Market Driven Money Supply..

[spartacusrex]

Hello!

Let's imagine a NEW economic paradigm.

Crypto currencies give us the ability to create ANY mathematically based currency, so I was wondering about a new type of coin.
 
Lets say, you want a coin that grows AND SHRINKS in number. One that if possible, responds to market forces.

Also - before anyone jumps in with the Inflation/Deflation is Theft Tirade.. If the growth is done FOR EVERYONE.. so that ALL coins grow and shrink, so that proportionally, your amount of coins remains the SAME, I don't think it is theft any longer. Printing and then giving it to a bank to redistribute, as they see fit, is Obviously, not cool.
(ie Alice has 1 coin, Bob has 10, Alice has 10% of Bob. Then 10% inflation. Alice has 1.1 coins, Bob has 11, Alice has 10% of Bob, still.. And Alice also retains her 1/11 stake in the entire coin, in both cases.)

I know there is an economic theory that says that the Money Supply should grow in line with Economic growth, and that this in turn would result in price stability. Unfortunately, measuring economic growth is harder done than said.

What I am wondering if there are any Market Driven Money Supply equations ?
 
For instance..

You could link the Money Supply growth to the Hash rate of the network.. ? (Don't like it..)

You could link Money Supply to the amount of TXN fees paid ? (Hmm.. still not into it..)

You could link it to the number of active accounts ? (Too easy to manipulate.. )

You could let the miners VOTE, in the coinbase (or somewhere) TXN as to whether there should be growth or demurrage ? (Not sooo bad..)

Does any one have any ideas as to how you might regulate the Money Supply Growth of a Crypto Coin in some pre-determined maths way ?

Oh &..Merry Xmas!

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[pietrosperoni]

It is already like this.

Since the only important thing is the relative wealth, what you can buy with that wealth does expand and contract depending on what is on the market. You don't need to change the numbers.

[spartacusrex]

It is already like this.

Since the only important thing is the relative wealth, what you can buy with that wealth does expand and contract depending on what is on the market. You don't need to change the numbers.

I agree that relative wealth is key, but I am looking for a system with price stability of the goods in that system. A system that can use mathematically based money-supply 'inflation/deflation'. 

In a growing economy with fixed money supply the prices will always tend down. I am not saying if this is good or bad, I am just looking for ideas for a system that has a variable money supply.

One that grows and shrinks as the economy grows and shrinks.

[kwest]

I suggest you have a look at eMunie.

[kjj]

The short answer is "no".

The long answer is "How do you measure 3 of {M,V,P,Q} quickly and accurately enough to set the fourth?"

[Lethn]

I personally hate the idea and wouldn't have anything to do with it but I don't see why these people who hate Bitcoin and deflationary currencies can't organise an altcoin of their own like this that they like more rather than trying to usurp the currency and wreck everything. The code is open source and there for you to use and download, even if you don't have any programming experience you could always hire like minded people with Bitcoins to develop it for you and fix things.

I think the Freicoin altcoin is one of the only ones out there that comes close to what you're planning but that hasn't been a great success and because I follow a different economics school I'm just being smug about that and saying it's because of the kind of ideas you're talking about in the first place but again I welcome currency competition, it's just the critics of deflationary currencies that don't. Oh yes! I almost forgot infinite coin, that's an inflationary currency someone made too, it's not doing too great either, there's also stuff like Starcoin and Luckycoin which give out random rewards, so there's all kinds of experiments happening.

[spartacusrex]

Gold backing gives some price stability, but the value of gold varies against the values of everything else. Ultimately, what you want is a currency backed by a very large basket of goods. Coincidentally, that is how the CPI is computed, so rather than backing it with a huge basket of goods (not very practical), you could do it by creating a market for CPI-based derivatives.

Yes - This is what I was thinking..

Aside from the technical difficulties, could you regulate the Money Supply if you knew the Price Of Gold, in the currency ?

Or - Which I can see a way of doing, could you regulate the Money Supply if you knew the Price of a Bitcoin .. ?

So that, if the Price of Gold/Bitcoins went up, you would print less..

If the Price of Gold went down, you would print more.

I think this is known as the 'Gold Price Rule'.  

http://www.forbes.com/sites/steveforbes/2013/05/08/heres-what-a-new-gold-standard-could-look-like/

I personally hate the idea and wouldn't have anything to do with it but I don't see why these people who hate Bitcoin and deflationary currencies can't organise an altcoin of their own like this that they like more rather than trying to usurp the currency and wreck everything. The code is open source and there for you to use and download, even if you don't have any programming experience you could always hire like minded people with Bitcoins to develop it for you and fix things.

