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Author Topic: Targeted Deflation Rate  (Read 2262 times)
kiba
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July 17, 2011, 05:22:26 AM
 #21

Different from the FED in that the goal would be to achieve deflation of around 2% or more per year. FED aims for inflation of around 2%. Also different in that currency generation is specified by an algorithm rather than an appointed commitee. Similar to the FED in that the system takes currency in and out of circulation to limit price volatility.

Extreme economic growth is going to lead to extreme deflation. You're going to prevent everyone from benefiting from deflation?

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cunicula
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July 17, 2011, 05:33:18 AM
 #22

To clarify: the problem is inflationary risk faced by merchants who receive payment in bitcoin.

The proposal is to set aside some portion of sent money as a flow of insurance funds. In the event of inflation the flow of insurance funds is destroyed to reduce the money supply. In the event of deflation, the insurance monies are redistributed to miners as rewards for processing transactions.


That is a problem best solved with companies that will offer private insurance funds and other classic hedging solutions long in use in mutlicurrency trading.   There is no need to burden the currency itself and hence everyone with those costs.


Whether everyone should be forced to participate in an insurance pool or just those who choose to is open to debate. Insurance can be prohibitively expensive when it is elective. Where can I purchase forward bitcoin contracts in non trivial volumes now? How much does this insurance cost?  How do i know that the insurer won't pull a 2008 banking crisis and fail to pay? I don't think usable insurance for bitcoin will ever materialize without revamping the generation protocol. This in my view is an Achilles heel.


Forcing the costs on those who don't need it will make even more ventures prohibitively expensive,   also for most current ventures we are choosing to self insure, why should we lost that right?   bit-pay already is offering this type of service for merchants from what they say, and if you really need non trival amounts there is always lloyds of london.    You can also cross insure if you want as well.   You are never going to get rid of all the risk in life.    I also see the generation protocol as a potential failure point, but not for the reasons you do.  I see what you want to do as far worse then what we have now.


Obviously i disagree with you regarding the effectiveness of private insurance markets in the management of systematic risk. However, the imposition of a tax is a serious issue as you point out. One option is two issue currency as bonds with fixed maturity. Bond transactions would not be taxed. Bonds would turn into regular coins at maturity. Transactions using regular coins would be taxed. This would allow businesses which need very frequent transactions to operate to use bonds for their operations.

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cunicula
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July 17, 2011, 06:05:37 AM
 #23

Different from the FED in that the goal would be to achieve deflation of around 2% or more per year. FED aims for inflation of around 2%. Also different in that currency generation is specified by an algorithm rather than an appointed commitee. Similar to the FED in that the system takes currency in and out of circulation to limit price volatility.

Extreme economic growth is going to lead to extreme deflation. You're going to prevent everyone from benefiting from deflation?

Not really though I would if I could think of a good method. There is a tension between controlling deflation and controlling inflation. If the algorithm can destroy coins at a much faster rate than it can create them, the algorithm will offer stronger protection against inflation. I view rapid deflation as the lesser of two evils. Accordingly the system would be designed to issue coins at a much slower rate than it can destroy them. Remember new issuance of currency in the current period would be set to a fraction (say one tenth) of the transaction fee/tax volume in the previous period.

E.g the tax brought in 10 coins last period for miners and destruction. This period the algorithm issues 1 coin. If difficulty is climbing according to Moore's law or faster, tax is distributed to miners. If difficulty is not climbing fast enough, tax destroys about 10 coins. Net money supply falls if difficulty falls and rises if difficulty rises.

Value of coins should be roughly one to one with transaction volume in the long run. Suppose transaction volume doubles from 100 to 200. Tax revenue would rise from 0.1 to 0.2. Iff difficulty is simultaneously increasing, currency issuance rate woul increase from 0.01 to 0.02. As you can see there is nothing in here to protect the system from rapid deflation. If difficulty is falling, currrency destruccreation would move from 0.01 to -0.09. As long as difficulty continued to fall, destruction would continue. In the event of a collapse, transaction volume would likely increase as wealth holders rushed to sell. Potential Destruction rates are proportional to transaction volume, so these would increase dramatically as well. This would provide some protection against a sudden collapse. The higher the tax rate the better the protection, still I couldn't accept tax rates higher than 0.1%.

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