Hypothetical Bitcoin clone except backed by gold

[kwhcoin]

I was pondering what would happen if somebody launched a completely separate Bitcoin clone except they tweaked the code slightly so the Bitcoin clone could be backed by gold. Below I discuss Goldcoin, a hypothetical Bitcoin clone except backed by gold, where goldcoins would have all the properties of bitcoins except each goldcoin would be redeemable for a predetermined amount of gold.

Overview of Goldcoin

I assume it wouldn't be too difficult to build a completely independent Bitcoin clone because Bitcoin is open source. Once this identical, yet separate, clone of the Bitcoin system were setup, the only algorithmic tweak necessary to enable the goldcoins to be backed by gold would be make it so instead of miners competing with computational power for the new coins, people would compete for the new goldcoins in auctions. The proceeds of the auctions would be used to purchase gold thus enabling each goldcoin in circulation to be backed by gold. Other than the differences mentioned above, the Bitcoin and Goldcoin systems would be identical.

Example Implementation of Goldcoin

To illustrate how this Goldcoin concept could work, In the paragraph below I make up some numbers and details about how a Goldcoin system could be implemented.

At launch, the number of goldcoins available for purchase would be identical to the current number of bitcoins (i.e. If launched today there would be an initial inventory of 6,770,350 goldcoins available for purchase). Additional new goldcoins would become available for purchase at the same rate new bitcoins became available to miners (i.e. the total bitcoins_in_circulation over time curve is identical to the total goldcoins_in_circulation+available_for_purchase over time curve). Frequent auctions of 1000 goldcoins would be scheduled whenever there were at least 1000 goldcoins available for purchase.  The minimum auction reserve price for 1000 goldcoins would be set at the price necessary to purchase an ounce of gold (i.e. gold's spot price plus around 3%). If the inventory of goldcoins available for purchase goes below 1000 goldcoins, then auctions are placed on hold until the total “goldcoins over time curve” makes it possible for more goldcoins to be available for purchase. Lastly, anyone can redeem 1000 goldcoins at any time and receive the current value of an ounce of gold less a storage fee which would be around 0.2% per year starting from the launch of Goldcoin until the date the goldcoins are redeemed (i.e. if you redeemed your goldcoins in five years from the launch of Goldcoin you would have a little less than 1% deducted from what you got for redeeming your goldcoins).

Similarities Between Goldcoin and Bitcoin

Please keep in mind how similar the Goldcoin and Bitcoin systems would be. There could be the same level of anonymity because the systems are virtual clones and you could even buy goldcoins with bitcoins. Transactions have the same degree of decentralization because the two systems are virtual clones with the gold backing being completely independent from the decentralized transaction system. The payment address conventions of Goldcoin and Bitcoin could be identical (perhaps put goldcoin_ in front of the goldcoin addresses to distinguish between the two) which would make it easy to modify existing systems that already accept bitcoins to also accept goldcoins. Also, similar to bitcoins, goldcoins could be bought and sold on independent exchanges as the goldcoin prices would actively fluctuate between auction prices and the redeemable price.

Tradeoffs Between Bitcoin and Goldcoin

The one advantage Bitcoin users would have over Goldcoin users is Goldcoin users would have to directly pay the cost of their transactions because new goldcoins aren't awarded to miners in exchange for performing computations. However, the goldcoin transaction fee system would be identical to the transaction fee system Bitcoin will use after all the bitcoins have been created.

Of course, the one main advantage Goldcoin would have over Bitcoin is that goldcoins would be backed by 0.001 ounces of gold per goldcoin. However, in the disaster scenario where the Goldcoin system of auctioning goldcoins and redeeming goldcoins completely fails (i.e. government crackdown, gold gets stolen, etc.) then the backup plan could be to have Goldcoin automatically revert to the exact same system Bitcoin uses of awarding new coins to miners. In other words, the failure scenario for Goldcoin could be to revert to the Bitcoin system.

Conclusion

If you were convinced that the hypothetical Goldcoin system described above were operated by an open source development team of the same level of skill and integrity as the Bitcoin development team, then would you exchange some of your bitcoins (i.e. currently bitcoins go for around $15 each) to get around a ten-fold number of goldcoins (i.e. currently goldcoins would be around $1.50 each)?

The reason I bring up the hypothetical Goldcoin system is because I believe it would be possible for the current Bitcoin system to be tweaked slightly so bitcoins could be backed by something like gold. For example, instead of giving new bitcoins to miners, bitcoins could be sold at auction and the proceeds could be used to buy gold and then each bitcoin could be redeemed for the amount of gold in storage divided by the number of bitcoins in circulation. This is just a crude example of how it could be done, but this simple approach of starting to back bitcoins with something now could make Bitcoin more competitive with future competing currencies like the hypothetical Goldcoin.

