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Author Topic: A Better Coin  (Read 11093 times)
jtimon
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August 17, 2011, 10:33:27 AM
 #101

@JohnDoe and SgtSpike
You can't have stable prices just by adding a constant inflation (exponential growth of the monetary base) according to your expected growth in GDP. Also, will we have dQ = 4% after, for example, peak oil?

Anyway, you are only accounting for dQ there. What about dV? You can't control it directly (as you can do with M).
With demurrage V should be higher and more constant, but still not controlled.
You can't have stable prices if you don't have an input of dP (which is much easier than knowing dQ).

If your concern is small deflation (caused by growth), demurrage partially solves the problem by lowering interest rates.

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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jtimon
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August 17, 2011, 10:42:14 AM
 #102

I guess I wasn't clear, but I'm referring to splitting trading depth among separate currencies, so that the price volatility problem is harder to overcome.

Oh, I see. You're right on this. I though you meant price volatility caused by difficulty volatility.

But I don't see how your "decentralized fractional reserve central bank backed by bitcoin" can work.
Also, the new currency will compete with bitcoin for the trading depth just like any other alternative currency. With the only difference that the demand for bitcoins is augmented for backing the new currency.

2 different forms of free-money: Freicoin (free of basic interest because it's perishable), Mutual credit (no interest because it's abundant)
bittersweet
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August 17, 2011, 10:49:53 AM
 #103

Maybe it's because everyone's mad they couldn't be an unfair early adopter with such a currency.

There is nothing unfair in being early adopter. Still, I would prefer sinusoidal initial distribution:



Inflation would be much smaller in the first years and it wouldn't create impression that "it's a ponzi scheme!11". So I think it would be slightly better, but it's not like it's a critical issue. People overstimate the problem, on a free market the money naturally flows from idiots to people who are smart anyway, so given enough time it doesn't matter who was first.

My Bitcoin address: 1DjTsAYP3xR4ymcTUKNuFa5aHt42q2VgSg
d'aniel
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August 17, 2011, 11:14:54 AM
 #104

No, steady deflation is definitely the real problem in my view. Volatility is tolerable as long as it's low, and low inflation is better than low deflation.

How can anything that is predictable be a serious problem? It is the unpredictable stuff you have to worry about. What measures how much unpredictable stuff is out there? volatility.

See this example with predictable 5% deflation:

https://bitcointalk.org/index.php?topic=28276.msg421352#msg421352


From that link:
Quote
...Only the very best investments will get funded with deflation.
I believe my post #58 in this thread addresses this.  It shows that it's not only the very best investments, but also any approximately average or better ones will get funded during deflation.  Furthermore, the money that would have otherwise gotten loaned instead gets hoarded, but it still provides a benefit to the economy, albeit less directly, and in ways that you can't see; it prevents the bidding up of the prices of goods in the economy that the borrower would have otherwise purchased.

In your example, the baker wouldn't take out the loan because his investment isn't at least as profitable as the average in the economy.  He would not be buying the flour that he otherwise would have, and so more efficient bakeries can now benefit from lower flour prices due to not having to compete with the would-be baker to buy it.  You might say that farmers would eventually just compensate for this increased demand, and increase supplies, but remember that this diversion of their resources would be occurring to accommodate an investment that is producing a below average return, and should perhaps not be seen as beneficial to the economy.
cunicula
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August 17, 2011, 11:17:07 AM
 #105


If you agree that volatility is a temporary hurdle, then do you believe that it's clear at this point that it will not be overcome by Bitcoin, and now requires a new attempt?
Yes, I am sure it is a temporary hurdle.  Bitcoin has many temporary hurdles.

The temporary hurdles I am most worried about are: a) wallet security b) price volatility c) merchant adoption.
I am also worried about one long-run hurdle: d) maintaining blockchain security once transaction fees stop

I don't know whether bitcoin will overcome these hurdles or not. However, I do believe that more promising solutions exist.
I don't believe it makes sense to wait for bitcoin to fail before pursuing promising solutions in an alternate chain. At worst it will be a learning experience.

My worry is that splitting the user base between two (or more) separate block chains could be enough to doom both to failure, since this would make the price volatility hurdle that much harder to overcome.  This is one reason why I proposed in post #61 to roll out any new ones via a "distributed central bank", so that it both benefits from and reinforces Bitcoin, while at the same time competing for its users.

