Proposal from a macroeconomist for an optimal crypto-currency

[r0ach]

The true value of a currency comes from its use in transactions, and a necessary condition for being useful in transactions is roughly stabilising the price level.

^That post is kind of easily debunked by the Peter Schiff paraphrase, "I need this currency to pay taxes so they won't throw me in prison".

Value through coercion.  Keynesians like this guy not only accept it as the norm, but like to see just how far they can expand on the idea.

[ZeroNominal]

keep in mind that with a cryptocurrency we can directly monitor and instantly respond to any changes in the velocity of money. 

We know exactly how much money is spent every block.  We can apply any kind of deterministic calculation to it to adjust the money supply over subsequent blocks.   Does that help?  I mean, if we observe that the velocity of money is contracting sharply (or expanding sharply) what adjustments ought to be made in upcoming blocks to preserve a stable economy that 'seeks' a particular level of inflation/interest?

Velocity is just as hard to measure as NGDP. Indeed, velocity is just NGDP divided by the money stock in question. As I said before, to get to NGDP (and hence velocity) we'd want to prune the list of all transactions of all transfers between wallets, and all intermediate transactions. (In any case, we're only interested in velocity as it enables us to derive NGDP. The original monetarists took velocity as constant in the short-run, so thought they could derive NGDP from the money stock. This assumption has proven to be a bad one.)

[ZeroNominal]

The true value of a currency surely is a function of supply and demand. Use in transactions represents one type of demand, but there are others. And I think there are a lot of real world examples where volatility in currency values has not inhibited its use in transactions.

The price of a currency is a function of supply and demand. The value is measured in different units ("utils" if you like). You're perhaps thinking of demand stemming from a currency's role as a "store of value", but this is an off-shoot demand from its use in transactions. If you did not expect to be able to use the currency in transactions in future, then it would not function as a store of value.

[technologible]

You're taking out of the picture the central bank role in regulating the price of the currency, that is the existence of the central authority with market-maker capacity. But this is the most prominent distinction between fiat and crypto. In a way traditional macroeconomics money theory cannot be directly applicable to cryptos

[ZeroNominal]

^That post is kind of easily debunked by the Peter Schiff paraphrase, "I need this currency to pay taxes so they won't throw me in prison".

Use of currency to pay taxes = use in transactions. It is because I expect that in future someone will give me real goods in exchange for the currency that it has value to me now. (In the case you refer to, the real goods are avoiding whatever consequences non payment of tax has. So, yes, "coercion" if you want.)

But the government is not the only body who might be prepared to exchange real goods for currency for you in future. In fact, it's readily easy to write down a model in which a fiat currency such as bitcoin has a value because everyone believes that everyone else will accept it for payment in future. The problem with these models is that they always have at least two equilibria. One in which people coordinate on believing that everyone else will accept the currency for real goods, and so they too are happy to accept the currency for real goods, and another in which no one believes this. Both are fully rational. (They are sub-game perfect Nash equilibria of the dynamic game.)

Macroeconomists have been interested in the role of nominal tax payments not because they're necessarily the fundamental source of a currency's value, but because they provide a way of ruling out the bad equilibrium of the model, in much the same way that gold's use as jewellery ruled out the bad equilibrium in societies in which gold was used as currency. It is interesting to note that there's nothing ruling out the bad equilibrium for bitcoin. However, this is not the case for e.g. namecoin, for which the (apparently) fixed price of a domain name provides a lower bound on value. The bad equilibrium should also be ruled out for coins such as primecoin for which the mining process is productive, since if I value prime chains sufficiently highly I should be prepared to accept primecoins for real goods in order to incentivise others to mine primecoins.

[maaku]

ZeroNominal, have you seen Freicoin?

http://freico.in/

[ZeroNominal]

ZeroNominal, have you seen Freicoin?

http://freico.in/

I might have heard it mentioned, but I hadn't seen the details. The problem is the fixed 5% demurrage rate. Having a fixed rate fixes no economic distortions whatsoever, since if (say) the value of a bitcoin grew by a constant 5% a year price setters could costlessly index to this known growth rate. The aim ought to be to use demurrage/interest to remove unpredictable fluctuations, not predictable trends.

The 80% distribution to a foundation also seems troubling.

[markm]

Algorithms are predictable though so basically you seem to be arguing that you want some kind of central bank or central committee or something.

They have to be unpredictable so the manipulators cannot predict and thus incorporate into their attack/manipulation the actions of the magic fairy dust scatterers who are to scatter fairy dust to make it all magically act how you want it to?

Actually it kind of seems you ultimately are arguing that manipulation is needed thus you want to be the manipulator or to specify the manipulations that are to be done.

-MarkM-

[ZeroNominal]

Algorithms are predictable though so basically you seem to be arguing that you want some kind of central bank or central committee or something.

They have to be unpredictable so the manipulators cannot predict and thus incorporate into their attack/manipulation the actions of the magic fairy dust scatterers who are to scatter fairy dust to make it all magically act how you want it to?

Actually it kind of seems you ultimately are arguing that manipulation is needed thus you want to be the manipulator or to specify the manipulations that are to be done.

No. I'm not saying what you thought I was saying... Removing predictable components of prices has no effects on welfare. Removing unpredictable components has a beneficial effect. But the unpredictable components can be removed via a very simple, entirely deterministic algorithm. In fact the simpler, more transparent, and less random the algorithm is, the better it is for welfare. For example, in "traditional" economies, central banks can use the Taylor rule https://en.wikipedia.org/wiki/Taylor_rule to stabilise prices.

