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Author Topic: Multicoin, Namecoin, Goldcoin, Silvercoin, OilCoin, 1971coin, backed by bitcoin!  (Read 11130 times)
Mike Hearn
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July 25, 2011, 04:44:32 PM
 #21

I think creating Bitcoin-like currencies backed by national currencies might make sense. I'm much less convinced about currencies backed by commodities.

Proxy currencies would allow for more flexible, distributed currency exchange than what is available today and some people might want to accept them for trade directly. The alt chain would still need to be backed by a (consortium of) issuers, thus it would be less decentralized than Bitcoin, but the backers would simply convert USDcoin/EURcoin into bank wires and back (along with all the AML stuff like id verification).

Once those institutions exist, you could do cryptographically enforced currency exchange, futures, options and other derivatives in a peer to peer/decentralized manner. I'm not sure how that would interact with various countries securities-trading regulations, I suppose you would need to check that out before creating such a network.
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July 25, 2011, 06:21:44 PM
 #22

I though this intrade-chain was the solution for the stable prices and not stable prices what the intrade-chain needed.
But if you can peg the value of a currency to a commodity without storing it (even only its price denominated in other currency), you can have a pretty stable currency defining the currency as a basket of commodities.

2) If you could peg a chain currency to a commodity using contracts, the options market still needs an arbiter to determine what the price of the commodity is at a given moment. How do you make that arbiter decentralized?

If you want a distributed currency pegged to ANYTHING, this is one of the biggest technological problems to solve. However, consider this: there are also attack vectors on bitcoin that involve fraudulent timestamps. Bitcoin uses a distributed timestamp protocol, where nodes reject timestamps that differ significantly from what they think the time is. I believe the same logic can be extended to exchange rates. If somebody lies about the exchange rate, other nodes will reject that block. Consequently, I consider the problem of distributed exchange rates a (mostly) solved problem.

I wouldn't say mostly solved, I'm sure is a complex problem, but It's a good idea, it may work.
I was assuming the intrade would use a third party chosen by the two participants specified in each contract to say what happened in the outside world. That's one of the things I meant when saying contracts are not fungible.
I like this "informing the network by voting" idea.
The "price" of a given commodity would be some weighted average from the last miners's reported prices. Nodes should be motivated somehow to not to "go on with the lie".  
One thing to think about is how miners are rewarded. The easiest ways to do it are issuing a new currency or paying them fees directly with bitcoins.

Your link led me to this very related thread ("Achieving stable prices through a reference currency"): http://forum.bitcoin.org/index.php?topic=11614.0

Sorry for the confusing links.

I think is impossible to "back" a currency without introducing centralization.
In this case, he want to use option contracts but I see a few problems.

1) As far as I know, option contracts are not fungible. I didn't get the Gascoin/antigascoin thing.

-Suppose oil is at 10 btc right now. How many btc to buy the oilcoin, a much for the antioilcoin?
dacoinminster, can you elaborate a little bit more on this?


For #1, I am not sure that gascoin/antigascoin is the way to go. It is possible that an intrade-like system as discussed earlier might be a better way to do it.

I will say that I imagine gascoins/antigascoins would have to have some sophisticated rules to prevent the bitcoins held in escrow from running out. I'm guessing the rules might involve some of the following ideas:

1) All bitcoins held in escrow could be used as needed when payouts happen, not just the bitcoins from one coin/anticoin pair
2) Anticoins would be fungible. If you bought one, some of your bitcoins might go into escrow if that anticoin was last sold when the commodity had a lower price. Some bitcoins might come out of escrow (to the seller) if the commodity had a higher price at the last sale.
3) If an anticoin was in danger of going "in the red", the protocol might force a sale, similar to a margin call
4) In the event that all the entire escrow fund went "in the red" (like if there was a "run" on the funds similar to a bank run), bitcoins could be created "out of thin air". I recognize this would violate the 21M hard limit, and that would probably never fly with the community. Perhaps instead of real bitcoins, they could be some kind of "IOU" from the escrow fund, redeemable when the fund went back in the black.

Regardless of whether people are trading something that looks like a future's contract (coin/anticoin), something that looks like intrade, or something else entirely, the first problem to solve is how to create a stabilized extrapolation of bitcoin.