Does this worry you as well?

Yes, splitting the user base is not desirable due to network effects. You are right to be concerned as this is a major downside. My views are:

a) people are going to try to introduce new currencies anyways. Even if you don't introduce a new currency, someone else will. They already have tried to some degree and I expect people to keep trying. As long as this is happening, trying to preserve network effects by keeping a potentially better product off the market may be misguided. It would be different if we had the power to prevent other new products from appearing.
 
b) if the improvements are substantial enough, a new coin may be worth introducing even if it causes a lot of disruption.

c) the bitcoin network is still not very developed. It is mostly just a community of speculators. It may be better to disrupt trade now, rather than waiting for it to happen when significant trade in real goods and services is occurring.

d) If technically feasible, any new currency should honor all extent bitcoin balances, but dilute them by issuing new coins as well. Dilution can be used to pay off a) developers for designing and maintaining the new currency, b) merchants for accepting the new currency on their sites. If you do this, then almost everyone here will download the new currency software and make at least one trade.




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cunicula
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August 17, 2011, 11:28:03 AM
 #106

So what about a new proposal then?  It's a merger, if you will, of the two mainly discussed methods in this thread.  Mild inflation + demurraging.

A currency that demurrages to help make up for lost coins (thus avoiding deflation due to lost coins), but also has built-in inflation at the rate of GDP growth (thus avoiding deflation due to an increase in GDP or money velocity with the same money supply).  The inflation rate would be a single percentage and unchangable number, and would be calculated from the weighted average GDP growth for the past 200 years worldwide.  While it wouldn't be a perfect match for future GDP, it is probably the best we could do to ensure as-close-to-possible stable purchasing power with using a number that no one could muck with.

Ideally, the demurraging would equal the number of lost coins, and the inflation would equal the worldwide growth in GDP throughout the coming years.

Also, I would still include the slowly-increasing block reward rate to ensure that anyone who wants to adopt it can do so without too much of a "late adoption" penalty, and to ensure that no single person ends up with too much of the currency.

So, as a bullet-pointed proposal, with some estimated numbers, it would be something like this...

ABCOIN
- Demurrage rate of 0.285% / year (the estimated number of lost coins each year as a percentage of total coins in circulation)
- Inflation rate of 4% / year (the estimated worldwide GDP growth each year - note that, because of GDP growth, the purchasing power of the coins should stay the same despite the inflation of actual money supply)
- Block rewards start at 1, and increase linearly to a rate of 500,000/block over the next 10 years
- Block reward then inflates at a rate of 4% / year.  So the next year, it would be 520,000, etc.
- Block reward will be paid partially in demurrage, partially in newly minted coins.  Eventually demurraged coins would exceed the block reward (when the number of outstanding coins reached around 14T), and no new coins would be necessary - the block rewards could be paid entirely from demurraged coins.

Again, of course, this is all planning for world domination of ABCOIN, but we should dream big, should we not?  Smiley

There is one nice feature, but I'm not overwhelmed by the advantages of ABCOIN.

                                     Blockchain Security Sustainable                  Strong Incentives for Consumer Adoption                 Strong Incentives for Merchant Adoption     Price Volatility
Bitcoin                      No (reward-market cap ratio goes to zero)                         Yes (early adopters could earn a mint)                          No                                         Yes (Supply not linked to demand)
ABCOIN                    Yes (reward-market cap ratio constant)                              No                                                                         No                                         Yes (Supply not linked to demand)

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cunicula
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August 17, 2011, 11:33:48 AM
 #107


There is nothing unfair in being early adopter.

The early adopters get rich thing is actually advantageous. It creates buzz and incentives for speculators to acquire the currency. The problem is that merchants don't have incentives to sell merchandise for bitcoin. They need to be paid to do this to get the ball rolling. Bitcoin has not struck an appropriate balance between paying off consumers and paying off merchants. All the money has been spent on the former. The latter are just doing it out of love (or more often not doing it at all).

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d'aniel
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August 17, 2011, 12:10:17 PM
 #108

But I don't see how your "decentralized fractional reserve central bank backed by bitcoin" can work.
If the concern is bank runs, then as I mentioned above, full-reserves can be maintained while achieving any desired inflationary effects using demurrage.  The excess reserves created by demurrage can then be used to pay interest later on when inflation needs to be controlled.

