Goldcoin and Stablecoin proposals

[bcforum]

The purpose of Goldcoin is to create a bitcoin like coin which could be exchanged for a set amount of gold, let's say 1 Goldcoin equals 1 ounce of gold.

Lets say I mine 50 Goldcoins, who is going to provide the gold?

[morpheus]

The purpose of Goldcoin is to create a bitcoin like coin which could be exchanged for a set amount of gold, let's say 1 Goldcoin equals 1 ounce of gold.

Lets say I mine 50 Goldcoins, who is going to provide the gold?

Nobody provides you the gold (directly anyways). Since the mining reward is variable based on the price of Goldcoin, then you would be able to sell the 50 Goldcoin on the open market for 50 ounces or more of gold (or equivalent).

[dacoinminster]

You are right that the hyperbitcoins idea accomplishes something like options, but nobody understands options except the few people who trade them for a living. :-/

Grandma isn't going to buy put options, but she might click the button on the bitcoin client to store value in 1971coins.

For your goldcoin blockchain, I think it would be better to piggyback on existing bitcoin mining, and create Goldcoin/Antigoldcoin pairs as described here: http://forum.bitcoin.org/index.php?topic=31032.msg390372#msg390372

[caston]

I would also like to suggest UnstableCoin where the value swings as wildly as possible. This could be accomplished in a few means e.g. by a very funky and rapidly changing way of a deciding difficulty and giving a random number of coins at the completion of each block.  

[cunicula]

First, I don't think there is anything wrong with bitcoin. However, people have brought up the idea of "backing" bitcoin with gold or otherwise controlling deflation. I'm proposing two types of coins which could be created with a modified version of bitcoin (possibly multicoin: http://forum.bitcoin.org/index.php?topic=24209.0). One would be based on the price of gold, Goldcoin, and the other would be stable with little to no inflation or deflation, Stablecoin.

I would like to see them created. I do not want to see bitcoin changed in any way to support them. I think there are enough other bitcoin like currencies out there that the idea of yet another competing currency would not harm bitcoin in any way.

Both coin programs I'm proposing, would need to include the bitcoin like program, and an exchange. There is not currently an exchange attached to any version of bitcoin to my knowledge. I'm working on a distributed exchange outside bitcoin (https://github.com/macourtney/Dark-Exchange), and you could use a centralized exchange like MtGox or TradeHill, but that would defeat the decentralized aspect of a bitcoin like program. More work and though is needed in this area.

For now, I'm assuming there is both the bitcoin program and an exchange which can be queried for the current exchange rate.

Goldcoin

The purpose of Goldcoin is to create a bitcoin like coin which could be exchanged for a set amount of gold, let's say 1 Goldcoin equals 1 ounce of gold.

Besides a modified bitcoin program (I'm calling the Goldcoin program), we need an exchange. This exchange will only exchange Goldcoin with gold. The price is listed in ounces of gold, and the current price can be queried at any time.

You can mine Goldcoin, and there are transaction fees for sending Goldcoins. However, the transaction fee is not given to the miners directly. The transaction fee and mining award is adjusted to keep the price of Goldcoin as close to 1 Goldcoin equals 1 ounce of gold.

How does it work? The Goldcoin program watches the exchange for Goldcoin and does the following:

If the price of Goldcoin increases above 1 ounce of gold, the Goldcoin program increases the number of coins given as an award to the miners. Also, the transaction fee is lowered, possibly to 0. If 1 Goldcoin is trading for 1.1 ounces of gold, then the Goldcoin program can increase the mining award by 10% (maybe more) until the price of Goldcoin goes back to the target.

If the price of Goldcoin decreases below 1 ounce of gold, then the Goldcoin program decreases the number of coins given as an award to the miners. However, the award for mining can never go to 0 since that would cause all miners to quit. The transaction fees are raised. Any coins captured by transaction fees are not given to minors, instead they would be destroyed. With less Gold coins floating around, the price of Goldcoin should move back up to 1 ounce of gold.

Thus, without an authority (besides programming code), and without using actual gold as a backing, Goldcoin will tend toward 1 Goldcoin equals 1 ounce of gold.