Imagine we have an intrade-chain denominated and paid in bitcoin (so not a good place to short BTC). The chain makes the escrow, but it cannot generate bitcoins out of nothing, they're real bitcoins from the btc network.
What I don't get is how you get from the intrade to an asset that can be sold at any moment for the current price (in BTC) of a barrel of oil.
How is that done with bets? How many parts are necessary?
I don't know how to do it even with a stable currency.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 25, 2011, 07:18:35 PM
 #23

I created a separate thread for "The Second Bitcoin Whitepaper":

http://forum.bitcoin.org/index.php?topic=31645.0

I am officially extending my offer to pay for intelligent posts to include posts made in that thread as well.

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July 25, 2011, 09:00:39 PM
 #24

Stable prices are an unachievable mythical goal in the real world.

It stems from deficient mathematical understanding, economists need to do some research into stationary fixed points of dynamical systems, strange attractors and the like. A non-linear dynamic, multi-variable system like a money market is never going to produce stable prices. A vibrant system needs a kernel of instability to retain flexibility and robustness, as a resistance to stagnation, corruption and large external disturbances (shocks).

With a more modern mathematical basis "stable prices" would be recognised as unattainable and anyway not desirable, imho.

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July 25, 2011, 09:55:11 PM
 #25

Stable prices are an unachievable mythical goal in the real world.

It stems from deficient mathematical understanding, economists need to do some research into stationary fixed points of dynamical systems, strange attractors and the like. A non-linear dynamic, multi-variable system like a money market is never going to produce stable prices. A vibrant system needs a kernel on instability to retain flexibility and robustness, as a resistance to stagnation, corruption and large external disturbances (shocks).

With a more modern mathematical basis "stable prices" would be recognised as unattainable and anyway not desirable, imho.

I agree that a perfectly stabilized currency is not possible. What is possible (in my opinion) is to let people choose who experiences the instability. The instability is there (risk), but with risk comes reward. I wish to give bitcoin users (at least) two additional choices beyond holding bitcoins: a low-risk low-reward extrapolation, and a high-risk high-reward extrapolation which takes on both the risk and reward from the people who chose low-risk low-reward.

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July 25, 2011, 09:59:31 PM
 #26

Imagine we have an intrade-chain denominated and paid in bitcoin (so not a good place to short BTC). The chain makes the escrow, but it cannot generate bitcoins out of nothing, they're real bitcoins from the btc network.
What I don't get is how you get from the intrade to an asset that can be sold at any moment for the current price (in BTC) of a barrel of oil.
How is that done with bets? How many parts are necessary?
I don't know how to do it even with a stable currency.

I think that the intrade idea was suggested as an alternative to holding "barrel of oil" type contracts. If speculation worked using binary options like intrade uses, you probably wouldn't be buying and selling bitcoin-backed contracts.

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July 25, 2011, 11:24:08 PM
 #27


Anti-gascoins ... ? is that something like Mylanta? ... or a brother to Roger Gascoine maybe?


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jtimon
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July 25, 2011, 11:25:47 PM
 #28

Imagine we have an intrade-chain denominated and paid in bitcoin (so not a good place to short BTC). The chain makes the escrow, but it cannot generate bitcoins out of nothing, they're real bitcoins from the btc network.
What I don't get is how you get from the intrade to an asset that can be sold at any moment for the current price (in BTC) of a barrel of oil.
How is that done with bets? How many parts are necessary?
I don't know how to do it even with a stable currency.

I think that the intrade idea was suggested as an alternative to holding "barrel of oil" type contracts. If speculation worked using binary options like intrade uses, you probably wouldn't be buying and selling bitcoin-backed contracts.

I'm disappointed. I thought you had a system with "hold a barrel of oil" contracts based on options instead of backing. It sounded almost magical to me but I was very curious. I think I get binary contracts, I just though there was a way to turn or combine them into a "hold a barrel of oil"-like contract.

It seems to me that you just want to have a currency based on bitcoin plus option based insurances for both bitcoin going down and going up. Option traders would sell those insurances. Still don't know where are you going to get all this shorts but it would be possible. It would not be stable, but more stable than bitcoin. I don't think a chain is needed nor useful for that.

Again, I don't know much about options.
But I still don't know what is wrong with having an intrade-chain like the one you proposed with an unstable currency. You could denominate them in whatever currency you like (even if it doesn't exist, a reference currency) and pay them with bitcoins. Once you have an input of information about markets you can redeem automatically the contracts before the money in the escrow can't meet the obligation. I guess you can't apply it to binary options. It should be possible to deposit more funds in the escrow to avoid the automatic redemption of the contract. It would be great to have bitoption in this thread.