To enforce Gresham's Law while engaging in demurrage, appropriate fees must be charged as deterrents to redemption.  And new issuance fees must be charged while paying interest in order to prevent speculators from immediately coming in and soaking up all of the bank's excess reserves.

Could you be a little more specific though on what you see the problem to be?

Quote
Also, the new currency will compete with bitcoin for the trading depth just like any other alternative currency. With the only difference that the demand for bitcoins is augmented for backing the new currency.
You're absolutely right.  OTOH, since the relative valuation of the new currency and Bitcoin is completely determined by the bank's transparent monetary policy, added trading depth in one should lead to added stability in the other as well by the actions of arbitrage seekers.
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August 17, 2011, 01:04:28 PM
 #109


From that link:
Quote
...Only the very best investments will get funded with deflation.
I believe my post #58 in this thread addresses this.  It shows that it's not only the very best investments, but also any approximately average or better ones will get funded during deflation.  Furthermore, the money that would have otherwise gotten loaned instead gets hoarded, but it still provides a benefit to the economy, albeit less directly, and in ways that you can't see; it prevents the bidding up of the prices of goods in the economy that the borrower would have otherwise purchased.

First of all, I'll consider the case if/when a steady user base has formed and the adoption rate has levelled off, as this is the only case where your perpetually fixed 10% annual bitcoin supply increase might make sense.  Otherwise, you're probably going to need human feedback in your system.

Yes, let's consider that case, our reasoning will be simpler.

Because the bitcoin supply will at this time be roughly fixed/very slowly increasing, any deflation will be caused by overall growth in the bitcoin economy.  Thus, the deflation rate and overall growth rate are equal, modulo lost coins and short-term fluctuations in velocity.

Credit acts often as a medium of exchange, so there's inflation caused by credit growth, which will eventually become unsustainable due to the exponential nature of compound interest.
When the credit growth is not sustainable, the credit begins to shrink, causing an effective decrease on supply that leads to deflation.
So deflation is not only caused by growth and hoarding (your short-term fluctuations in velocity ?), but let's assume that's true for a while.

So if the deflation rate is steady and predictable enough (true by the above assumption), then people will only borrow to invest if they are sure their investment can at least keep up with the overall growth rate of the bitcoin economy, plus the usual premium paid for risk/time value of money/lender profit.

Why is economic growth predictable? In today's world, for example, the energy production grows exponentially, but nothing warranties that will be the case in the near future. Even if we avoid the coming energy crises through thorium based nuclear energy, why must the growth be similar to the one fueled by coil/gas/oil extraction? It could be faster or slower.
Even if growth were predictable. The risk premium must be separated from the lender's profit/"time value" of money/basic interest/liquidity premium.
While the growth and the risk premium can be equal to zero, the basic interest (with scarce and everlasting money/money-capital) cannot.
The growth can even be negative.

And if the loan is thus not made, and the money hoarded instead, then the deferred consumption that the hoarded money represents results in concomitant price decreases in the bitcoin economy that would not have occurred if the loan had been made.  So the overall bitcoin economy is the beneficiary of the deferred consumption, rather than the borrower whose investment couldn't keep up with its growth rate.  And this should be the case, should it not?

Here the borrower is asked to outperform the average growth (that we're assuming is equal to deflation) by basic interest (exclude the risk premium here).
The interest rate is not equal to the average growth but to the average capital yields. But capital yields are not like other profits. While profit drops to zero naturally by competition, capital yields tend to be equal to the interest rates of money, that won't ever drop to zero with everlasting money.
Thus interest on money prevents competition between real capitals. If a build a house near to yours, the capital yield of both houses (rent) will drop, and either the capital yield or the value of the house with it.
If interest rates were zero, the cost of construction of a house would tend to be equal to the amount exacted from the rent during the life of the house. But with interest rates, the demand for houses cannot be fully satisfied, because houses must be at least as profitable as money is. We're assuming free market and fixed monetary base so please don't bring the housing bubble to our reasoning.
With deflation, an investment must be at least as profitable as the interest rate plus the deflation rate (that you claim would be equal to growth).