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[imperi]

Frequent auctions of 1000 goldcoins would be scheduled whenever there were at least 1000 goldcoins available for purchase.  The minimum auction reserve price for 1000 goldcoins would be set at the price necessary to purchase an ounce of gold (i.e. gold's spot price plus around 3%). If the inventory of goldcoins available for purchase goes below 1000 goldcoins, then auctions are placed on hold until the total “goldcoins over time curve” makes it possible for more goldcoins to be available for purchase. Lastly, anyone can redeem 1000 goldcoins at any time and receive the current value of an ounce of gold less a storage fee which would be around 0.2% per year starting from the launch of Goldcoin until the date the goldcoins are redeemed (i.e. if you redeemed your goldcoins in five years from the launch of Goldcoin you would have a little less than 1% deducted from what you got for redeeming your goldcoins).

How is the auction reserve price set? Where is the auctioning happening? Where can you redeem gold?

[gusti]

Bitcoin not having any backing assets, is not a bug, is a feature.
It means no assets to protect from any evil or corrupted entity.

[kwhcoin]

Frequent auctions of 1000 goldcoins would be scheduled whenever there were at least 1000 goldcoins available for purchase.  The minimum auction reserve price for 1000 goldcoins would be set at the price necessary to purchase an ounce of gold (i.e. gold's spot price plus around 3%). If the inventory of goldcoins available for purchase goes below 1000 goldcoins, then auctions are placed on hold until the total “goldcoins over time curve” makes it possible for more goldcoins to be available for purchase. Lastly, anyone can redeem 1000 goldcoins at any time and receive the current value of an ounce of gold less a storage fee which would be around 0.2% per year starting from the launch of Goldcoin until the date the goldcoins are redeemed (i.e. if you redeemed your goldcoins in five years from the launch of Goldcoin you would have a little less than 1% deducted from what you got for redeeming your goldcoins).

How is the auction reserve price set? Where is the auctioning happening? Where can you redeem gold?

The reserve price is set as a fixed ratio between gold and goldcoins. In my example I just picked 1000 goldcoins to 1 ounce of gold to be the fixed ratio for every auction. The auctions could take place on a website. The bids could be done with bitcoins (using the conversion rates between bitcoins, dollars, and gold) and you could also redeem goldcoins for bitcoins (using the conversion rate between bitcoins, dollars, and gold). Of course you could also use a service like goldmoney.com to to directly give people gold when they redeemed their goldcoins. I'm not sure if the details I picked are the best, but I wanted to pick some numbers to illustrate the Goldcoin concept.

[imperi]

Frequent auctions of 1000 goldcoins would be scheduled whenever there were at least 1000 goldcoins available for purchase.  The minimum auction reserve price for 1000 goldcoins would be set at the price necessary to purchase an ounce of gold (i.e. gold's spot price plus around 3%). If the inventory of goldcoins available for purchase goes below 1000 goldcoins, then auctions are placed on hold until the total “goldcoins over time curve” makes it possible for more goldcoins to be available for purchase. Lastly, anyone can redeem 1000 goldcoins at any time and receive the current value of an ounce of gold less a storage fee which would be around 0.2% per year starting from the launch of Goldcoin until the date the goldcoins are redeemed (i.e. if you redeemed your goldcoins in five years from the launch of Goldcoin you would have a little less than 1% deducted from what you got for redeeming your goldcoins).

How is the auction reserve price set? Where is the auctioning happening? Where can you redeem gold?

The reserve price is set as a fixed ratio between gold and goldcoins. In my example I just picked 1000 goldcoins to 1 ounce of gold to be the fixed ratio. The auctions could take place on a website. The bids could be done with bitcoins (using the conversion rates between bitcoins, dollars, and gold) and you could also redeem goldcoins for bitcoins (using the conversion rate between bitcoins, dollars, and gold). Of course you could also use a service like goldmoney.com to to directly give people gold when they redeemed their goldcoins. I'm not sure if the details I picked are the best, but I wanted to pick some numbers to illustrate the Goldcoin concept.

Hypothetically, what happens when these websites don't feel like giving people gold back or they shut down?

[kwhcoin]

Frequent auctions of 1000 goldcoins would be scheduled whenever there were at least 1000 goldcoins available for purchase.  The minimum auction reserve price for 1000 goldcoins would be set at the price necessary to purchase an ounce of gold (i.e. gold's spot price plus around 3%). If the inventory of goldcoins available for purchase goes below 1000 goldcoins, then auctions are placed on hold until the total “goldcoins over time curve” makes it possible for more goldcoins to be available for purchase. Lastly, anyone can redeem 1000 goldcoins at any time and receive the current value of an ounce of gold less a storage fee which would be around 0.2% per year starting from the launch of Goldcoin until the date the goldcoins are redeemed (i.e. if you redeemed your goldcoins in five years from the launch of Goldcoin you would have a little less than 1% deducted from what you got for redeeming your goldcoins).