Anyway, I think the best idea of the thread is to have a chain that "knows" the prices of commodities. I'm thinking about proposing freicoin 2 with a dynamic monetary base (You hated freicoin? Wait to see what's new in freicoin 2).
With price deflation the system would increase the demurrage rate but increase more the block reward (thus increasing the monetary base).
With price inflation you would decrease the demurrage rate but decrease more the block reward (thus decrasing the MB).
With that you just got the full feedback loop.
With stable prices you keep the demurrage and the annual reward equal.
But that sounds too complicated, let's think first about the intrader-chain without arbiters.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 26, 2011, 07:12:55 AM
 #29



I read a bit about OT when it first came out, but I don't claim to understand it completely. At first blush it seems way too complicated for the average Joe to understand and use,

Since there are people working on various OT clients, I get images and screenshots in the email sometimes. Below is an example.

I never understood why people say that OT is "way too complicated for the average Joe" since those people have probably never actually SEEN an OT client. Plus, in my own personal opinion, the OT-API is retard-easy to use. In fact, I can't imagine a system doing all the things OT does and having an easier interface than it already does. A trained monkey could code an OT client!



Of course, every OT client will have a different interface, so above is only an example of what could be done.

There are also some screenshots of the test GUI: https://github.com/FellowTraveler/Moneychanger
(But keep in mind that a Test-GUI isn't meant to have the prettiest interface. Rather, it's meant for testing the protocol.)

Quote
and it is not clear to me who is being trusted.

In OT, the issuer is the one being trusted. (The magical part about OT is not having to trust the transaction server.)

In the case of Bitcoin (using Bitcoin as a "backing currency" on an OT server) then you could have a trusted issuer also, the same as with gold or anything else. While this is no different than what the Bitcoin world is doing now (MyBitcoin, MtGox, etc) it is certainly not good enough for me, which is why I have written on this forum on how to use voting pools to eliminate entirely any need for an "issuer" (for Bitcoin on OT.)

Quote
It is not clear to me who is being trusted. With bitcoins, I know I only have to trust an algorithm implemented in Open Source software.

If you want to learn more about OT's concept of "low trust servers", check out the post Stephen already referenced:
http://forum.bitcoin.org/index.php?topic=20425.0

"Seek and ye shall find."

As well as this related post:
http://forum.bitcoin.org/index.php?topic=28565.msg363945#msg363945

FYI, OT is open source.

Quote
What would be interesting to me would be the "marketing copy" for OT (like how WeUseCoins makes the case for bitcoin). I'd be interested in reading anybody's attempt at marketing copy for OT: a convincing story about who would use OT, under what circumstances, why they would trust it, the "killer app" that makes everyone start using it, how it could change the world, and most importantly (to me) how it could be used to create a black market for currencies, commodities, stocks, bonds, etc.

Given that the first clients haven't been released yet, other than the test client, I think marketing copy is a bit premature.  However, there is a pretty easy description at the top of the OT Wiki:

WHAT IS “Open Transactions” ?
  • Open-Transactions allows users to issue and manipulate digital assets. Users may create many pseudonyms (public keys), each of which may own asset accounts of various types. Users can transfer digital assets securely between accounts (even a server cannot change balances or forge transactions.) Users can also operate “cash-only” (without accounts) for maximum anonymity.
  • Open-Transactions supports a range of financial instruments, such as cheques, vouchers, and untraceable digital cash. These are all analogous to the same financial instruments that we all use at normal banks today. Everyone already has an intuitive understanding of these financial instruments, because we use them regularly in our normal daily lives.
  • Open-Transactions also implements higher-level, contract-based transactions such as payment plans and markets with trades. The markets on Open-Transactions support market orders, limit orders, fill-or-kill orders, day orders, stop orders, and stop limits, just like trading on a real market. OT also supports basket currencies.
  • All of this is accomplished in such a way that all parties are able to prove, at all times, which transactions have cleared and which instruments are authorized, without having to store their entire transaction history, but instead by merely keeping the last signed receipt.
    (Without the special mechanism that makes this possible, all parties would otherwise be forced to store all receipts forever--no matter which system you are actually using.)

Quote
the "killer app" that makes everyone start using it

OT is not a "killer app" but rather, a SOFTWARE LIBRARY. There are MANY possible different interfaces that could be built.