I think the Freicoin altcoin is one of the only ones out there that comes close to what you're planning but that hasn't been a great success and because I follow a different economics school I'm just being smug about that and saying it's because of the kind of ideas you're talking about in the first place but again I welcome currency competition, it's just the critics of deflationary currencies that don't. Oh yes! I almost forgot infinite coin, that's an inflationary currency someone made too, it's not doing too great either, there's also stuff like Starcoin and Luckycoin which give out random rewards, so there's all kinds of experiments happening.

Don't worry - no one is talking about 'wrecking' lovely bitcoin.. This would definitely be an Alt-Coin.

Just trying some different ideas out. Thinking out loud.. So many possibilities now that were not even thought possible BBTC.. (before bitcoin.. ;-p)

As I said in the OP, if you could take the Human element out of the equation, maybe some of this stuff is not soooo terrible..

[Impaler]

You would need to have a functioning prediction market entirely in the block-chain that requires coin state to participate in and which allows people to hold some kind of 'bond' token which rewards them for correctly betting on future inflation or deflation of the purchasing power of a unit of money.  This ensures honest predictions, meanwhile coin volume grows or shrinks counter to the market prediction, predicted inflation shrinks money supply and predicted deflation grows it.

[deisik]

I personally hate the idea and wouldn't have anything to do with it but I don't see why these people who hate Bitcoin and deflationary currencies can't organise an altcoin of their own like this that they like more rather than trying to usurp the currency and wreck everything. The code is open source and there for you to use and download, even if you don't have any programming experience you could always hire like minded people with Bitcoins to develop it for you and fix things.

For the proposed system to work, they would have to have behind them a state with its power to coerce the new system on everyone. It seems a bit paradoxical to me, that is, people, if given such choice, willingly cling to a monetary system that would ultimately ruin their lives in the end, and at the same time have to be coerced to a system which would profit them in the long run (corruption and all that shit aside)...

[spartacusrex]

You would need to have a functioning prediction market entirely in the block-chain that requires coin state to participate in and which allows people to hold some kind of 'bond' token which rewards them for correctly betting on future inflation or deflation of the purchasing power of a unit of money.  This ensures honest predictions, meanwhile coin volume grows or shrinks counter to the market prediction, predicted inflation shrinks money supply and predicted deflation grows it.

Now we're getting somewhere..

But - we need a system that doesn't require external/non-crypto inputs..

Could you determine the amount to inflate or deflate the Money Supply of a currency given the price of Bitcoins in the given currency ?  

Or - what I mean is, could the monetary supply of the US Dollar have been regulated given the value of Gold in US Dollars ?

Mathematically speaking..

(I say 'have been' as the current Gold price is SOOO manipulated it bares no relationship, to anything..)

[Phrenico]

This proposal would not change relative price levels and would thus have no effect on purchasing power, and no effect whatsoever, good or bad.

It's equivalent to if everybody suddenly appends a "0" to the end of each unit of their local currency. If gas cost $3.50 beforehand, it would cost $35.0 after the switch. When you assume that people's desire to hold the same proportion of their worth as cash balances, prices have to multiply by the factor that their purchasing power just rose due to the change.

[spartacusrex]

This proposal would not change relative price levels and would thus have no effect on purchasing power, and no effect whatsoever, good or bad.

? Err.. I have to disagree. Agreed that 'relative' prices stay the same, but what about Price Stability ?

1)Price stability makes it easier for people to recognise changes in relative prices since such changes are not obscured by fluctuations in the overall price level. This enables firms and consumers to make better-informed decisions on consumption and investment. This in turn allows the market to allocate resources more efficiently. By helping the market to guide resources to where they can be used most productively, price stability raises the productive potential of the economy.

2)If investors can be sure that prices will remain stable in the future, they will not demand an "inflation risk premium" to compensate them for the risks associated with holding nominal assets over the longer term. By reducing such risk premia in the real interest rate, monetary policy can contribute to the allocative efficiency of the capital market and thus increases the incentives to invest. This in turn fosters economic welfare.

3)The credible maintenance of price stability also makes it less likely that individuals and firms will divert resources from productive uses to hedge against inflation. For example, in a high inflation environment there is an incentive to stockpile real goods since they retain their value better than money or some financial assets in such circumstances. However, stockpiling goods is not an efficient investment decision, and therefore hinders economic growth.

4)Tax and welfare systems can create perverse incentives that distort economic behaviour. In most cases, these distortions are exacerbated by inflation or deflation. Price stability eliminates the real economic costs entailed when inflation exacerbates the distortionary impact of tax and social security systems.

5)An environment of stable prices helps to maintain social cohesion and stability, since price stability prevents the considerable and arbitrary redistribution of wealth and income that arises in both inflationary and deflationary environments. Several scenarios in the twentieth century have shown that high rates of inflation or deflation tend to create social and political instability.