When viewed this way, the deflation rate is seen as a valuable measure of something like the average ROI in the bitcoin economy, and loans that are made uneconomical due to it are revealed clearly by it to be just that.  And there are clearly still beneficiaries of deferred consumption in the event that bitcoins are hoarded instead of lent - they are instead the bitcoin users who would have otherwise been competing to buy the goods that the borrower would have bought.  They're Bastiat's "unseen", whereas the borrower would have been the "seen".

Again, the interest rates must be added to deflation.

In your example, the baker wouldn't take out the loan because his investment isn't at least as profitable as the average in the economy.  He would not be buying the flour that he otherwise would have, and so more efficient bakeries can now benefit from lower flour prices due to not having to compete with the would-be baker to buy it.  You might say that farmers would eventually just compensate for this increased demand, and increase supplies, but remember that this diversion of their resources would be occurring to accommodate an investment that is producing a below average return, and should perhaps not be seen as beneficial to the economy.

In my example I'm assuming that this baker is as efficient as any other baker. He can profit 5% annually (in proportion to the price of the bakery), but what's happening is that his bakery is being devalued by deflation.
The bakers that already own their bakery and don't have debts can sustain their business despite the deflation, but they may find more interesting to sell it, buy it again (at a lower price) when the deflation passes and live on the difference between both values in the meantime.
It's money against other capitals, and during deflation money is king, because it yields the same percentage and is not devalued.

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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August 17, 2011, 01:52:44 PM
 #110

But I don't see how your "decentralized fractional reserve central bank backed by bitcoin" can work.
Could you be a little more specific though on what you see the problem to be?

Sorry I only read your explanation in 61 post. Now I think I'm starting to get the concept. It's not that I see problems in your proposal is just that I'm not sure I understand how it works.
Is there a detailed explanation somewhere?


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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August 17, 2011, 01:57:01 PM
 #111

But I don't see how your "decentralized fractional reserve central bank backed by bitcoin" can work.
Could you be a little more specific though on what you see the problem to be?

Sorry I only read your explanation in 61 post. Now I think I'm starting to get the concept. It's not that I see problems in your proposal is just that I'm not sure I understand how it works.
Is there a detailed explanation somewhere?



+1

I also don't really understand what you are talking about. Might be worth explaining everything step by step for us. Please describe the problem you are trying to solve as the very first thing.

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August 17, 2011, 04:51:40 PM
 #112

How can anything that is predictable be a serious problem? It is the unpredictable stuff you have to worry about. What measures how much unpredictable stuff is out there? volatility.

Then I'd be much better convinced if you would directly address what is wrong with the description I gave of steady deflation in post #58.

I already gave my explanation of how steady deflation makes investment impossible in post #66, jtimon gave a better one in #100, so it looks like you are not here to listen, you are just trying to fix your cognitive dissonance through denial. If you don't accept those answers that's fine, I'm not interested in convincing you, I'm just here to further this idea with SgtSpike and others.

ABCOIN
- Demurrage rate of 0.285% / year (the estimated number of lost coins each year as a percentage of total coins in circulation)
- Inflation rate of 4% / year (the estimated worldwide GDP growth each year - note that, because of GDP growth, the purchasing power of the coins should stay the same despite the inflation of actual money supply)
- Block rewards start at 1, and increase linearly to a rate of 500,000/block over the next 10 years
- Block reward then inflates at a rate of 4% / year.  So the next year, it would be 520,000, etc.
- Block reward will be paid partially in demurrage, partially in newly minted coins.  Eventually demurraged coins would exceed the block reward (when the number of outstanding coins reached around 14T), and no new coins would be necessary - the block rewards could be paid entirely from demurraged coins.

Again, of course, this is all planning for world domination of ABCOIN, but we should dream big, should we not?  Smiley

- I'm still unsure about the difference between adding a demurrage 0.285% or just using an inflation of 4.285%. I'm guilty of skipping some of the discussion though, I'll have to take a better look.
- What about the evidence that the growth rate actually grows exponentially on a large scale of time (probably due technological progress and population growth)? I'm of the opinion that this trend will continue rather than slow down so our model could be obsolete in just a few decades.
- If we start the reward from 1 and increase it linearly to 500k in 10 years (it would have to increase by almost 1 coin every block) then no merchant will ever want to accept the currency for goods and services because the initial inflation will be way too high. I propose we have a minimum block reward instead, say 1000. If nSubsidy is simply MoneySupply * rate then the reward remains 1000 always until nSubsidy becomes greater in about 10 year or more depending on the rate. In this way (supply) inflation from year 1 to 2 would be 100%, from 2 to 3 50%, then 33,34%, 25%, etc. until we reach our target inflation.
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August 17, 2011, 05:01:33 PM
 #113

Okay, I'll leave you to work on your thread then. No gifted and suitably trained individuals needed here.

