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Author Topic: Proposal: Idea for a much more stable bitcoin  (Read 4183 times)
Stuffe
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July 06, 2011, 01:10:59 AM
 #1

[EDIT]Shortened and simplified a lot. Also removed reference to a central bank, because it was misleading.[/EDIT]

Currently the price has fallen more than 60% from the top (to around 12,5) and what I think happened with the bitcoin is that too many people were speculating too much in it. But when the value reached heights far above what it would have without speculators (meaning with only merchants use), a small sell off prompted other investors who had probably made money, to cash out. Thus a small dip would turn into a violent tumble. The bottom of the plunge is where most speculators have sold off the bitcoin and even some businesses who are not totally dependent on the bitcoin might have dropped using it. This is what characterizes a bubble.

What I suggest is to change the rules a bit. So instead of just having the miners create 50BTC ever 10 minutes, we set the creation rate based on the velocity of the money.

This year we are set to have around a 50% inflation rate of the money supply (HUGE). This is may be ok, when the value is shooting up, but it is hard to justify when the market is plunging (inflation) . Rright now, someone is generating 50 bitcoins every 10 minutes, then probably selling them at mtgox driving down the price when everyone is loosing money, why do we want this to happen? This is only ok, when the price is NOT falling.

To explain how the velocity of money is related to the price at mtgox, lets say the price in dollars per bitcoin fell from 15 to 10. Now people have to spend more bitcoins to pay people and buy their goods. Maybe the price of a cake before was 2BTC (30$ before) but a cake now is 3BTC (30$ now), thus more money is transferred when people buy stuff or transact. The total sum of transactions is called the velocity and with a small change, it could be calculated.
When the bitcoin prices rise on mtgox (deflation), the opposite will happen, now people have to spend less bitcoin to buy the same stuff and this can also be seen on the velocity in the same way. So instead of the system just spitting out 50BTC every 10 minutes, the amount could be depend on the velocity of transactions.
(The amount of bitcoin days destroyed should also count so that no one could manipulate the velocity too much by transacting quickly to himself, I will can write a lot about that if people like the general idea.)

In order to be able to correctly establish the velocity we would need an additional small change though. Today all the bitcoin in a block that was not meant for transfer will be transferred back to a new address of the sender, which means we cant really calculate the real velocity. Because people can use block explorer, this doesn't really add any stealth though, is there some purpose for this that I am missing?

So lets say we could perfectly control the inflation/deflation rate, what rate should we aim for? 2% inflation like most developed countries? No. I think 1-3% deflation would be better for the bitcoin. In our economy, we don't really care if people hold our money, as long as there isn't any speculation bubble (everyone buying just because they want to sell off and profit shorty after, driving the price to unsustainable heights). I would rather buy German government bonds for a 2% or 3% return so there is no reason for me to speculate in bitcoin at that level.
But on the other hand I would be comfortable storing my long term savings in bitcoins, with this healthy return rate. Also merchants would be comfortable knowing that they got a healthy and steady interest on the bitcoins they hold in mid transactions. Lastly 1-3% deflation sets a safety margin, because we can easily slow down the appreciation of the bitcoin (deflation) by creating more money, but it is much harder to control the depreciation of the bitcoins (inflation) by taking out money from the system. This means that we can easily control deflation bubbles, but the inflation spiral into hyper inflation is much more dangerous and harder to control, so better be on the safe side and have a bit of deflation instead of a bit of inflation.

Sometimes we will inevitably have a little bit of inflation though and when the amount of bitcoin that gets generated per 10 minutes approaches 0 I suggest that we destroy some percentage of the transaction fees (proportional to the level of inflation of course) when people transact, which would also increase transaction costs further, thereby encouraging less transactions. Still not as effective and easy as controlling deflation, where we can just increase the amount created every 10 minutes.
But I think we would have to always give those computing a minimum wage to keep the system running though (With the current system the miners will get zero per block created). Under the new rules, they would sometimes earn almost nothing and other times earn a lot of money, in effect they would "take" the volatility from the bitcoin price, only they cannot really loose money (though electricity costs money, so maybe a little bit).

Under something approaching hyper inflation over a longer period (will hopefully never happen) to save the future of the bitcoin, an emergency fee of transactions (in percentage, calculated by severity) could be imposed and destroyed, which would stop the hyper inflation very quickly and effectively.

But think about what this would create, a currency that was very stable and normally with a healthy return. In the financial crisis in 2060 big banks and financial firms would store their money sagely in bitcoins, because it would be as stable as gold, but yield a fine interest none the less. We can calculate and control the money supply more efficiently than can any central bank. When the euro and the dollar is falling, some people might even prefer to be paid in bitcoin.