Of course, it would not be perfectly stable with sudden interest causing the price to go up temporarily and loss of interest could bring it down. In either case, you can always assume if you wait long enough, the price will go back to the target price.

One last point. The exchange could use USD instead of gold, and since the price of gold in USD is well known, you could simply target the USD exchange to match the price of gold. You would then have exactly the same outcome as the gold exchange.

Using this method, you could create a coin targeted to almost anything. Which leads me to another coin:

Stablecoin

With Stablecoin, you have the same bitcoin like program and exchange as with Goldcoin with only a couple modifications.

The exchange is in USD. However, instead of targeting USD directly, we target a specific date. Let's say we use the date Stablecoin comes into existence. From then on, we keep track of how much USD has inflated/deflated using something like CPI or the Billion Price Index or even a combination of indices. If USD inflates say 1% we increase the target to $1.01 for one Stablecoin. On the other hand, if USD deflates by 1% we target $0.99 for one Stablecoin. Over time the increase and decreases would be added together to get some strange multiple as the target for Stablecoin.

The ultimate goal for Stablecoin would be to target a value not a price, and thus never inflate or deflate over time.

Stablecoin would be a great benefit to any merchant. They could simply price their goods and services in Stablecoin once, and never have to change the price again. They also know, no matter how long they hold Stablecoin, the value of Stablecoin would never increase or decrease significantly. If it does, they can wait until it makes it back to it's target.

Once Stablecoin is used to price goods and services online, you could then drop the use of CPI and Billion Price index and simply use a basket of goods priced in Stablecoin. If merchants start charging more or less on average for their goods, Stablecoin could adjust the number of coins accordingly.

Stablecoin could become the perfect currency for merchants. Which would make Stablecoin perfect for customers who want to buy from those merchants. Once enough merchants and customers adopt Stablecoin, everyone else would follow.

Making it happen

Unfortunately, I have my own bitcoin project to work on right now which is taking all of my time (did I mention Dark Exchange: https://github.com/macourtney/Dark-Exchange ). However, I'm sure some goldbugs on this forum would be interested in the Goldcoin idea and take off with it (if you do, please make it open source).

I'm more interested in Stablecoin, and would be willing to put some time into building it. I just don't have the time right now.

Maybe one exchange could work for all of the targeted coin types. If the exchange could be built first (maybe Dark Exchange is that exchange), then I'll work on Stablecoin when I have more time.

Feedback

Please give me feedback on my two proposals. What works? What doesn't/can't work? What have I not thought through enough?

I'm not as interested in whether or not a gold based digital currency or a digital currency with no inflation or deflation is useful. By creating the currencies, they will be able to compete in the open market and the market will decide. I want to know if such coins could be created and how.

Any other feedback is welcome.

I have a very similar idea, but much prefer to peg generation and destruction rates to difficulty growth rather than market prices.

My issue with pegging generation/destruction to market prices is that it requires a third party to supply accurate price information to the system forever. Two issues with this:
a) this is very centralized; take out the third party and you take out the coin
b) the third party could benefit from supplying inaccurate information.

An ostensibly attractive option is to allow users to vote on prices, but this does create incentives to supply truthful information. A voting system can ensure that everyone supplies similar information, but it cannot ensure that this information is truthful. There is no apparent economic reason why people will form a consensus around the truth instead of forming a consensus around a lie.

Pegging generation and destruction to difficulty growth (for example to achieve 50% annual difficulty growth) does not require the supply of outside price information. The relevant information is in the blockchain already. Linking coin generation and destruction to difficulty would ensure that the coin price approximately tracks the electricity price (I am assuming Moore's law will continue to hold).

There are certain features of this idea which would make it very difficult for anyone to profitably manipulate difficulty, but I don't want to go into the details because most people have short attention spans.

[alemaaltevinden]

If you release stablecoin it should be in EUR cause EUR is more stable, and most important, I work with EUR :p

[caston]

Could you blend it with dark exchange?

[dacoinminster]

I am just absurdly interested in these "pegged" coins of all type, as you can tell from my own threads. I was wondering how you would handle the case when the coins were too plentiful and their prices too low, so I'm glad you described your plan.