The basic use cases are:

-- Issue a new currency (by uploading the new currency contract to an OT server.)
-- Open accounts of any asset type.
-- Withdraw / Deposit in untraceable digital cash.
-- Use "cash only" (no accounts) for full anonymity.
-- Write cheques, cashier's cheques, and perform account transfers (all with signed and unforgeable receipts.)
-- Trade on markets (like MtGox.)

Who could use OT?
-- A market site (like MtGox) where users are able to trade currencies, including Bitcoin, on markets.
-- A "Wallet" website (like MyBitcoin or whatever).
-- A client application. (OT works on all platforms...Android, Windows, Linux, Mac, etc)
-- A gambling site.
-- Etc.

The above are just basic uses which I mention first, since you are all mostly building such things. However, much more useful applications of the library are possible, such as creating the next generation of file-sharing software, the next generation of anonymous networks, etc.

I think the most disruptive use of OT would be using it to solve issues of resource allocation that arise in anonymous networks, mesh networks, darknet hosting, etc.

OT is also useful in combination with Bitcoin. Why?

Bitcoin gives OT: a universal “glue” between servers, a network of existing exchangers, and a publicly-auditable, reserve currency that cannot be confiscated or shut down.

OT gives Bitcoin: Untraceable cash, instant finality of settlement, and convertibility to other currencies on OT Markets.

(Soon, using the low-trust technology, OT will also give Bitcoin the only servers where Bitcoins can safely be stored, without risk of the server, or a hacker, stealing them.)

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July 26, 2011, 09:03:48 AM
 #30

@fellowtraveler

I had read about OT but not deeply enough. I've recently proposed a chain for exchanges between bitcoin-like currencies.
Could this be made directly with OT? Note that the exchanges must be atomic.

Also, can binary options be made through OT without the need of an arbiter (in the intrade-chain way)?

For the stable currency. Imagine we define a currency as a basket of commodities. The problems I see are:

How can we trust the issuers? I mean, why would anyone trust an anonymous issuer?
How can an OT token of say oil fungible with another oil token issued by another issuer?

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 26, 2011, 10:01:22 AM
 #31

@fellowtraveler

I had read about OT but not deeply enough. I've recently proposed a chain for exchanges between bitcoin-like currencies.
Could this be made directly with OT? Note that the exchanges must be atomic.

I think this would work, yes.

First, you'd actually issue two bitcoin-like currencies onto an OT server. For example, Bitcoin and Namecoin.

Second, since you don't want to have to trust an issuer, we'd use the "low trust / voting pool" solution I've proposed, which eliminates the need for an issuer, for any Bitcoin-like currencies. (There is no avoiding issuers for gold-based currencies, but for bitcoin-like currencies it is possible to eliminate issuers.)

Third, since OT has markets (like MtGox) the users are now able to make offers on those markets, trading Bitcoins for Namecoins.

Finally, the OT server(s) processes the trades according the rules defined in the various market offers. Whenever a successful trade occurs, receipts are dropped into the parties' inboxes.

(And yes, the trades are atomic, meaning BOTH parties get a receipt, or not at all.)

Quote
Also, can binary options be made through OT without the need of an arbiter (in the intrade-chain way)?

Not sure what you mean by this...

When you make an offer onto an OT market, you can attach specific terms to your offer. That is, minimum price ($50 per bushel minimum) or minimum amount traded (500 bushel minimum per trade). You can also create stop-orders (do not activate this offer until the price reaches $50 per bushel.) Basically the same sorts of things you would do on a real market: stop orders, limit orders, stop limits, fill-or-kill orders, day orders (date ranges), etc.

Quote
For the stable currency. Imagine we define a currency as a basket of commodities. The problems I see are:

How can we trust the issuers? I mean, why would anyone trust an anonymous issuer?

(FYI, OT does support basket currencies, so if you actually wanted to define a single currency as a basket of others, you can do that.)

As I said before, the magic of Open-Transactions is that you do not have to trust the transaction servers. IOW, you still do have to trust the issuer.
For example, if the issuer is holding 100 oz of your gold, he could still disappear with your gold. (This is why OT has traditionally focused on securing the transaction server, so that the server itself doesn't become ANOTHER party that you have to trust, since you normally have no choice about trusting the issuer.)

