adrian-x]

Do you recall what mechanism Stablecoin uses to address rapid drops?  Is there a reserve built in?

As far as the price is concerned, Bitcoin's price is far from stable.  Viewed from the worst realistic case, someone who'd bought in at 1200 a few months ago has now lost almost half of their investment.  Most people have savings that cannot be exposed to this kind of risk.  In the marketplace, you offer as many alternatives as you can, and different people pursue different solutions and products.

I can only address this with sarcasm, stability comes from the market participants, not the inflation algorithm, since the drug supply has been eliminated by the FBI, many investors have are trading without meds, this alone explains the bipolar behavior.  

My conclusion reading all the posts (some posts have been removed) was:
Volatility is a necessary feature not a problem,
The price is based on supply and demand, (a fundamental law in free markets)
The higher the market participation, the lower the volatility.
Bitcoin supply diminishes at a predictable rate, and is constrained,
The demand fluctuates as Bitcoin is a new innovation and it is hard for the market to evaluate.
The FED creates stability in price at the expense of the Business cycle.
Bitcoin will become somewhat volatile and self correct and stabilise as it goes through business cycle.  

In another thread "Impaler"  shose orthodox views regards economics I don't agree with, I think presented the best option to reduce volatility, to paraphrase with license: "maintaining the blockchain is reworded with a Proof of Storage coin, this coin inflates indefinably, Proof of Storage is redeemed for an option to participate in a round of Proof of Work / mining."  The result is the two types of coins end up hedging each other, and the supply (or distribution) is monitored by the market, self regulated by the price.  

Another solution was to have a coin that has an inflation rate that is vastly different to that of Bitcoin for example coins are generated according to a normal distribution function as opposed to Bitcoin's step function. The result is the supply will not track Bitcoin and the supply and demand models could complement each other. An alternate supply model for an alt coin to hedge Bitcoin volatility  is the coins supply could be regulated by the monitoring of the transaction volume on the blockchain.

[_Miracle]

It will take time (maybe a decade) and use (adoption).
More volume, more use...less freaking out.

[aminorex]

As the market cap goes up, the impact of a few dollars rushing in or out will decline.

Price cannot achieve its most stable regime until the growth declines dramatically.   Currently the fundamental value is doubling roughly every 100 days.  Humans just can't track that very well.  It results in speculative manic spikes above fair value, which lead to subsequent crashes below fair value when they deflate.  This will continue, but will be moderated by inertia as the market cap grows.  It does not make bitcoin a bad place for long-term savings.  It makes bitcoin a bad place for short-term demand deposits.

[maxxoccupancy]

In the free marketplace, there are different products that cater to different interests and different needs.  On the stock market, there are many different types of investment products, and some of those absolutely depend on being based on a stable currency.  If cryptocurrency is able to broaden its appeal, that I view that as a good thing.

Besides, who am I to say that someone else cannot invest their time and energy into any number of altcoins or other efforts.  Let each of us decide for ourselves.