A Better Coin

[jtimon]

So the demurrage wouldn't necessarily be recorded in each block (else you'd have millions of transactions per block), but it could be easily calculated to show an accurate wallet balance at any given time.  Makes sense.

Exactly.

Lost coins would still take a long time to recover though... I mean, 0.97^X=0.000000004 where X = what?  634 years before a lost coin would completely recovered if rounded out to 8 decimals.  Still, it's better than not recovering them at all, and most of it would be recovered early on.

Yes. It's a lot of time until the last satoshi of each lost wallet because the less there is the slower it rots.

Sounds like a good idea.  I like it.  I think I like it better than my own idea, but will have to give it some more thought.  There's definitely some psychological battles to acceptance for such a currency...

This idea has been very criticized because Gesell is unfairly associated with Keynes and his theory of interest is vastly ignored.

Also, how would a demurraging currency account for growth in GDP?  Wouldn't price deflation hit if more people are after the same number of coins?

In the stable prices version, instead of trying to account the growth in GDP, it would try to account the level of prices. Not necessarily the same way ICP is calculated, probably only through a basket of commodities to facilitate the input for miners.
But as you said, this may be the hardest part. I have a lot of reserves because it could spring many problems, like the one you mentioned with the pools.
 
But if you don't try to solve the price stability problem through inputs of external price data, demurrage will also make the currency more stable than without it.
Because demurrage makes V more stable (by discouraging hoarding) and also increases it. It encourages investment in real capitals even with small price deflation. And deflation created only by growth shouldn't be much high. The other causes of deflation are solved:

-hoarding
-monetary base decline
-bust after an inflation induced boom
-burst of the exponential growth of credit that compound interest causes. The shrinking credit reduces the effective money supply.

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[d'aniel]

Arbitrarily specifying a %ΔM as 10% or 8% or 0% or -5% is completely useless. There is no way you can predict the growth rate of the BTC economy a priori. You need blockchain feedback in the system, otherwise the modification will have no affect on price volatility whatsoever. Completely pointless.

I acknowledge that we can't predict economic growth, it's a weakness of having a decentralized monetary policy, but I can't see how it can be improved upon without adding centralization. You are wrong about not having a mechanism to combat volatility though. Since %ΔM and %ΔQ can be estimated with fairly good accuracy in the short to medium range then the unknown variable %ΔV can act as a buffer when inflation is expected, as people move their cash on hand to financial assets to avoid the loss in purchasing power, thus decreasing velocity.

This doesn't make sense to me.  A flight from the currency exerts inflationary pressure on it, doesn't it?

Even if volatility is self-correcting in this way, then this mechanism exists with or without your proposed constant 10% monetary inflation, right?

So if volatility is the problem, and not steady deflation, as you explained in your response to me above (reposted below), then what's the point of the constant 10% monetary inflation if it does nothing to address volatility?

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.

This is exactly how I rationalized it before. The problem is that in investment nothing is certain, there are way too many unknown variables to be able to say for sure that the investment will pay off.

For example, if you need a stapler for the office and it costs 1 BTC, how could you be able to asses that the stapler will produce 1 BTC or more in value? Or if you discover a molecule that you think could be the next aspirin and you need research money, how will you convince your creditors that it will be a success, that everything will go smoothly on the 5 to 10 years of research and that you won't go overbudget? Or if you need 1000 BTC to pay for college, even if you are smart as hell and you are certain to land a high paying job after, how could you justify that loan if the purchasing power of BTC is increasing at an astonishing rate and by the time you graduate those 1000+ BTC you owe will pay for a small country? You would end up being richer if you just started working as a garbage man for BTC right after highschool.

Things get further complicated in that debtors would need very low interest rates to make the venture worth it but creditors need to ask for high interest rates to make lending worth it.

[cunicula]

This doesn't make sense to me.  A flight from the currency exerts inflationary pressure on it, doesn't it?

Even if volatility is self-correcting in this way, then this mechanism exists with or without your proposed constant 10% monetary inflation, right?

So if volatility is the problem, and not steady deflation, as you explained in your response to me above (reposted below), then what's the point of the constant 10% monetary inflation if it does nothing to address volatility?

+1

[JohnDoe]

I think it's important to think about the currency AFTER it has been fully adopted (to whatever point full adoption will come to).  You can't count on deflation happening when people flock to the currency, and have a high inflation rate to attempt to counter it, because then you will still have a high inflation rate after the increased adoption level has ceased.

Yeah, I guess you are right.