However for Bitcoin-like currencies (crypto-currencies) as I said before, this "issuer risk" can be eliminated on OT using low-trust servers with voting pools. (By eliminating the issuer entirely.) But obviously such solutions are not possible with gold, silver, or other physical commodities, and so the markets will have to decide on their own which gold issuers they will trust. (One thing OT will never be able to do is PHYSICALLY AUDIT your gold warehouse.)  Therefore I don't know how "anonymous issuers" will work, although I've heard that the eCache group is experimenting with a solution for that, based on bonding.

Quote
How can an OT token of say oil fungible with another oil token issued by another issuer?

Keeping things simple, let's assume there is only one OT server, and that 2 oil issuers are using it. (They have both issued their own oil currencies onto the OT server.)

Even though we logically know that both contracts are valued in the real world in terms of "oil", the OT server has no way of knowing that. OT just sees two different contracts -- that's all.

An easy way to convert between the two oil-based currencies, in that example, would be to trade on OT markets.  You just trade one for the other, on the market, the same way that people trade dollars for BTC now on MtGox. The trades would be processed automatically by the OT server, based on the terms in the respective offers, with receipts being dropped into the inboxes of the respective parties once the trade is complete.

There are other solutions for this. For example, if each of the 2 issuers honestly believe that the other oil-based currency is comparable to their own, then there is no reason why the issuers themselves couldn't perform such exchanges on behalf of the users. The issuers could also leave standing orders on the oil markets, and thus use the markets themselves to perform this functionality.  That way no one has to worry about being paid the second half of any trade, since the OT markets handle all of this.




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July 26, 2011, 11:46:22 AM
 #32

Thank you for the answers, it's an interesting project.

I had read about OT but not deeply enough. I've recently proposed a chain for exchanges between bitcoin-like currencies.
Could this be made directly with OT? Note that the exchanges must be atomic.

I think this would work, yes.

First, you'd actually issue two bitcoin-like currencies onto an OT server. For example, Bitcoin and Namecoin.

Second, since you don't want to have to trust an issuer, we'd use the "low trust / voting pool" solution I've proposed, which eliminates the need for an issuer, for any Bitcoin-like currencies. (There is no avoiding issuers for gold-based currencies, but for bitcoin-like currencies it is possible to eliminate issuers.)

Third, since OT has markets (like MtGox) the users are now able to make offers on those markets, trading Bitcoins for Namecoins.

Finally, the OT server(s) processes the trades according the rules defined in the various market offers. Whenever a successful trade occurs, receipts are dropped into the parties' inboxes.

(And yes, the trades are atomic, meaning BOTH parties get a receipt, or not at all.)

Cool. But I still don't understand how it can be done.
I guess what I don't get is the "low trust / voting pool" solution part (questions at the end)
Example.
I offer 1 BTC for 10 NMC.
You accept the trade.
Then what happens? I have to send you the BTC and you have to send me the NMCs.
Is there an escrow with my BTC and your NMCs?
If it's all decentralized, where the private keys of those escrows are stored?

Quote
Also, can binary options be made through OT without the need of an arbiter (in the intrade-chain way)?

Not sure what you mean by this...

When you make an offer onto an OT market, you can attach specific terms to your offer. That is, minimum price ($50 per bushel minimum) or minimum amount traded (500 bushel minimum per trade). You can also create stop-orders (do not activate this offer until the price reaches $50 per bushel.) Basically the same sorts of things you would do on a real market: stop orders, limit orders, stop limits, fill-or-kill orders, day orders (date ranges), etc.


I mean options and things like intrade. Example:

Will 1 NMC worth more than 0.80 BTC by the end of the year?
I put 10 BTCs in escrow and sell it for 5 BTC to you (then you can resell it at any price you want and can).
Whoever was right by the end of the year gets the money in the escrow.

However for Bitcoin-like currencies (crypto-currencies) as I said before, this "issuer risk" can be eliminated on OT using low-trust servers with voting pools. (By eliminating the issuer entirely.) But obviously such solutions are not possible with gold, silver, or other physical commodities, and so the markets will have to decide on their own which gold issuers they will trust. (One thing OT will never be able to do is PHYSICALLY AUDIT your gold warehouse.)  Therefore I don't know how "anonymous issuers" will work, although I've heard that the eCache group is experimenting with a solution for that, based on bonding.

Can you explain how this work?
Is a new currency backed by bitcoin or you can trade directly with btc within OP ?