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SgtSpike
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August 17, 2011, 05:22:33 PM
 #114


If you agree that volatility is a temporary hurdle, then do you believe that it's clear at this point that it will not be overcome by Bitcoin, and now requires a new attempt?
Yes, I am sure it is a temporary hurdle.  Bitcoin has many temporary hurdles.

The temporary hurdles I am most worried about are: a) wallet security b) price volatility c) merchant adoption.
I am also worried about one long-run hurdle: d) maintaining blockchain security once transaction fees stop

I don't know whether bitcoin will overcome these hurdles or not. However, I do believe that more promising solutions exist.
I don't believe it makes sense to wait for bitcoin to fail before pursuing promising solutions in an alternate chain. At worst it will be a learning experience.

My worry is that splitting the user base between two (or more) separate block chains could be enough to doom both to failure, since this would make the price volatility hurdle that much harder to overcome.  This is one reason why I proposed in post #61 to roll out any new ones via a "distributed central bank", so that it both benefits from and reinforces Bitcoin, while at the same time competing for its users.

Does this worry you as well?
Yes, this worries me.  I think cunicula brought up some good points in response though.  I suppose I look at it this way as well:  Since Bitcoin is already established, if a better coin is created, it will be adopted more quickly than Bitcoin and overtake Bitcoin as the top digital currency.  If the better coin is actually a worse coin than Bitcoin, then it will never come close to reaching the same adoption levels as Bitcoin, and Bitcoin will continue on.  I think there are too many people interested in digital currencies for them to both fail.

@JohnDoe and SgtSpike
You can't have stable prices just by adding a constant inflation (exponential growth of the monetary base) according to your expected growth in GDP. Also, will we have dQ = 4% after, for example, peak oil?

Anyway, you are only accounting for dQ there. What about dV? You can't control it directly (as you can do with M).
With demurrage V should be higher and more constant, but still not controlled.
You can't have stable prices if you don't have an input of dP (which is much easier than knowing dQ).

If your concern is small deflation (caused by growth), demurrage partially solves the problem by lowering interest rates.

jtimon, if the global GDP grows by an average of 4% per year, and the money supply stays the same, what do you suppose would happen?  Well, you'd have 4% deflation every year.  In order to counter that, you must increase the money supply by 4%.

Of course it's not going to be completely stable - I already said that in my previous post.  But the goal is to make it as stable as possible without having changable numbers.  In that case, 4% inflation (or whatever the actual weighted average ends up being) is the best estimate we can make to ensure as stable prices as possible.  No, it won't be exact, and no, prices won't be perfectly stable.  But this method gets us as close as possible to stable prices without having variables introduced into the equation that can be falsified and manipulated.

There might be a drop in global GDP growth as we reach the maximums of resource consumption (in fact, I am sure there will be), but there is no way to know when or to what extent this will happen, so we shouldn't attempt to account for it.  The best we can do is extrapolate historical GDP growth into the future.

Demurrage wouldn't solve the problem of deflation.  There's still the issue of less money available per transaction due to GDP growth.
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August 17, 2011, 05:42:48 PM
 #115

ABCOIN
- Demurrage rate of 0.285% / year (the estimated number of lost coins each year as a percentage of total coins in circulation)
- Inflation rate of 4% / year (the estimated worldwide GDP growth each year - note that, because of GDP growth, the purchasing power of the coins should stay the same despite the inflation of actual money supply)
- Block rewards start at 1, and increase linearly to a rate of 500,000/block over the next 10 years
- Block reward then inflates at a rate of 4% / year.  So the next year, it would be 520,000, etc.
- Block reward will be paid partially in demurrage, partially in newly minted coins.  Eventually demurraged coins would exceed the block reward (when the number of outstanding coins reached around 14T), and no new coins would be necessary - the block rewards could be paid entirely from demurraged coins.