I believe we can agree that currently reported GDP numbers for countries worldwide are generally accurate and indisputed.  If that is the case, could we extrapolate it into the future, and come up with an equation of growth in block reward based on historical worldwide average GDP growth?

I got historical world GDP from here: http://en.wikipedia.org/wiki/Gross_world_product
And made this: https://docs.google.com/spreadsheet/ccc?key=0AhKydNsC7d17dENHbV9OVTFEWHVRbXgzU0ZNYmd0SXc&hl=en_US#gid=0

If that data is even somewhat accurate then it's clear that GDP growth rate is actually growing exponentially so even my 10% annual supply growth would end up being insufficient at some point. So if we are to believe this numbers then our equation has to make the supply growth rate increase over time to avoid deflation, sounds like a very scary thing to do though.

Regardless of what the end equation is, it shouldn't be adjusted based on GDP growth numbers in the future (since those numbers could potentially be manipulated).  It would need to be a set-it-in-stone-forever equation of growth, even if it doesn't match up with the real-world number perfectly.

We are definitely on the same page on this one.

This doesn't make sense to me.  A flight from the currency exerts inflationary pressure on it, doesn't it?

You are right, I didn't think that one through.

So if volatility is the problem, and not steady deflation, as you explained in your response to me above (reposted below), then what's the point of the constant 10% monetary inflation if it does nothing to address volatility?

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.

[cunicula]

There is a severe disconnect with reality emerging here. Most of the posters seem to be ignoring the problem that exists now, and focusing on a different problem that does not exist now and will not exist in the future.

The relevant %ΔQ is the change in bitcoin-denominated trade in goods and services. Currently, bitcoin-denominated trade in goods and services has almost no relationship to world GDP whatsoever. If in some event, however unlikely, bitcoin became the primary world currency, %ΔQ will be directly related to world GDP. Once this happens volatility will not be an issue anymore. World GDP is highly stable.

Discussion should be focused on near-horizon/mid-horizon volatility issues, i.e. the issues that may prevent bitcoin adoption. Instead discussion has focused on solving volatility issues in an imaginary and impossible future.

In sum, focus on the near- to mid-term, not the distant future.

The only volatility solution that preserves decentralization is to link coin generation and destruction rates to difficulty growth rates. In the distant future, this might not work. However, this also goes for almost any solution imaginable. For now, linking difficulty change to coin generation and destruction is what should be done.

[cunicula]

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.

[d'aniel]

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.

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.

In sum, focus on the near- to mid-term, not the distant future.

The only volatility solution that preserves decentralization is to link coin generation and destruction rates to difficulty growth rates. In the distant future, this might not work. However, this also goes for almost any solution imaginable. For now, linking difficulty change to coin generation and destruction is what should be done.

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?

[SgtSpike]

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? 

[FlipPro]

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? 

Bitcoin will always be a jewel in my heart, but this is sounding juicy!

SGT you should try getting some recommendations from some economist and ask them if these numbers coincide with their theory of a perfect currency. I don't even know if the current programming of Bitcoin is capable of doing the things we have mentioned in this thread, but I am sure anything is possible to make when coding is involved. Bettercoin would be a direct repudiation of the deflationary dream that is Bitcoin, and a realization of a better currency that can be spent world wide, that makes practical sense, and that isn't just controlled by a few people at the top!

[cunicula]

SGT you should try getting some recommendations from some economist and ask them if these numbers coincide with their theory of a perfect currency.

Ahem. Economist, here.

[FlipPro]

SGT you should try getting some recommendations from some economist and ask them if these numbers coincide with their theory of a perfect currency.

Ahem. Economist, here.
 

I read your post above, are you suggesting that we should take the cap of 21,000,000 away and continue generating coins based on a difficulty/loss ratio. That's sorta what I was suggesting on my original post, but I didn't know how to articulate above. Doesn't this same system have the adoption problem we have been discussing?

[d'aniel]

SGT you should try getting some recommendations from some economist and ask them if these numbers coincide with their theory of a perfect currency.

While I'll reserve any agreement with Milton Friedman on this until my views of deflation given in post #58 and the second half of #60 are addressed, here's his idea on this:

"We don't need a Fed," Milton Friedman says, twirling a letter opener as he speaks. "I have, for many years, been in favor of replacing the Fed with a computer," he adds. Each year, it "would print out a specified number of paper dollars" to augment the money supply. "Same number, month after month, week after week, year after year."

[FlipPro]

SGT you should try getting some recommendations from some economist and ask them if these numbers coincide with their theory of a perfect currency.