I am concerned that destroying coins in high transaction fees would lower interest in the coins, leading to lower prices for existing coins, which would force you to raise transaction fees, which would lower interest in the coins, leading to lower prices, . . . you get the picture. Basically, this could result in a divergence which never recovers.

Another concern I have is that you don't want to drive the price too forcefully, or you will limit the impact of goldcoin traders on real-life markets. As long as the prices converge over the long-term, short-term swings are not much concern, and they present arbitrage opportunities.

You might want to consider combining your feedback system with the one I came up with: charging variable transaction fees. If you have a distributed exchange, you can charge no transaction fee when trading at the external spot price for gold, and an increasing transaction fee the further you trade from that spot price. This continually nudges prices toward the external spot price, and helps you not rely so heavily on destroying coins.

[morpheus]

I am just absurdly interested in these "pegged" coins of all type, as you can tell from my own threads. I was wondering how you would handle the case when the coins were too plentiful and their prices too low, so I'm glad you described your plan.

If the price of the coins drops too low, then the mining reward will be dropped (not all the way to zero which would stop people from mining), and the transaction fee would be raised. The lower the price of the coins, the higher the transaction fee. All coins collected from transaction fees which are not given to miners are destroyed.

I am concerned that destroying coins in high transaction fees would lower interest in the coins, leading to lower prices for existing coins, which would force you to raise transaction fees, which would lower interest in the coins, leading to lower prices, . . . you get the picture. Basically, this could result in a divergence which never recovers.

I don't think we can know exactly what will happen with this setup without the actual stable coins in existence. My guess is, the higher transaction fees would cause people to hoard the coins. This will then remove more coins from existence than the higher transaction fees, and thus cause the price to rise.

Anyone desperate enough to sell below the fair value, would also likely be desperate enough to pay the transaction fee. Hoarders would then have an opportunity to make money through arbitrage, and coins would be destroyed at the same time.

In other words, I think the threat of higher fees or higher mining rewards would keep the price fairly stable without the actual higher fees or higher mining rewards going into effect that often.

Another concern I have is that you don't want to drive the price too forcefully, or you will limit the impact of goldcoin traders on real-life markets. As long as the prices converge over the long-term, short-term swings are not much concern, and they present arbitrage opportunities.

I agree. I would have to think carefully about how to set the fee structure. A little bit of price fluctuation is fine as long as it converges to a stable price over time. However, that does seem to go against the name "Stablecoin". Maybe, "Targetcoin" is a better name.

You might want to consider combining your feedback system with the one I came up with: charging variable transaction fees. If you have a distributed exchange, you can charge no transaction fee when trading at the external spot price for gold, and an increasing transaction fee the further you trade from that spot price. This continually nudges prices toward the external spot price, and helps you not rely so heavily on destroying coins.

The problem with a distributed exchange is, there is no central authority to enforce trading fees. Otherwise, it would be a good idea.

[dacoinminster]

I don't think we can know exactly what will happen with this setup without the actual stable coins in existence. My guess is, the higher transaction fees would cause people to hoard the coins. This will then remove more coins from existence than the higher transaction fees, and thus cause the price to rise.

Anyone desperate enough to sell below the fair value, would also likely be desperate enough to pay the transaction fee. Hoarders would then have an opportunity to make money through arbitrage, and coins would be destroyed at the same time.

In other words, I think the threat of higher fees or higher mining rewards would keep the price fairly stable without the actual higher fees or higher mining rewards going into effect that often.

I will be so, so happy when this hypothesis actually gets tested by someone

The problem with a distributed exchange is, there is no central authority to enforce trading fees. Otherwise, it would be a good idea.

Dang. You are right. I don't know why I didn't see that - even if everyone somehow used the same rules on the distributed exchange, people would just trade outside of the distributed exchange.

I'm increasingly convinced that you have the right approach here. I'm just worried about the coin destruction driving down coin prices rather than driving them up. If you can handle the "doomsday scenario" where 90% of people holding these coins panic that the coins won't hold their value, I'll be totally convinced.

People don't behave rationally during a panic, and I don't think you can rule one out.