How is the auction reserve price set? Where is the auctioning happening? Where can you redeem gold?

The reserve price is set as a fixed ratio between gold and goldcoins. In my example I just picked 1000 goldcoins to 1 ounce of gold to be the fixed ratio. The auctions could take place on a website. The bids could be done with bitcoins (using the conversion rates between bitcoins, dollars, and gold) and you could also redeem goldcoins for bitcoins (using the conversion rate between bitcoins, dollars, and gold). Of course you could also use a service like goldmoney.com to to directly give people gold when they redeemed their goldcoins. I'm not sure if the details I picked are the best, but I wanted to pick some numbers to illustrate the Goldcoin concept.

Hypothetically, what happens when these websites don't feel like giving people gold back or they shut down?

The failure scenario you bring up would render Goldcoin to be like Bitcoin with nothing backing the coins. However, at least with Goldcoin there is a chance for there to be a backing.

[RandyMarsh]

Bitcoin not having any backing assets, is not a bug, is a feature.
It means no assets to protect from any evil or corrupted entity.

I agree without this as a "feature" there could essentially be a bit-currency backed by the dollar, ie. the Bitdollar, for use in exactly the same secure, convenient, fast, cheap, online, and semi anonymous way as the Bitcoin, but exchangable for a dollar at your local bank and vice versa... and of course with value controlled by the value of the dollar

[gusti]

so, bitcoin is like a failed goldcoin ... smart thinking   

[kwhcoin]

I agree without this as a "feature" there could essentially be a bit-currency backed by the dollar, ie. the Bitdollar, for use in exactly the same secure, convenient, fast, cheap, online, and semi anonymous way as the Bitcoin, but exchangable for a dollar at your local bank and vice versa... and of course with value controlled by the value of the dollar

Yes the dollar could also be a possible way to back a Bitcoin-like currency. It would actually be easier to back with a dollar because instead of having to pay to store the gold backing the "goldcoins" you could earn interest storing the dollars that back your "bitdollars". I didn't want to use the dollar in my example of backing a Bitcoin clone-like currency because people would probably attack the dollar aspect instead of thinking about the concept of a Bitcoin clone being backed by something.

[btcbaby]

I had a similar thought after reading this story today: http://www.rgbdaily.com/story/25-reasons-to-buy-gold-and-dump-dollars

Here's the thing though, as a community we have to invest our energy into Bitcoin for better or worst.  Think of Bitcoin as HTML.  It was horrible when it first came out, remember the blink tag?  Bitcoin gets better with every release of the core client/protocol.  The ecosystem is also getting better.  We have to protect our investment or something proprietary will try to shut us down when we are weak (Facebook credits).  

In your mind you have to convince yourself that you are at the beginning of something that will be lasting.  That will make your time with Bitcoin a lot more profitable.  If you are just along for the ride you might mine, hell you might buy a bunch of machines.  However the real opportunity is with real services.  Accept Bitcoin for payment.  Go through the processing headaches and just charge a markup.  Make Bitcoin real.

Ultimately backing bitcoin with gold is a feature for when the lights go out.  Being able to sync the block chain in a disconnect manner is the alternative.  As another poster mentioned, they have to be accepted, not backed.  Bitcoins are a store of value and be exchanged for tangible goods/services in a virtuous loop.  For example in a world where Bitcoin is no longer valued in USD we would see relative prices.  You can buy a pencil for $0.10 and a cheap car is 100,000 times more valuable.  Priced in Bitcoin the ratio would be maintained, but we really don't know what the Bitcoin dime looks like because the currency is not easily exchanged for goods. We can experiment though by injecting Bitcoin into closed communities.  For example Bitcoin is an excellent way to compensate knowledge workers.  Where the raw materials you are expending are skill and time.  In that way the work/electricity/time a machine miner consumes can be translated to the coin and exchanged for the bioelectric energy/time of the knowledge worker.

[kwhcoin]

so, bitcoin is like a failed goldcoin ... smart thinking   

If Goldcoin should have its backing fail, then it would be possible to have it automatically switch to function exactly like Bitcoin which has no backing. The thought experiment of Goldcoin was designed to be a Bitcoin clone except for the tweak to allow it to be backed. Automatically undoing that tweak in an emergency situation of losing its backing could make it just like Bitcoin.

[Sannyasi]

so, bitcoin is like a failed goldcoin ... smart thinking   

If Goldcoin should have its backing fail, then it would be possible to have it automatically switch to function exactly like Bitcoin which has no backing. The thought experiment of Goldcoin was designed to be a Bitcoin clone except for the tweak to allow it to be backed. Automatically undoing that tweak in an emergency situation of losing its backing could make it just like Bitcoin.

wrong- bitcoin is backed by time- literally the only constant/unchanging thing in the universe.