Why only have the advantages of anonymity and decentralization, when we can add stability to the list, without any disadvantages as far as I can see?

Please add your opinion Smiley
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amincd
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July 06, 2011, 02:44:25 AM
 #2

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Everybody knows that hyper inflation is a huge problem. After experiencing serious hyper inflation, Zimbabwe disbanded their currency in 2009 and is now relying on foreign currencies.

Hyper inflation is only a serious risk for currencies that can have their supply arbitrarily expanded. This is not the case for bitcoin.

Quote
I don't know any examples of hyper deflation (because it is very easy to combat, you simply create money). But deflation led to people not investing or lending out money during the great depression, because they would rather keep their money which yielded a better and safer return.

The Great Depression was due to FDR and Hoover preventing wages from decreasing in nominal terms to adjust to the decrease in the money supply, which led to artificially high wages, but high unemployment.

hugolp
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July 06, 2011, 05:00:42 AM
 #3

A horrible idea. Money transfered between accounts does not mean that people is spending money. Miners that want more money created would just transfer money between their accounts so more money is created and they can get some. And there is no way to change this without radically changing Bitcoin and loosing some of its basic characteristics.

And then its also a bad idea for the economics behid it.

Also more people will start to speculate in the bitcoin, with a more regulated economy this would be a good thing. This would mean that people would buy if they think the price is too low and sell when they think it is too high, thus softening otherwise steep jumps or plunges and create a more stable merchant friendly bitcoin. But speculators can also have a very bad effect on not regulated small markets as I will describe later.

A regulated market means a market rigged in favour of the bit players (see Goldman Sachs, JP Morgan, etc...). I much rather deal with stupid kids trying to play the free market (and most of them loosing at it) than knowing that the system is completely rigged in favour of a few by regulations.

Just remember how a Chicago trader approached the SEC several times warning the regulators about Madoff. The SEC did 3 investigations on Madoff and decided not to act. Madoff was very well connected. And this is not an exception, its the norm. For example, recently a judge retiring from the CFTC, the commodity regulators, admitted that they had been covering market manipulations. His own words:

"There are two administrative law judges at the Commodity Futures Trading Commission: myself and the Honorable Bruce Levine. On Judge Levine's first week on the job, nearly twenty years ago, he came into my office and stated that he had promised Wendy Gramm, then Chairwoman of the Commission, that we would never rule in a complainant's favor. A review of his rulings will confirm that he has fulfilled his vow. Judge Levine, in the cynical guise of enforcing the rules, forces pro se complaints to run a hostile procedural gauntlet until they lose hope, and either withdraw their complaint or settle for a pittance, regardless of the merits of the case"

See how regulations and regulators work? They only serve the big players. Its not something you want in Bitcoin, unless you are a cheater and want to make use of them.
Stuffe
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July 06, 2011, 11:50:44 AM
 #4

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Everybody knows that hyper inflation is a huge problem. After experiencing serious hyper inflation, Zimbabwe disbanded their currency in 2009 and is now relying on foreign currencies.

Hyper inflation is only a serious risk for currencies that can have their supply arbitrarily expanded. This is not the case for bitcoin.

Money supply is not only influenced by the nominal supply, the real supply has a lot to do with the velocity of money. Do you not believe in the Quantity theory of money?

Quote
I don't know any examples of hyper deflation (because it is very easy to combat, you simply create money). But deflation led to people not investing or lending out money during the great depression, because they would rather keep their money which yielded a better and safer return.

The Great Depression was due to FDR and Hoover preventing wages from decreasing in nominal terms to adjust to the decrease in the money supply, which led to artificially high wages, but high unemployment.

I agree that those were some of the causes, but none the less there was a high degree of deflation http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression

A horrible idea. Money transfered between accounts does not mean that people is spending money. Miners that want more money created would just transfer money between their accounts so more money is created and they can get some. And there is no way to change this without radically changing Bitcoin and loosing some of its basic characteristics.

I know this is a problem. That is why I said bitcoin days destroyed should factor in (quickly transferring the same money will not destroy much bitcoin days). I think this problem can be fixed.

Also more people will start to speculate in the bitcoin, with a more regulated economy this would be a good thing. This would mean that people would buy if they think the price is too low and sell when they think it is too high, thus softening otherwise steep jumps or plunges and create a more stable merchant friendly bitcoin. But speculators can also have a very bad effect on not regulated small markets as I will describe later.

A regulated market means a market rigged in favour of the bit players (see Goldman Sachs, JP Morgan, etc...). I much rather deal with stupid kids trying to play the free market (and most of them loosing at it) than knowing that the system is completely rigged in favour of a few by regulations.