[morpheus]

I will be so, so happy when this hypothesis actually gets tested by someone

I'm having too much trouble with multicoin and will look at modifying bitcoin directly (creating a new block chain and all). I'm not a C++ maven, so don't expect anything soon.

People don't behave rationally during a panic, and I don't think you can rule one out.

I'm sure panics will happen, but people who behave rationally would earn a lot of money from those who panic. I think it will sort itself out without destroying the currency. However, we won't know until the coin is created.

[jtimon]

I had a similar idea but using demurrage instead of destroying the currency through fees.
The problem is how you get from starting zero to the target value just by controlling the quantity of coins.

The pegging idea may be more viable. Assuming that voting to obtain the price index in terms of a bitcoin-like currency works, I have a completely decentralized solution for a distributed reserve.
I'm still not sure that the system would be resistant to the depreciation of the currency in reserve.

The idea is based on the decentralized exchange for coins.
Anyone can "destroy" (put in the network reserve) middlecoins to issue stablecoins or destroy middlecoins to get back middlecoins from the reserve.
The number of stablecoins depends on the market, but the number of middlecoins should be stable to prevent its depreciation.
Stablecoins can also be traded with other users at the price they like, for middlecoins, for bitcoin and/or other currencies if the protocol makes miners know about other chains.
Middlecoins can also be traded for any of the supported currencies.

Maybe in this case, escrowcoin would be a better name than middlecoin. It can be in another chain, but it has to look inside whatever chain want to use it as reserve and make sure that no more escrowcoins are created in the other chain than were destroyed previously (to put them in the reserve).

[dacoinminster]

morpheus,

While pondering this topic this morning I suddenly realized there is a fatal flaw in your plan as stated. I'm very sad to have to point this out, because I really want something like this to work because it is so beautifully simple.

Your plan to destroy coins will not work as stated. You are right that destroying coins will give people incentive to not transfer them between wallets, but they will simply sell whole wallets loaded with coins instead. Once some people start doing this, anybody transferring the normal way will be at a disadvantage, and everyone will have to start doing it, then *poof* you completely lose all control over reducing the coin supply.

Personally, I have to return to pondering the hideously complex ideas in my proposal for the second bitcoin whitepaper for now, but I'm hoping you have a good answer for this because I liked your idea better.

[jtimon]

morpheus,

While pondering this topic this morning I suddenly realized there is a fatal flaw in your plan as stated. I'm very sad to have to point this out, because I really want something like this to work because it is so beautifully simple.

Your plan to destroy coins will not work as stated. You are right that destroying coins will give people incentive to not transfer them between wallets, but they will simply sell whole wallets loaded with coins instead. Once some people start doing this, anybody transferring the normal way will be at a disadvantage, and everyone will have to start doing it, then *poof* you completely lose all control over reducing the coin supply.

Personally, I have to return to pondering the hideously complex ideas in my proposal for the second bitcoin whitepaper for now, but I'm hoping you have a good answer for this because I liked your idea better.

You could use demurrage instead of fees to destroy the currency. With demurrage the velocity of circulation would also be more constant and higher, thus the changes in the monetary base affecting more to the value of the currency.
I still see the problem of how do you get to the target value in the first place. The system can't control the value of a currency only by controlling its monetary base, and you have limits on how fast you can destroy and create. At the beginning you need to increase its value and also create much more than it is destroyed. I guess the value targeting system should be "switched off" until the currency reaches certain value.
Although I'm very curious about the feasibility of a decentralized stable currency, I'm not sure it would be desirable "for the economy".
The hard technical problem of a decentralized price index is still there. It could be very useful to solve it even without the stable currency.

[jtimon]

I've updated the list on my sign to include stablecoin and reservecoin (decentralized beertoken/1971coin backed by escrowcoins).

[morpheus]

morpheus,

While pondering this topic this morning I suddenly realized there is a fatal flaw in your plan as stated. I'm very sad to have to point this out, because I really want something like this to work because it is so beautifully simple.