[Trader Steve]

The problem you run into is finding a trusted, centralized authority who would back the coin by gold - fail because you lose decentralization. Having individuals back it leaves you with no guarantee they will perform. At least with the current system, bitcoin has its own value based upon its unique features, qualities and benefits. These features, qualities and benefits are valued enough by people like me who will sell you their gold for your bitcoin.

Trader Steve
http://www.GoldStarBullion.com

[kwhcoin]

The problem you run into is finding a trusted, centralized authority who would back the coin by gold - fail because you lose decentralization. Having individuals back it leaves you with no guarantee they will perform. At least with the current system, bitcoin has its own value based upon its unique features, qualities and benefits. These features, qualities and benefits are valued enough by people like me who will sell you their gold for your bitcoin.

Trader Steve
http://www.GoldStarBullion.com

Goldcoins would also have value based on the unique features, qualities and benefits of bitcoins because the hypothetical Goldcoin was designed to deliberately have those same features. Goldcoins would likely trade at values above their redeemable gold value. Goldcoins would just have an additional feature because goldcoins would be backed by gold.

The main criticism I am hearing about the Goldcoin concept is that the gold backing may fail. To me this is an admission that it would be good if the backing did not fail which means people have an intuitive sense that it is better to have backing than to not have backing. If the backing of goldcoins described above were somehow magically guaranteed, then would you prefer 10 goldcoins over 1 bitcoin?

[mrb]

kwhcoin: but what backs gold?

[drrussellshane]

so, bitcoin is like a failed goldcoin ... smart thinking   

If Goldcoin should have its backing fail, then it would be possible to have it automatically switch to function exactly like Bitcoin which has no backing. The thought experiment of Goldcoin was designed to be a Bitcoin clone except for the tweak to allow it to be backed. Automatically undoing that tweak in an emergency situation of losing its backing could make it just like Bitcoin.

wrong- bitcoin is backed by time- literally the only constant/unchanging thing in the universe.

Time is relative...

[sadpandatech]

I did not read through all of it but was only curious about a few small things.
If by 'backed by gold' you mean physical gold, then how would you propose funding the acquisition of any where near enough gold to be able to back the goldcoins?  If you are just meaning to back the intrinsic value of goldcoins with price of gold then it would f....


nm, my head hurts and i don't really care, sorry. ;p left this here so others could see how dumb I was for attempting to contribute to something I spent 0 diligence on.

[vector76]

The success will depend on the "strength" of the backing, and this is not addressed in your system.

If someone wishes to attack the currency, the first place is to attack the backing.  So even if the backing hasn't failed yet, it stands to be very weak unless there is some mechanism to make it robust.  Weak backing does not deserve the term backing.

Anything other than physical coins that have bullion value have a chance of failing, but some instruments are much stronger than others.  A personal check vs a cashier's check are worlds apart in terms of their strength.  Even though neither is absolute, I would want the system to be roughly as strong as a cashier's check in terms of the level of certainty that I'll be able to redeem it.

It is theoretically possible to make it decentralized using dead drops or if some anonymous trust mechanism can be strong enough.  I think this could be a fruitful direction of exploration.  Figuring out how to set up anonymous, decentralized, guaranteed redemption is the hard part, not how to set up auctions and create the currency.

[istar]

Some problems

That would mean that each bitcoin/goldcoin would have a fixed value and cannot rise in value as more people adopt it.
Ofcourse it could raise in value simply by adding more gold at a constant rate.

It would also mean that the value would be decided by the speculation in gold instead of reflecting how useful, adopted and good the bitcoin services are. Removing the very important incentive to create good services.

And question, how would you decide how much gold each coin should be worth?

But ofcourse, you are free to create such a coin.

You just need one of the worlds best securities.

[gusti]

The problem you run into is finding a trusted, centralized authority who would back the coin by gold - fail because you lose decentralization. Having individuals back it leaves you with no guarantee they will perform. At least with the current system, bitcoin has its own value based upon its unique features, qualities and benefits. These features, qualities and benefits are valued enough by people like me who will sell you their gold for your bitcoin.

Trader Steve
http://www.GoldStarBullion.com

Goldcoins would also have value based on the unique features, qualities and benefits of bitcoins because the hypothetical Goldcoin was designed to deliberately have those same features. Goldcoins would likely trade at values above their redeemable gold value. Goldcoins would just have an additional feature because goldcoins would be backed by gold.

The main criticism I am hearing about the Goldcoin concept is that the gold backing may fail. To me this is an admission that it would be good if the backing did not fail which means people have an intuitive sense that it is better to have backing than to not have backing. If the backing of goldcoins described above were somehow magically guaranteed, then would you prefer 10 goldcoins over 1 bitcoin?

Bitcoin is ok as it is, no backing is necessary. You are free to create your own goldcoin or such, good luck.