[markm]

Algorithms are predictable though so basically you seem to be arguing that you want some kind of central bank or central committee or something.

They have to be unpredictable so the manipulators cannot predict and thus incorporate into their attack/manipulation the actions of the magic fairy dust scatterers who are to scatter fairy dust to make it all magically act how you want it to?

Actually it kind of seems you ultimately are arguing that manipulation is needed thus you want to be the manipulator or to specify the manipulations that are to be done.

No. I'm not saying what you thought I was saying... Removing predictable components of prices has no effects on welfare. Removing unpredictable components has a beneficial effect. But the unpredictable components can be removed via a very simple, entirely deterministic algorithm. In fact the simpler, more transparent, and less random the algorithm is, the better it is for welfare. For example, in "traditional" economies, central banks can use the Taylor rule https://en.wikipedia.org/wiki/Taylor_rule to stabilise prices.

That rule references target inflation rate without seeming to actually prescribe how that target should be calculated...

-MarkM-

[Raxe.io]

ZeroNominal, we have emailed you.

[ZeroNominal]

That rule references target inflation rate without seeming to actually prescribe how that target should be calculated...

That's another question... With physical currencies positive target inflation rates may be justified by the zero lower bound on nominal interest rates. But as I said in my original post, that need not be a problem for cryptocurrencies, so 0% inflation would be desirable were it possible.

[Simakki]

Zeronominal check this coin, it will use Proof of importance (POI). If you check it, could you shares your views about it. NEM tries to be next big thing in world of cryptos

https://bitcointalk.org/index.php?topic=426303.msg5940057#msg5940057

[Cryddit]

In the presence of transaction fees, I think we can rule out many sources of 'noise' in measuring the velocity of money.  One can move coins to a different account within a wallet without incurring fees, and if wallets become sophisticated enough for accounting purposes, a natural desire to avoid incurring expenses ought to mean that money hardly ever moves between wallets unless it is genuinely being moved between actors. 

So we should be able to know, instantly, what the velocity of money is.  We can detect how much of the money supply is spent in every ten-minute block and we can react.

[markm]

How much will it cost someone to move enough coins to cause a reaction they for some reason choose to instigate?

Who gets that cost, is it destroyed thus everyone including the perpetrator gains from it or does it go to miners or something so that who it goes to is compensated somewhat for the cost of the moving?

Is the amount of coin created by a move less than or more than the amount moved, and by how much?

-MarkM-

[maaku]

Cryddit, except that (1) collusion with a miner nullifies those assumptions, (2) when you have the ability to make bets (options) based on the interest rate you've monetized manipulating it, (3) technologies being worked on now like committed transactions and Zerocash encrypt the value amounts so you don't even know how much currency is moving.

We've been looking at this problem since 2010, and I'm confident to say there is no decentralized solution

[ZeroNominal]

Zeronominal check this coin, it will use Proof of importance (POI). If you check it, could you shares your views about it. NEM tries to be next big thing in world of cryptos

There seem to be two proposals, neither of which seem like particularly good ideas:

1) Proposal for hybrid POS/PON: Non-linear proof of stake rewards. Rewards are effectively per account up to a threshold. Seems ripe for exploitation by botnets.
2) Proposal for POI: Seems to be the Google Page Rank algorithm (i.e. Principal Components) with transactions replacing links between webpages, and the sum of coin ages replacing the content quality measure (i.e. the prior distribution over nodes). Seems equally vulnerable to exploitation by botnets. (Suppose there are N legitimate nodes, all trading, N botnet nodes, not trading, and 1 master node for the botnet. The botnet nodes have arbitrarily old coins so receive substantial weight, despite their lack of any trading except with the master. All of this weight then flows to the 1 master node for the botnet, who must then get the highest "PageRank" in the network.) In any case, rewarding old coins is the opposite of what you want to do. The existence of old coins implies that the currency isn't actually being used! By rewarding old coins you're effectively taxing transactions, which imposes a large efficiency cost.

[ZeroNominal]

In the presence of transaction fees, I think we can rule out many sources of 'noise' in measuring the velocity of money.  One can move coins to a different account within a wallet without incurring fees, and if wallets become sophisticated enough for accounting purposes, a natural desire to avoid incurring expenses ought to mean that money hardly ever moves between wallets unless it is genuinely being moved between actors. 

So we should be able to know, instantly, what the velocity of money is.  We can detect how much of the money supply is spent in every ten-minute block and we can react.

Not entirely convinced by this. Think of all of the transactions generated by a pool. Given even a tiny bit of concern about the continued existence of the pool, people are prepared to incur the transaction fee in order to remove the risk of the pool disappearing with all of their earnings. And in any case, it's not clear that the distortions generated by transaction fees aren't so high as to remove any benefits from e.g. NGDP targetting.

And in any case, even if we knew all transactions corresponded to an exchange of goods, we still wouldn't know which of these were intermediate transactions and which were final. Only the latter is relevant to the calculation of NGDP and/or velocity. We need to know the value added by each transaction, not the final sale price.

[markm]

So everyone's financial details should be spied upon in deep detail by Big Brother so that Big Brother can manipulate the currency "properly" ?

-MarkM-

[anonuser777]

So everyone's financial details should be spied upon in deep detail by Big Brother so that Big Brother can manipulate the currency "properly" ?

-MarkM-

Yes. Their models require 100% accurate information :/

Keynesian economic models also assume that "everything else remains equal" (ceteris paribus). In the real world, however, this never happens.