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
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July 26, 2011, 04:08:25 PM
 #33

I think that the intrade idea was suggested as an alternative to holding "barrel of oil" type contracts. If speculation worked using binary options like intrade uses, you probably wouldn't be buying and selling bitcoin-backed contracts.

I'm disappointed. I thought you had a system with "hold a barrel of oil" contracts based on options instead of backing. It sounded almost magical to me but I was very curious. I think I get binary contracts, I just though there was a way to turn or combine them into a "hold a barrel of oil"-like contract.

It seems to me that you just want to have a currency based on bitcoin plus option based insurances for both bitcoin going down and going up. Option traders would sell those insurances. Still don't know where are you going to get all this shorts but it would be possible. It would not be stable, but more stable than bitcoin. I don't think a chain is needed nor useful for that.

Again, I don't know much about options.
But I still don't know what is wrong with having an intrade-chain like the one you proposed with an unstable currency. You could denominate them in whatever currency you like (even if it doesn't exist, a reference currency) and pay them with bitcoins. Once you have an input of information about markets you can redeem automatically the contracts before the money in the escrow can't meet the obligation. I guess you can't apply it to binary options. It should be possible to deposit more funds in the escrow to avoid the automatic redemption of the contract. It would be great to have bitoption in this thread.

Anyway, I think the best idea of the thread is to have a chain that "knows" the prices of commodities. I'm thinking about proposing freicoin 2 with a dynamic monetary base (You hated freicoin? Wait to see what's new in freicoin 2).
With price deflation the system would increase the demurrage rate but increase more the block reward (thus increasing the monetary base).
With price inflation you would decrease the demurrage rate but decrease more the block reward (thus decrasing the MB).
With that you just got the full feedback loop.
With stable prices you keep the demurrage and the annual reward equal.
But that sounds too complicated, let's think first about the intrader-chain without arbiters.

I personally prefer the "hold a barrel of oil" model too. Take a look at this post I made describing how it could work for buying and selling "U.S. dollar" denominated bitcoins, which is exactly how I imagine it could work for oil, gold, and anything else you can think of: http://forum.bitcoin.org/index.php?topic=31645.msg400477#msg400477

The idea DOES feel magical to me, which is why I'm pushing it so hard. There's no reason that binary contracts couldn't be built into the system too, but I really like the idea of something your kid brother or Grandma could use to buy/sell oil, gold, Euros, or anything else without understanding anything more than "buy a barrel of oil", "sell an ounce of gold", etc. No paperwork, no money trail, no proof of identification, no trying to grasp the difference between a put and a call or a futures contract. All you do is download bitcoin, get some bitcoins, and then start buying/selling whatever you want to hold.

I would personally hold the hyperbitcoins over any currency or commodity, allowing my bitcoins to be added to escrow as insurance against a crash in bitcoin prices in exchange for massive leveraged exposure to bitcoin price increases.

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July 26, 2011, 05:24:43 PM
 #34

I agree that oil, gold, whatever markets will be valuable for the bitcoin economy. But as they introduce a single point of failure, they should be kept outside of the bitcoin protocol. What is wrong with creating trade contracts, signing them with your PGP key and establishing a web of trust between traders? This approach can be extended upon in a bottom-up manner, it can use bitcoin as a currency, but it will still not be able to damage bitcoin security.

I disagree with the recent populism targeting at artificially stabilizing the bitcoin currency. Bitcoin will stabilize itself like any other currency when we establish a prosperous bitcoin-backed economy. For this to work, the most important next step will be merchants growing up and providing services or goods for real BTC prices instead of constantly adapting their prices to the exchange rates. After that, the market will stabilize the price by itself (and probably lead to an even more stable currency than what certain national currencies currently are due to the governments becoming more and more indebted).

Please do also note that I cannot be bribed with 0.1 BTC or whatever in order to write something that pleases someone else. I have my own plans on doing bitcoin business, and I have found that there are people in the community who agree with what I do because I received BTC donations both anonymously and by prior agreement. I am always open to new collaborations with people from the bitcoin community, but I will not engage in business which is easily recognizable as being bound to fail.

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July 26, 2011, 05:38:08 PM
 #35

I agree that oil, gold, whatever markets will be valuable for the bitcoin economy. But as they introduce a single point of failure, they should be kept outside of the bitcoin protocol. What is wrong with creating trade contracts, signing them with your PGP key and establishing a web of trust between traders? This approach can be extended upon in a bottom-up manner, it can use bitcoin as a currency, but it will still not be able to damage bitcoin security.