Again, of course, this is all planning for world domination of ABCOIN, but we should dream big, should we not?  Smiley

- I'm still unsure about the difference between adding a demurrage 0.285% or just using an inflation of 4.285%. I'm guilty of skipping some of the discussion though, I'll have to take a better look.
- What about the evidence that the growth rate actually grows exponentially on a large scale of time (probably due technological progress and population growth)? I'm of the opinion that this trend will continue rather than slow down so our model could be obsolete in just a few decades.
- If we start the reward from 1 and increase it linearly to 500k in 10 years (it would have to increase by almost 1 coin every block) then no merchant will ever want to accept the currency for goods and services because the initial inflation will be way too high. I propose we have a minimum block reward instead, say 1000. If nSubsidy is simply MoneySupply * rate then the reward remains 1000 always until nSubsidy becomes greater in about 10 year or more depending on the rate. In this way (supply) inflation from year 1 to 2 would be 100%, from 2 to 3 50%, then 33,34%, 25%, etc. until we reach our target inflation.
- Hmmm... now you've got me all confused about the same thing.  Would putting the lost coin rate into inflation increase prices of goods over time?  I believe the argument for demurrage is that it would help keep prices stable, even though a person might lose coins over time.  So instead of a $1 burger being $5 30 years down the road, it would still be $1, but you would only have $0.20 left after 30 years.  And that would be a very extreme example with a much higher demurrage rate than what we are talking about here, but you get the idea.

- Not much we can do about change in growth rate.  It's completely unpredictable.  You argue that the rate will grow due to technological advances, and I might argue that it will shrink due to limited resources.  This will introduce some amount of mild inflation or deflation, depending on whether growth rate increases or decreases.  Without including some sort of manipulatable index, there's no way to account for this potential change, so it must be accepted as a caveat of the currency.

- The initial 10 years (or whatever period of time is chosen) would be the "adoption period".  I would guess that this would involve lots of mining and very little actual merchant transactions.  The purpose of this period would be to spread coins to anyone who wanted them.  There should be no "early adopter" problem, where a single individual ends up with more than 1% of the currency.  We could have that time period only be 1 year, or increase it to 20, depending on whatever is deemed appropriate before the project is started.  Even after the block reward reaches maturity and only inflates by 4%/year, the actual inflation rate of the currency will be very high for several more years, as the new block reward/year will be much higher than the number of coins in circulation.

The problem with starting out with a minimum block reward, as you have suggested, is the early adopter problem.  It could easily end up with a single person holding 1% or more of the currency if enough people don't jump the gun and get onboard with mining with a constant block reward.  That's why there needs to be a "ramp up" to the ending block reward.  Now maybe 10 years is a bit extreme for that ramp up, so the actual amount of time to "ramp up" should be considered.

Okay, I'll leave you to work on your thread then. No gifted and suitably trained individuals needed here.
Aww, don't be like that.  I am enjoying your inputs!
JohnDoe
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August 17, 2011, 11:10:28 PM
 #116

- Hmmm... now you've got me all confused about the same thing.  Would putting the lost coin rate into inflation increase prices of goods over time?  I believe the argument for demurrage is that it would help keep prices stable, even though a person might lose coins over time.  So instead of a $1 burger being $5 30 years down the road, it would still be $1, but you would only have $0.20 left after 30 years.  And that would be a very extreme example with a much higher demurrage rate than what we are talking about here, but you get the idea.

Even more confused now, how can demurrage achieve this if it has no control over the demand for money? As I see it, demurrage just encourages an increase in money velocity, which has the same effect on inflation as an increase in money supply.

- Not much we can do about change in growth rate.  It's completely unpredictable.  You argue that the rate will grow due to technological advances, and I might argue that it will shrink due to limited resources.  This will introduce some amount of mild inflation or deflation, depending on whether growth rate increases or decreases.  Without including some sort of manipulatable index, there's no way to account for this potential change, so it must be accepted as a caveat of the currency.

But is there any evidence to suggest that we are reaching a peak in resources? Even if we were to reach a peak in some physical resources during the next decades or centuries, I don't think it would hit GDP growth too hard as information keeps grabbing an increasingly bigger share of GDP, and information can be almost infinite.

How about a compromise? Let's say I grab all the historical data I can find and extrapolate it to the year 2200 or whatever. I tell you then that we should expect an average annual world GDP growth of 9% by that time, so we start with your 4% supply growth and very slowly increase it over 10 million blocks or so until we reach the 9% which would be a hard limit. How does that sound?