Your plan to destroy coins will not work as stated. You are right that destroying coins will give people incentive to not transfer them between wallets, but they will simply sell whole wallets loaded with coins instead. Once some people start doing this, anybody transferring the normal way will be at a disadvantage, and everyone will have to start doing it, then *poof* you completely lose all control over reducing the coin supply.

Personally, I have to return to pondering the hideously complex ideas in my proposal for the second bitcoin whitepaper for now, but I'm hoping you have a good answer for this because I liked your idea better.

I don't have a great answer for this problem, but...

If someone wanted to sell 100 Stablecoin this way, they would have to create a new wallet and put 100 Stablecoin in it. If they did this while the price of Stablecoin is low, then they would have to pay the higher transaction fee. Thus solving the problem in this case. If they moved the coin while the price was high, they wouldn't have to pay the transaction fee, but they could just sell the coin for a profit instead. The only way this would work is if they bought the coin when the price is low, then moved the coin into separate wallets when the price is high, then sold the wallets when the price is low again. Not only is this complicated and risky, but the initial purchase would pay the high transaction fee.

An alternative to the above is if someone bought a bunch of Stablecoin at some point and doesn't care about selling exactly 100 coins. They could sell their entire wallet at once with some random number of coins inside. The problem with that is, the receiver couldn't pull the coins out of the wallet without paying the high transaction fees. The receiver would have an incentive to hold the wallet until the prices come back up. He could then sell the coins at a profit and may not have to worry about the transaction fee. Again this encourages hoarding which would drive the price of Stablecoin back up.

The big issue is an exchange like Mt Gox. If there were an exchange like Mt Gox which held all of its Stablecoin in a wallet and let people buy and sell on its open market, then the price of Stablecoin would be independent of transaction fees. Of course, anyone who bought a bunch of Stablecoin while the price is low would not be able to pull it out of the market without paying the transaction fee. This again would encourage hoarding which would drive price back up to the fair market value.

There may be issues in practice, and the transaction fee/miner reward may have to be adjusted at times. I still think it could work and I'm slowly working on an implementation.

If anyone has any info on creating your own bitcoin chain, let me know. I'm looking for a tutorial if one exists. Or maybe a tutorial could be added to the bitcoin wiki.

[dacoinminster]

I don't have a great answer for this problem, but...

If someone wanted to sell 100 Stablecoin this way, they would have to create a new wallet and put 100 Stablecoin in it. If they did this while the price of Stablecoin is low, then they would have to pay the higher transaction fee. Thus solving the problem in this case. If they moved the coin while the price was high, they wouldn't have to pay the transaction fee, but they could just sell the coin for a profit instead. The only way this would work is if they bought the coin when the price is low, then moved the coin into separate wallets when the price is high, then sold the wallets when the price is low again. Not only is this complicated and risky, but the initial purchase would pay the high transaction fee.

An alternative to the above is if someone bought a bunch of Stablecoin at some point and doesn't care about selling exactly 100 coins. They could sell their entire wallet at once with some random number of coins inside. The problem with that is, the receiver couldn't pull the coins out of the wallet without paying the high transaction fees. The receiver would have an incentive to hold the wallet until the prices come back up. He could then sell the coins at a profit and may not have to worry about the transaction fee. Again this encourages hoarding which would drive the price of Stablecoin back up.

The big issue is an exchange like Mt Gox. If there were an exchange like Mt Gox which held all of its Stablecoin in a wallet and let people buy and sell on its open market, then the price of Stablecoin would be independent of transaction fees. Of course, anyone who bought a bunch of Stablecoin while the price is low would not be able to pull it out of the market without paying the transaction fee. This again would encourage hoarding which would drive price back up to the fair market value.

There may be issues in practice, and the transaction fee/miner reward may have to be adjusted at times. I still think it could work and I'm slowly working on an implementation.

If anyone has any info on creating your own bitcoin chain, let me know. I'm looking for a tutorial if one exists. Or maybe a tutorial could be added to the bitcoin wiki.

I'm especially worried about the scenario where somebody writes a client which stores your coins in hundreds of little wallets, and sends and receives wallets instead of coins, completely bypassing the transaction fees and coin destruction. If everybody switched to that method, including the exchanges, then no coins would ever be transferred through the protocol, nor would they ever be destroyed. And people would definitely have a big incentive to move in that direction, even if it didn't get that extreme.

