I'm trying to gather some ideas and to peer review some of my ideas with you in the hope that this can be a start of a draft for - yet
- a new white paper about cryptocurrencies.
I want in this first post to address some problems with current digital currency (cryptocurrencies) implementations.
1 - Scalability
The first problem we can identify with current cryptocurrencies is their lack of scalability and this problem has 2 main origins the first is, of course, the processing power hungry PoW algorithms and the second is the blockchain itself. Both those 2 problems reside in the hearth of the architecture of cryptocurrencies and their security.
One one side, having a computing intensive PoW stops a lot of attacks and makes the network itself less vulnerable, on the other side having a full blockchain from the genesis block all the way to the current block provides a way to build trust has any peer can check the full history of transactions and account balances.
Those problems are not recent and are identified for some time now. A lot of new alt-currencies already have partial or full solutions to those problems. For example, Ethereum in the new hard fork is PoS instead of PoW and has a Lite Version that doesn’t need the full chain and instead trusts on the network for older data.
2 - Hardcoded monetary policy
This is a broader subject and not directly related to the technical implementation of the currencies. In fact, quite the opposite, the fewer assumptions and hard-coded limits regarding the money supply and the overall monetary policy the better. (hold your flames I'm going to try to explain this a little bit better)
Let’s take bitcoin as an example. It was designed and implemented taking the gold standard as it’s “inspiration”, like gold it has a finite maximum total amount of coins and the money creation method was modelled in a way similar to the behavior of gold when it’s mined (with coins being more and more hard to mine with time).
Bitcoin did emerge from the 2008/9 crisis as a return to a set of laws closer to gold because a lot of people were in disbelief over the real value of money without anything to back it up - like the gold standard or gold reserves.
The problem with gold as a currency is its value and its limited supply.
According to the Gresham’s Law if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will disappear from circulation (as people will tend to store the more valuable one especially if the commodity itself has a deflationary behaviour and then to be more valuable in the future).
Bitcoin and other finite supply currencies have a deflationary behavior and are not real currencies but assets. I think that they will never be used widely as currencies have their value growth (deflation) will make consumers delay spending them. On the other hand, they are a nice asset to invest into. (hold your flames a little bit more).
Bitcoin can be the gold-standard of the cryptocurrency age but not a real consumer currency.
A real cryptocurrency that can be used as a day to day consumer currency needs to have its monetary policy adapt to the global commodity market changes. The problem to design a set of rules that are future proof is big. We can’t design a currency that is meant to be the currency of a future which we can’t predict. (i’m going to be burned and I hear a lot of you saying we can always hard fork a new set of rules if needed).
What I think is that such a currency will need a democratic way of adapting its inflation and other rules to the evolution of the global (or local) market. Democracy should be implemented in the protocol and the blockchain itself with nodes being able to vote for changes (like maximum supply, inflation, and other parameters).
3 - Power usage/ sustainability and real distribution of the network.
We all know that PoW algorithms require a lot of computing power and that makes the creating of money expensive and the peer influence in the network unbalanced and the network less decentralized.
PoS that involves the deposit of currency as a prof will also tend to make the network less decentralized because nodes with more currency will have more power in the network and get all the money creation. (there are a lot of other Po”X” algorithms I'm not going into each one, maybe in the discussion, we can share ideas)
We need an algorithm that makes the network secure, consume less power and distributes value according to the actual importance of a node in the network (number of transactions, computing power, etc).
Hope to start a nice discussion (and not a lot of flames).
Pedro