- The initial 10 years (or whatever period of time is chosen) would be the "adoption period".  I would guess that this would involve lots of mining and very little actual merchant transactions.  The purpose of this period would be to spread coins to anyone who wanted them.  There should be no "early adopter" problem, where a single individual ends up with more than 1% of the currency.  We could have that time period only be 1 year, or increase it to 20, depending on whatever is deemed appropriate before the project is started.  Even after the block reward reaches maturity and only inflates by 4%/year, the actual inflation rate of the currency will be very high for several more years, as the new block reward/year will be much higher than the number of coins in circulation.

The problem with starting out with a minimum block reward, as you have suggested, is the early adopter problem.  It could easily end up with a single person holding 1% or more of the currency if enough people don't jump the gun and get onboard with mining with a constant block reward.  That's why there needs to be a "ramp up" to the ending block reward.  Now maybe 10 years is a bit extreme for that ramp up, so the actual amount of time to "ramp up" should be considered.

Ok I can go with that, but it should be like a year at most or we risk irrelevancy.
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August 17, 2011, 11:41:38 PM
 #117

- Hmmm... now you've got me all confused about the same thing.  Would putting the lost coin rate into inflation increase prices of goods over time?  I believe the argument for demurrage is that it would help keep prices stable, even though a person might lose coins over time.  So instead of a $1 burger being $5 30 years down the road, it would still be $1, but you would only have $0.20 left after 30 years.  And that would be a very extreme example with a much higher demurrage rate than what we are talking about here, but you get the idea.

Even more confused now, how can demurrage achieve this if it has no control over the demand for money? As I see it, demurrage just encourages an increase in money velocity, which has the same effect on inflation as an increase in money supply.

- Not much we can do about change in growth rate.  It's completely unpredictable.  You argue that the rate will grow due to technological advances, and I might argue that it will shrink due to limited resources.  This will introduce some amount of mild inflation or deflation, depending on whether growth rate increases or decreases.  Without including some sort of manipulatable index, there's no way to account for this potential change, so it must be accepted as a caveat of the currency.

But is there any evidence to suggest that we are reaching a peak in resources? Even if we were to reach a peak in some physical resources during the next decades or centuries, I don't think it would hit GDP growth too hard as information keeps grabbing an increasingly bigger share of GDP, and information can be almost infinite.

How about a compromise? Let's say I grab all the historical data I can find and extrapolate it to the year 2200 or whatever. I tell you then that we should expect an average annual world GDP growth of 9% by that time, so we start with your 4% supply growth and very slowly increase it over 10 million blocks or so until we reach the 9% which would be a hard limit. How does that sound?

- The initial 10 years (or whatever period of time is chosen) would be the "adoption period".  I would guess that this would involve lots of mining and very little actual merchant transactions.  The purpose of this period would be to spread coins to anyone who wanted them.  There should be no "early adopter" problem, where a single individual ends up with more than 1% of the currency.  We could have that time period only be 1 year, or increase it to 20, depending on whatever is deemed appropriate before the project is started.  Even after the block reward reaches maturity and only inflates by 4%/year, the actual inflation rate of the currency will be very high for several more years, as the new block reward/year will be much higher than the number of coins in circulation.

The problem with starting out with a minimum block reward, as you have suggested, is the early adopter problem.  It could easily end up with a single person holding 1% or more of the currency if enough people don't jump the gun and get onboard with mining with a constant block reward.  That's why there needs to be a "ramp up" to the ending block reward.  Now maybe 10 years is a bit extreme for that ramp up, so the actual amount of time to "ramp up" should be considered.

Ok I can go with that, but it should be like a year at most or we risk irrelevancy.
Uhhh, just realized I have no time to reply to this right now.  I'll try to remember to reply later.  Tongue
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August 18, 2011, 01:47:08 AM
 #118

But I don't see how your "decentralized fractional reserve central bank backed by bitcoin" can work.
Could you be a little more specific though on what you see the problem to be?

Sorry I only read your explanation in 61 post. Now I think I'm starting to get the concept. It's not that I see problems in your proposal is just that I'm not sure I understand how it works.
Is there a detailed explanation somewhere?