Just remember how a Chicago trader approached the SEC several times warning the regulators about Madoff. The SEC did 3 investigations on Madoff and decided not to act. Madoff was very well connected. And this is not an exception, its the norm. For example, recently a judge retiring from the CFTC, the commodity regulators, admitted that they had been covering market manipulations. His own words:

"There are two administrative law judges at the Commodity Futures Trading Commission: myself and the Honorable Bruce Levine. On Judge Levine's first week on the job, nearly twenty years ago, he came into my office and stated that he had promised Wendy Gramm, then Chairwoman of the Commission, that we would never rule in a complainant's favor. A review of his rulings will confirm that he has fulfilled his vow. Judge Levine, in the cynical guise of enforcing the rules, forces pro se complaints to run a hostile procedural gauntlet until they lose hope, and either withdraw their complaint or settle for a pittance, regardless of the merits of the case"

See how regulations and regulators work? They only serve the big players. Its not something you want in Bitcoin, unless you are a cheater and want to make use of them.

I agree with you to some extend, but when I used the word "regulting", I simply meant to say "lets change the rules a bit". There will be NO regulator. NO central authority. Only different set of rules. The hashing power of the combined network will still be the only "authority", the only difference is that the rule set will be different.

Thanks for your comments though, I hope we can get a discussion going about this.
hugolp
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July 06, 2011, 12:04:03 PM
 #5

I know this is a problem. That is why I said bitcoin days destroyed should factor in (quickly transferring the same money will not destroy much bitcoin days). I think this problem can be fixed.

Im all eyes and actually curious. Tell us how this can be solved.
Stuffe
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July 06, 2011, 12:41:52 PM
 #6

As I said bitcoin days destroyed would have to be a part of the function. So that transactions of money that just been transacted recently would weigh a lot less. Only when the last transaction of the money was older than some barrier would the transaction weigh in 100% on the total velocity. The time barrier could be set to something like 3 hours, but it would be better to set it dynamically based on the last total velocity. I know the number would not be completely precise, but I think it would still be more so than the velocity when calculated in the real world.

Also a single dude cheating would mean less and less, as more and more people get a hold of money.
David M
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July 06, 2011, 10:27:39 PM
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Why only have the advantages of anonymity and decentralization, when we can add stability to the list, without any disadvantages as far as I can see?

What is your definition of stability?  1% intra-day moves? 1% intra-weekly?

Volatility/stability is meant to reflect shifting sentiment.
Vitalik Buterin
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July 06, 2011, 11:43:39 PM
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an emergency fee of transactions (in percentage, calculated by severity) could be imposed and destroyed, which would stop the hyper inflation very quickly and effectively.

No, that wouldn't. It would reduce the number of coins out there, but it would reduce the value of each one even more since it would become nearly useless for its only purpose, spending.

Argumentum ad lunam: the fallacy that because Bitcoin's price is rising really fast the currency must be a speculative bubble and/or Ponzi scheme.
Stuffe
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July 07, 2011, 12:42:19 AM
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Why only have the advantages of anonymity and decentralization, when we can add stability to the list, without any disadvantages as far as I can see?

What is your definition of stability?  1% intra-day moves? 1% intra-weekly?

Volatility/stability is meant to reflect shifting sentiment.

All I am saying is we could have more stability, how much exactly would only be a guess.
Volatility/stability DOES reflect shifting sentiment. What I am saying is simply that we can control the supply side.

an emergency fee of transactions (in percentage, calculated by severity) could be imposed and destroyed, which would stop the hyper inflation very quickly and effectively.

No, that wouldn't. It would reduce the number of coins out there, but it would reduce the value of each one even more since it would become nearly useless for its only purpose, spending.

You might actually be right about that. Scratch that then, it is not really important anyway (since that emergency scenario will probably never happen).

Also here's the full quote:
Under something approaching hyper inflation over a longer period (will hopefully never happen) to save the future of the bitcoin, an emergency fee of transactions (in percentage, calculated by severity) could be imposed and destroyed, which would stop the hyper inflation very quickly and effectively.

Also it seems that no one really likes this type of idea, so never mind (although I think the most important part of my arguments are still solid).
amincd
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July 07, 2011, 01:20:04 AM
 #10

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Hyper inflation is only a serious risk for currencies that can have their supply arbitrarily expanded. This is not the case for bitcoin.


Money supply is not only influenced by the nominal supply, the real supply has a lot to do with the velocity of money. Do you not believe in the Quantity theory of money?

The way I'm defining it, money supply is nominal supply. I'm using the terms synonymously. Inflation is not nominal supply, but it is influenced by it.

As for velocity, that is just one contributor to inflation. Nominal price is determined by the formula: P= MV/Y, with M representing money supply, V representing money velocity, and Y the GDP.