What is wrong with contracts, PGP keys, and webs of trust? The problem with them is they are hard to explain to Grandma. It's much easier to tell Grandma, "See, you bought some bitcoins, but you can store them as USD, Euros, gold, oil, . . . "

I disagree with the recent populism targeting at artificially stabilizing the bitcoin currency. Bitcoin will stabilize itself like any other currency when we establish a prosperous bitcoin-backed economy. For this to work, the most important next step will be merchants growing up and providing services or goods for real BTC prices instead of constantly adapting their prices to the exchange rates. After that, the market will stabilize the price by itself (and probably lead to an even more stable currency than what certain national currencies currently are due to the governments becoming more and more indebted).

I hope you are right that bitcoin will eventually stabilize. However, price volatility favors speculators at the expense of people who just want to use bitcoin to engage in commerce or store value. The assertion that bitcoin will stabilize may be true, but it can't be proven. I'd rather have the protocol provide stability for the people that want it, and transfer the volatility to the speculators who want it.

Please do also note that I cannot be bribed with 0.1 BTC or whatever in order to write something that pleases someone else. I have my own plans on doing bitcoin business, and I have found that there are people in the community who agree with what I do because I received BTC donations both anonymously and by prior agreement. I am always open to new collaborations with people from the bitcoin community, but I will not engage in business which is easily recognizable as being bound to fail.

Please don't be insulted if I offer to pay you for your post Smiley

The payments are kind of a gimmick to spur conversation on a topic that I am really really interested in.

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July 26, 2011, 06:39:45 PM
 #36

At a fundamental level, this is all about derivatives. 

Nominally holding commodity A, while it is stored as commodity B, means you hold B and you also hold a derivative that is short B and long A.  And your unit of B that you are holding should be in escrow in case the derivative goes sour.

If the derivative short B and long A is inextricably tied to a unit of commodity B, then it is safe from default, but there is not much advantage compared to just trading commodity A.  If they are severed, then there is risk of default, and the risk is tied to whoever is the counterparty to the derivative, which means they are not fungible.

It is premature to speak of how a block chain or somesuch could implement deriatives trading, before the inherent issues are resolved conceptually.
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July 26, 2011, 06:40:45 PM
 #37

The entire problem with backing bitcoins with gold, silver, etc is that someone has to come up with the 200 tons of gold in the first place to back it...  and treat bitcoins as the paper.

It's not going to happen.  

I am not saying it's impossible,  but you need some serious gold / silver / whatever behind it to make bitcoins backed by anything.

Here I'll back it..  1 ounce of silver for each bitcoin...  so people start sending me their bitcoins, and I in turn have to start sending them ounces of silver...  i'll go bankrupt in a week as I will hold thousands of bitcoins,  but out thousands of ounces of silver at 40 bucks a pop.

Now if you scale it down...  3 bitcoins for each ounce of silver...   that's fine...  until silver skyrockets or bitcoins do.. then someone's going to be either sending me more coins to exchange... or sending more silver to exchange...   leading to another bankruptcy...    

bitcoins have to stand on their own.


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July 26, 2011, 07:49:34 PM
 #38

At a fundamental level, this is all about derivatives. 

Yes. I want derivatives which are an order of magnitude easier to use. So much easier that they are invisible and seemless to the average user.

Nominally holding commodity A, while it is stored as commodity B, means you hold B and you also hold a derivative that is short B and long A.  And your unit of B that you are holding should be in escrow in case the derivative goes sour.

If the derivative short B and long A is inextricably tied to a unit of commodity B, then it is safe from default, but there is not much advantage compared to just trading commodity A.  If they are severed, then there is risk of default, and the risk is tied to whoever is the counterparty to the derivative, which means they are not fungible.

I think I agree with those statements, if I understand them correctly, except that I think there is a HUGE advantage to holding oil-denominated bitcoins, whereas you say there is not much advantage.

Try creating a trading account to buy some oil futures. Go ahead, I'll wait . . . .

I bet your experience will be several orders of magnitude more complicated than clicking "value stored as" and choosing "oil" in your bitcoin client.

It is premature to speak of how a block chain or somesuch could implement deriatives trading, before the inherent issues are resolved conceptually.