[jtimon]

I'm especially worried about the scenario where somebody writes a client which stores your coins in hundreds of little wallets, and sends and receives wallets instead of coins, completely bypassing the transaction fees and coin destruction. If everybody switched to that method, including the exchanges, then no coins would ever be transferred through the protocol, nor would they ever be destroyed. And people would definitely have a big incentive to move in that direction, even if it didn't get that extreme.

That's not going to happen. When you transfer a wallet you can keep a copy of it. The recipient must move them through the block chain or trust you. And if they need to trust you, you've lost the main advantage of scarce moneys. Now people have to trust each other and not be completely anonymous: people probably prefer Ripple for that. You can denominate IOUs in stablecoins, but again you need the decentralized price index system.

The destruction of money through transaction fees has other problems:
Is the transaction fee voluntary?
Why would the merchants include a transaction with a big fee sooner than one with a small one?

I think you need demurrage for this system even if you don't like it.

[dacoinminster]

I'm especially worried about the scenario where somebody writes a client which stores your coins in hundreds of little wallets, and sends and receives wallets instead of coins, completely bypassing the transaction fees and coin destruction. If everybody switched to that method, including the exchanges, then no coins would ever be transferred through the protocol, nor would they ever be destroyed. And people would definitely have a big incentive to move in that direction, even if it didn't get that extreme.

That's not going to happen. When you transfer a wallet you can keep a copy of it. The recipient must move them through the block chain or trust you. And if they need to trust you, you've lost the main advantage of scarce moneys. Now people have to trust each other and not be completely anonymous: people probably prefer Ripple for that. You can denominate IOUs in stablecoins, but again you need the decentralized price index system.

The destruction of money through transaction fees has other problems:
Is the transaction fee voluntary?
Why would the merchants include a transaction with a big fee sooner than one with a small one?

I think you need demurrage for this system even if you don't like it.

You are quite right that only trusted transactions would skip the fees and/or coin destruction. I hadn't thought that through all the way. So buying coins from a trusted exchange could potentially be free, but selling coins to the exchange would definitely require paying the fee since the exchange doesn't trust you.

If you want widespread adoption, there's a huge marketing advantage to getting rid of demurrage. I think morpheus' transfer fee idea has all the advantages of demurrage without the drawbacks. When the price of coins is at or above the target, there would be no fees or penalties of any kind.

[jtimon]

If you want widespread adoption, there's a huge marketing advantage to getting rid of demurrage. I think morpheus' transfer fee idea has all the advantages of demurrage without the drawbacks. When the price of coins is at or above the target, there would be no fees or penalties of any kind.

Demurrage has many advantages for its users than just providing a means of money destruction.
It lowers interest rates, drives transaction fee prices down (or improves security) and recovers lost coins.
Merchants should accept a currency that his customers are willing to spend. But let's discuss these other advantages in the freicoin thread if you don't agree or don't see them as advantages.

If you want to influence prices by changing the monetary base, changes will have more effect if there's demurrage, because demurrage increases the velocity of circulation, and having a high V multiplies the effects of increasing/decreasing M.

M * V = P * Q

You can change both, the amount of newly created coins NCC and the demurrage fee rate.
When you have stable prices, you have NCC = (coins destroyed by demurrage) CDD to keep M constant.
When you have inflation you want NCC < CDD to decrease M
When you have deflation you want NCC > CDD to increase M
When you have inflation you want to decrease CDD to decrease V
When you have deflation you want to increase CDD to increase V
So finally,

With deflation you increase both NCC and CDD, but NCC more than CDD
With inflation you decrease both, but you decrease NCC more than CDD

If you destroy the money through transaction fees, you don't have direct control over coins destroyed by transaction fees CDT, you just can change the mandatory transaction fee rate MTR.
Even worse, when you increase MTR to fight deflation inflation, V goes down, reducing CDT, making you increase MTR even more...a positive feedback that takes fees to the sky and stops transactions completely. It is better to have deflation inflation than no trade at all.
I don't think that morpheus's proposal can work as it is.

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