Velocity accelerates when money supply starts increasing rapidly and/or unexpectedly and people lose their trust in a currency as a store of value. This is very unlikely to be a problem for a currency with a supply that is guaranteed to be fixed over its lifetime.

Quote
The Great Depression was due to FDR and Hoover preventing wages from decreasing in nominal terms to adjust to the decrease in the money supply, which led to artificially high wages, but high unemployment.


I agree that those were some of the causes, but none the less there was a high degree of deflation http://en.wikipedia.org/wiki/Causes_of_the_Great_Depression

In an unobstructed market, the market adjusts to the deflation quickly, and people return to being productive and contributing to economic growth. That is what happened after the 1920 crash, and what was prevented from happening after the 1929 crash.
marcus_of_augustus
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July 07, 2011, 01:59:08 AM
 #11


Bitcoin is getting more and more stable all the time ... just another non-problem.

Wider adoption will introduce more stability will introduce wider adoption will ....

(see chodpaba time series analysis, the waves are getting broader and longer with each cycle => percentage-wise the volatility will decrease)

naturallaw
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July 07, 2011, 02:01:40 AM
 #12

The main reason bitcoin is unstable I think is from what I can see the exchanges don't reflect any kind of reality. Seems like everyone, myself included, is just riding a speculative bubble trying to get rich quick. You need to expand the market to actually buy useful goods with it. Trying to be a central banker and control the supply doesn't change those facts. I think the market would still be very volatile.  Also, with Bitcoin exchanges when compared to tradional financial exchanges, how many are invested long-term?
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July 07, 2011, 02:27:37 AM
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The main reason bitcoin is unstable I think is from what I can see the exchanges don't reflect any kind of reality. Seems like everyone, myself included, is just riding a speculative bubble trying to get rich quick. You need to expand the market to actually buy useful goods with it. Trying to be a central banker and control the supply doesn't change those facts. I think the market would still be very volatile.  Also, with Bitcoin exchanges when compared to tradional financial exchanges, how many are invested long-term?

What reality did you have in mind for the exchanges exactly?

... noone "needs" to DO anything ... people are using bitcoin for whatever they see fit and the price reflects that.

Confusing an historically anomalous monetisation event for a speculative bubble could be dangerous for your financial well-being.

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July 07, 2011, 02:37:56 AM
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Confusing an historically anomalous monetisation event for a speculative bubble could be dangerous for your financial well-being.

Not sure what you are referring to here exactly, clarify if you could.
marcus_of_augustus
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July 07, 2011, 02:41:13 AM
 #15

Confusing an historically anomalous monetisation event for a speculative bubble could be dangerous for your financial well-being.

Not sure what you are referring to here exactly, clarify if you could.

I could, but I can't be bothered. I'll leave it as an exercise for the interested reader.

MoonShadow
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July 07, 2011, 02:41:56 AM
 #16

Such a proposal would be subject to manipulation, which disqualifies it for consideration.  However, if you insist that your idea is better, start your own blockchain and change the name of your currency.  We will let the market decide.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
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July 07, 2011, 02:42:52 AM
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Confusing an historically anomalous monetisation event for a speculative bubble could be dangerous for your financial well-being.

Not sure what you are referring to here exactly, clarify if you could.

I could, but I can't be bothered. I'll leave it as an exercise for the interested reader.

humbug
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July 07, 2011, 02:44:34 AM
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Confusing an historically anomalous monetisation event for a speculative bubble could be dangerous for your financial well-being.

Not sure what you are referring to here exactly, clarify if you could.

I could, but I can't be bothered. I'll leave it as an exercise for the interested reader.

humbug

whatever?

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July 07, 2011, 02:48:25 AM
 #19

Confusing an historically anomalous monetisation event for a speculative bubble could be dangerous for your financial well-being.

Not sure what you are referring to here exactly, clarify if you could.

He is saying that, should you mistake the self bootstrapping of a new currency for a speculative bubble (or vice versa) you are likely to make a serious error in investment choices.

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

- Carroll Quigley, CFR member, mentor to Bill Clinton, from 'Tragedy And Hope'
CurbsideProphet
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July 07, 2011, 02:55:35 AM
 #20


Bitcoin is getting more and more stable all the time ... just another non-problem.

Wider adoption will introduce more stability will introduce wider adoption will ....

(see chodpaba time series analysis, the waves are getting broader and longer with each cycle => percentage-wise the volatility will decrease)

As I type, MtGox, Low: 13.51  High: 16.5

That's a change of 22.1% IN ONE DAY.  This is stability?  For perspective, the Dollar moved against the Euro by 0.8% today.  The dollar has fallen against the Euro by about the same 22% margin.... it just took EIGHT YEARS rather than a day.

1ProphetnvP8ju2SxxRvVvyzCtTXDgLPJV
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