6)Price stability also contributes to financial stability, because it eliminates market distortions and uncertainties arising from unstable prices. For example, price stability reduces risk premia vis-à-vis interest rates because there is less uncertainty about future inflation.

Or so they say.. 

Problem is of course that if someone has the power to PRINT money, they'll PRINT IT! (Regardless of WHY they should be printing it..)

What we need is an equation.. A maths way of calculating how to affect the Money Supply.

And it seems some kind of Free Market, might be a way of ensuring 'Honest' discovery.

[Impaler]

You would need to have a functioning prediction market entirely in the block-chain that requires coin state to participate in and which allows people to hold some kind of 'bond' token which rewards them for correctly betting on future inflation or deflation of the purchasing power of a unit of money.  This ensures honest predictions, meanwhile coin volume grows or shrinks counter to the market prediction, predicted inflation shrinks money supply and predicted deflation grows it.

Now we're getting somewhere..

But - we need a system that doesn't require external/non-crypto inputs..

Could you determine the amount to inflate or deflate the Money Supply of a currency given the price of Bitcoins in the given currency ?  

Or - what I mean is, could the monetary supply of the US Dollar have been regulated given the value of Gold in US Dollars ?

Mathematically speaking..

(I say 'have been' as the current Gold price is SOOO manipulated it bares no relationship, to anything..)

Thx, I've thought about this problem a metric Fuckton but it is still not solved to my satisfaction so if you interested in exploring the concept further I am game.

I completely agree that non-crypto inputs are neither desired nor useful, first off all real currencies currently target some level of inflation so even perfectly matching one of them would introduce an inflation rate into said coin that we really do not want.  So I'd forget about any scheme focusing on coins relative to anything external, just worry about the prediction markets relative valuation between 'now coin' and 'future coin'.

To get that kind of prediction you need to allow people to do effective trading of coins between the present and the future, but the 'push' nature of all transactions in BTC makes this nigh impossible, the person who is to receive in the future has no means to compel delivery of what's been promised which is a great part of why BTC is nearly impossible to short.  So we need some kind of NEW instrument that is recorded in the Block-chain along side coins and denominated IN coins but distinct, a kind of coin-futures-contract or coin-bond.

So are prediction market participants would be taking opposing sides in these special instruments, one side predicting a decrease in value for future coins, they are willing to give away future coins to receive coins in the present, and a side predicting an increase in value, they will give-up present coins to receive them in the future.  The instruments will be for some specified period of time so the market will produce a prediction that can be expressed in a ratio for multiple time segments.  For example the prediction for 6 months could be a 3:1 ratio, predicting a coin will fall to 1/3rd it's current value in that time.

How to turn the ratio into a change in money supply, it might be as simple as pushing the mint rate up and down in rather crude fashion until the ratio comes closer to 1:1, supply expansion and contraction could be stake based such that no ones proportional share is changed.  This would be the simplest solution from a technical standpoint (well maybe changing mining rewards is even simpler) but I don't think it would allow any kind of viable futures instrument because your effectively erasing the possibility of being diluted which is motivating people to enter truthful predictions in the market.

[Xav]

Let's imagine a NEW economic paradigm.

Let's be aware of the meaning of Bitcoin or any currency. A currency serves as a trusted "medium of exchange." IOW it supports the spread of "economic value" over its population. The amount of 21 million coins has already introduced this "new economic paradigm." Yet, it appears that Bitcoin additionally does not trespass the borders of the playground occupied by miners, speculators, early adapters, opportunists and other geeks with more than average thrill seeking genes, cq hormones.
Let's face it. At this moment 12 million BTC's remain in the hands of only less than 3 million people. That's more than 50% of a possible future Bitcoin economy. Are these 3 million persons in the same position as bankers, governments and CEO's of multinationals right now? Houston, we've got a problem !

[teukon]

This proposal would not change relative price levels and would thus have no effect on purchasing power, and no effect whatsoever, good or bad.

? Err.. I have to disagree. Agreed that 'relative' prices stay the same, but what about Price Stability ?

1)Price stability makes it easier for people to recognise changes in relative prices since such changes are not obscured by fluctuations in the overall price level. This enables firms and consumers to make better-informed decisions on consumption and investment. This in turn allows the market to allocate resources more efficiently. By helping the market to guide resources to where they can be used most productively, price stability raises the productive potential of the economy.

This sounds more like a service than an alt-coin to me.  Design some method to determine the general price level and then create a website which keeps an up-to-date value of the result expressed in terms of bitcoins.  Equipped with a simple API, wallets and shops can (as per your claims) use this to allow their users/customers to make "better-informed decisions on consumption and investment".