+1

I also don't really understand what you are talking about. Might be worth explaining everything step by step for us. Please describe the problem you are trying to solve as the very first thing.
Sure.  The problems to be solved are the temporary hurdles of price volatility and merchant adoption, while effectively avoiding splitting the user base, and making the network effect - and thus reduction in price volatility - harder to achieve.  Any potential long run problems like steady deflation or lack of mining incentives should be looked at separately, and can be easily overcome later on if the time comes that they are relevant.  As I believe cunicula agrees, they should not be a consideration at this time.

Based on the conversations here, these problems appear to require human management to be most effectively solved, and any decentralized solutions have been admittedly lacking.  So to solve these problems while keeping the user base effectively contiguous, I proposed having all of the new currency be issued through a "distributed central bank".  By distributed, I mean that any transactions it engages in must be signed by some threshold number of the organizations that run it.  This is possible using the OP code CHECKMULTISIG which isn't currently enabled in Bitcoin.  The bank would uphold a promise to redeem its currency 1-1 for bitcoins, plus any variable fees.

It can credibly keep this promise, without any risk of a run, by using demurrage when it wants to devalue the currency instead of inflation.  Demurrage results in excess reserves being held by the bank, which can be used later on to pay interest to currency holders in order to fight undesirable currency devaluation, as well as to subsidize merchants and developers.  In this way, the price chart of the new currency could look more like a moving average of Bitcoin's if the bank does a good job.

Gresham's law would need to be enforced during times of deliberate currency devaluation, since otherwise people would just dump the currency on the bank 1-1 for bitcoins.  This can be done by deterring redemption at these times with fees.  Conversely, while the bank is supporting the currency with interest, arbitrageurs need to be deterred with fees from buying up a ton of the new currency from the bank 1-1 for bitcoins, and soaking up all the available excess reserves to be paid out.

Txn fees can also be used to devalue the currency, and collect revenue to be distributed as interest, or merchant and developer subsidies.

Despite the increased centralization, trust should not be an issue as it can be distributed over multiple organizations in the way described above.  Management can also be distributed over multiple jurisdictions, and because the backing is non-physical, it should be resistant to confiscation by states, unlike gold for example.  Also, because this is a measure designed to overcome the temporary hurdles described above, the arrangement doesn't have to last forever, or even very long, hopefully.  Afterward, the bank can stop issuing new currency, gradually redeem all of what remains in circulation, and then finally disband once it's achieved its purpose.

This solution effectively avoids splitting the user base since the relative valuation of the new currency and Bitcoin is completely determined by the bank's transparent monetary policy.  This means that added trading depth in one should lead to added stability in the other as well by the actions of arbitrageurs.

It also avoids having to solve the initial distribution problem and builds off of the work already done by Bitcoin toward solving the initial adoption and volatility smoothing problems.  People are incentivized to buy into and hold onto the new currency because it offers them improved stability, and out of the sense that by doing so, they're helping to aid the the adoption and development of Bitcoin, thereby increasing the value of their holdings in the long run.

If this is successful in giving us a widely adopted, steadily deflating currency, then at that point the protocol and blockchain can be forked to solve the steady deflation problem, if it is indeed a problem.  Or if human feedback is desired, then a new "distributed central bank" can form with this new purpose.  I'd prefer the latter solution, as it would be more effective, and the transition wouldn't be at all economically disruptive.  That, or a gradual transition to the former via the latter.  In the same way any potential future miner incentive problem can be addressed.
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August 18, 2011, 01:53:52 AM
 #119

I already gave my explanation of how steady deflation makes investment impossible in post #66, jtimon gave a better one in #100, so it looks like you are not here to listen, you are just trying to fix your cognitive dissonance through denial. If you don't accept those answers that's fine, I'm not interested in convincing you, I'm just here to further this idea with SgtSpike and others.
If you reread your post #66, you'll see your only objection to steady deflation was volatility.  And then you even agreed that steady deflation, not volatility, was the problem later on:
No, steady deflation is definitely the real problem in my view. Volatility is tolerable as long as it's low, and low inflation is better than low deflation.
It was only after that, and before jtimon's post that I asked for a direct refutation of my description of steady deflation, so I don't see what your hostility is all about.  I'll stop addressing you in this thread if I'm bothering you.
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August 18, 2011, 02:12:41 AM
 #120

jtimon,

I appreciate your response in post #110, but I'll respond to it in this thread only if people end up disagreeing that any long-run steady deflation problem should be tackled down the road.
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