Well, resolving the conceptual issues is what this thread is for. I want to know if this idea has a fatal flaw.

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July 27, 2011, 12:02:09 AM
 #39

Yes, I agree, holding something with the features of bitcoins but with the value stability of oil would be great.  The problem is that somewhere along the line it requires a contract that's long on oil.  I agree that it is difficult or impossible to hold oil in a digital wallet.  This is precisely the problem.

To tie bitcoins into an oil contract such that it can be redeemed for oil will require an oil contract that can be held and transferred digitally.  Essentially a digital bearer certificate that can be unlocked when the derivative is redeemed... or something like that.  A company or 'bank' could hold reserves and issue digital bearer certificates, and those could be connected to bitcoins through derivatives.

But at that point it would be simpler to just use the digital bearer certificates themselves.

This doesn't mean that the derivative market is infeasible, it only means that the derivatives are subject to default risk.  If the bearer certificates could be used, then they could provide 100% guaranteed "backing" but without them there must be some counterparty who is holding the other side of the contract, and that counterparty could default.

If I trade derivatives through a broker, the broker is on the hook if my liabilities exceed my assets, so the broker will liquidate/cover my position if my reserves get too low.  This sort of system might be required for derivatives to be trustworthy enough to be fungible.  It would be a step in the right direction, and exchanges could provide this sort of service today if they wanted, without any changes to the block chain.

To go fully decentralized and guaranteed only by encryption, default risk is going to be a problem.  And it has two facets, one is the actual default risk, and the other is that it makes the derivatives non-fungible.

In my mind, overcoming the default risk is one of the core challenges of setting up such a system.  Perhaps the derivatives could be restricted to those with limited downside, where you can't lose more than 100% of the investment.  Instead of being short, you essentially own a put (or something like that).  Then these contracts can exist without risk of default and without having to figure out how to somehow connect the underlying asset itself.
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July 27, 2011, 12:12:33 AM
 #40

Yes, I agree, holding something with the features of bitcoins but with the value stability of oil would be great.  The problem is that somewhere along the line it requires a contract that's long on oil.  I agree that it is difficult or impossible to hold oil in a digital wallet.  This is precisely the problem.

To tie bitcoins into an oil contract such that it can be redeemed for oil will require an oil contract that can be held and transferred digitally.  Essentially a digital bearer certificate that can be unlocked when the derivative is redeemed... or something like that.  A company or 'bank' could hold reserves and issue digital bearer certificates, and those could be connected to bitcoins through derivatives.

But at that point it would be simpler to just use the digital bearer certificates themselves.

This doesn't mean that the derivative market is infeasible, it only means that the derivatives are subject to default risk.  If the bearer certificates could be used, then they could provide 100% guaranteed "backing" but without them there must be some counterparty who is holding the other side of the contract, and that counterparty could default.

If I trade derivatives through a broker, the broker is on the hook if my liabilities exceed my assets, so the broker will liquidate/cover my position if my reserves get too low.  This sort of system might be required for derivatives to be trustworthy enough to be fungible.  It would be a step in the right direction, and exchanges could provide this sort of service today if they wanted, without any changes to the block chain.

To go fully decentralized and guaranteed only by encryption, default risk is going to be a problem.  And it has two facets, one is the actual default risk, and the other is that it makes the derivatives non-fungible.

In my mind, overcoming the default risk is one of the core challenges of setting up such a system.  Perhaps the derivatives could be restricted to those with limited downside, where you can't lose more than 100% of the investment.  Instead of being short, you essentially own a put (or something like that).  Then these contracts can exist without risk of default and without having to figure out how to somehow connect the underlying asset itself.

It is true that with some futures contracts, you can actually take delivery of the underlying commodity (although people actually doing this is very rare). Almost all futures contracts are cash-settled. There are some futures contracts that are 100% cash settled (no way to actually take delivery of the underlying commodity).

Bitcoin-settled tokens like the ones described here and in the sister post for "the second bitcoin whitepaper" (http://forum.bitcoin.org/index.php?topic=31645.0) would actually have nearly zero risk of default by the counterparty. I believe it would not be possible to default without hacking bitcoin.

The risk I would be worried about, which is spelled out in significant detail in posts in the sister thread linked above, is that bitcoin values will crash, and the escrow fund will not be able to cover the value of all the tokens it has issued.

I believe the protocol can mitigate this risk to near zero (again, see the sister thread for details).




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