While I'll reserve any agreement with Milton Friedman on this until my views of deflation given in post #58 and the second half of #60 are addressed, here's his idea on this:

"We don't need a Fed," Milton Friedman says, twirling a letter opener as he speaks. "I have, for many years, been in favor of replacing the Fed with a computer," he adds. Each year, it "would print out a specified number of paper dollars" to augment the money supply. "Same number, month after month, week after week, year after year."

http://www.cato.org/pub_display.php?pub_id=4918

Who knew that it would come in this fashion!

The funny thing is that it was Bitcoins greedy deflationary property's that have brought us all here !

"I do not believe the Fed ought to let its monetary policy be determined by the stock market," Friedman says. "The Fed ought to devote its attention solely to keeping a relatively stable price level of goods and services." He points to the bull markets in 1920s America and 1980s Japan. "Both of those were brought to an end by monetary policies adopted to bring them to an end."

EDIT: Please answer how we get over the early adopter phase in such a currency. People need incentive, and it's not enough to just say "it will take off", people need to believe why a never ending inflationary currency is worth their time.

[d'aniel]

EDIT: Please answer how we get over the early adopter phase in such a currency. People need incentive, and it's not enough to just say "it will take off", people need to believe why a never ending inflationary currency is worth their time.

Remember, Gresham's Law only applies when the bad money is overvalued by fiat.  Otherwise, expect the exact opposite outcome.  (Bitcoin is the "good" money.)

I get the feeling that achieving the desired results from these alternative currencies is going to turn out to be a lot like herding cats.

[cunicula]

SGT you should try getting some recommendations from some economist and ask them if these numbers coincide with their theory of a perfect currency.

Ahem. Economist, here.
 

I read your post above, are you suggesting that we should take the cap of 21,000,000 away and continue generating coins based on a difficulty/loss ratio. That's sorta what I was suggesting on my original post, but I didn't know how to articulate above. Doesn't this same system have the adoption problem we have been discussing?

I'm not sure what the adoption problem everyone is discussing is. Setting aside the volatility portion of the adoption problem, I will discuss the network externality side.
 
If a merchant or a consumer begins using bitcoin, he receives some benefits from the sales or purchases he makes. He also benefits everyone in the bitcoin economy by increasing confidence in the currency. Since merchants and consumers do not enjoy these benefits, they will make fewer purchases and sales than is socially optimal. Merchants will not begin accepting bitcoin because it is not personally beneficial, even though it is beneficial to society as a whole.

There is a relatively close analogy in the ACH electronic payments system. When banks allow ACH payments and when consumers make them, they make the ACH system more valuable to everyone. If enough people make the initial switch to ACH, then everyone will. However, since banks and consumers do not capture all the benefits of ACH, they make fewer ACH payments than is socially optimal.
This paper recommends large subsidies for banks and moderate subsidies for consumers as a solution to the adoption problem:

http://www.nber.org/papers/w12488                 

The same solution would work for bitcoin. Bitcoin should subsidize early adopters, both consumers and merchants. By basically handing out free money for electricity, bitcoin has handled subsidizing consumers all too well. However, it hasn't done anything to subsidize people selling goods and services. This is bad because these people need  subsidies more than the consumers do (see the paper on ACH). The solution is to pay merchants for accepting bitcoin. This must be accomplished through human decision making. The IXcoin model is excellent here. Set up a trust fund to pay out subsidies to merchants before you release the currency. Unlike IXcoin, structure the payments as flows rather "bounties". For example, I would collect a 1 million coin trust fund before I released the currency. After releasing the currency, I would issue 0.5% of the trust fund balance each week to number of merchants I identify as benefiting the community. Merchants would continue to receive weekly payments as long as they continued to provide benefits. The total payment stream would decline over time, though it could increase in USD value.  In week 1, 5000 coins are distributed across merchants currently making contributions to the community, with division according to a human assessment of their relative contribution. In week 2, 4975 coins are distributed... In week 52, 3872 coins are distributed....In week 138, 2516 coins are distributed and the trust fund is about half used up. A separate trust fund could be set up for developers who work on the core technology, working on the same principle as the merchant trust fund. I would continue to hand out some money to consumers through currency generation, but not at the ridiculous level that bitcoin has opted for.

[cunicula]

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.

[d'aniel]

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?

[jtimon]

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?

This is not a concern with merged mining.

[jtimon]

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

[d'aniel]

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?

This is not a concern with merged mining.

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.