[spartacusrex]

So we need some kind of NEW instrument that is recorded in the Block-chain along side coins and denominated IN coins but distinct, a kind of coin-futures-contract or coin-bond.

Yep..

..I've thought about this problem a metric Fuckton..

LOL .. yep.. me too..

I think I have an idea. How about this..

I have been looking for a relationship between some financial instrument and the Money Supply. Think I have found one. I have mentioned it in other posts but the idea is now very clear to me..

The Gold Standard
https://bitcointalk.org/index.php?topic=222653
https://bitcointalk.org/index.php?topic=268336

This is a nice article with good stats
http://www.macro-investing-strategy.com/gold-and-money-supply/

What that basically says, is something that when you think about it, makes sense.

What is the connection between the Gold Price and The Money Supply ?
  
"The price of gold is the link between real growth and monetary growth: When real growth under-performs monetary growth, the price of gold rises. When real growth out-performs monetary growth, the price of gold falls. And when real growth matches monetary growth, the price of gold is flat."

Now we have a connection between a 'fixed amount commodity', like Gold, or BITCOINS, and the money supply.

OK - so here it is..

You have a normal blockchain based crypto coin, but with 2 coins on the chain, rather than 1.
There is an exchange on chain from one coin to the other.

1 Coin has a fixed amount.. say 1 million in all. Ever. Call it Gold.
1 Coin is not fixed. It grows and shrinks based on the Price of the Other Fixed Coin (Gold).. Call it Cash.

..supply expansion and contraction could be stake based such that no ones proportional share is changed.

Yep.. And how would the amount of expansion/contraction be calculated ? Simple..

The FAIR price is the total amount of Cash divided by the total amount of Gold.

If the Market price of Gold is higher than the Fair price, we contract the amount of cash..
If the Market price of Gold is lower than the Fair price, we expand the amount of cash..

No need for a futures/bond market.. the Price of Gold does that.. And it ALL happens ON CHAIN.. no external inputs.

What do you think Impaler ? Can it work...

ps Best of all.. I am working on coding a version myself.. It kinda' works..  

[Etlase2]

spartacus, I know I've directed you before to my Decrits proposal. While I don't have a perfect solution, I do have one that is very decentralized and crypto-only.

First of all, a requirement for a crypto where the money creation is variable and based on demand or whatever needs to have its security separate from mining. This I've already solved.
Secondly, to provide a stable value base, the only real way is to provide a consistent cost to produce the currency. This is really difficult, but I think I've got something that comes really close. If the cost to create the currency is consistent, then people create more of it when its price is high and none of it when the price is low. Rather than finding a way to remove currency from circulation when the price is low, I changed my opinion to the one where you leave things be, because a currency that is below its cost to produce will look undervalued and will incentivize people to accept it as payment, so it is self-correcting.

A consistent cost to produce doesn't guarantee any value, but it will have a very real impact on how people will think about such a currency. I think it will lead to far more stability than just about any other metric could.

[spartacusrex]

Hi Etlase2!

..If the cost to create the currency is consistent, then people create more of it when its price is high and none of it when the price is low...

That's interesting.. I think a way of doing that would be to have the block reward for mining to be proportional to the Hash Rate of the Network ?

Higher the Hashrate, higher the block reward.. All though - when computers change it might cost less for the same hash rate..

Hmm.. so do you have a way of determining a 'Consistent Cost to Produce' ?

I know that Decrits uses a voting system.. Maybe a block vote could take place to determine the price of a unit of energy.

BUT - I am really after a system that has 'Price Stability'.. Which I don't think this system would have, since as you say the variable price would determine whether miners mine it or not (Unless I'm missing something..) ?

[Etlase2]

Hmm.. so do you have a way of determining a 'Consistent Cost to Produce' ?

Yes, but it is very complicated. But the gist is rather than everyone competing for one block of coins, everyone competes to create their own money from a big block available with those creating it faster earning slightly more. Then the system compares a the speed of creating a block of coins with prior blocks and uses that to increase the difficulty. I have some other tricks to account for potential reductions in energy requirements.

BUT - I am really after a system that has 'Price Stability'.. Which I don't think this system would have, since as you say the variable price would determine whether miners mine it or not (Unless I'm missing something..) ?

Well you can never have something that is perfectly stable. What I aim for is something that would be more stable in the long run vs. a basket of commodities than any other individual commodity. If things are going well, demand is going to go through periods where it far exceeds supply, and things may occasionally go bad where supply exceeds demand. The price will always oscillate, the question is how well can you keep it oscillating around a given, stable point.

[Snowfire]

I played with some ideas like this in a post I made back in April:

https://bitcointalk.org/index.php?topic=181728.msg1897412#msg1897412

In general, I think any reactive scheme built into a system must be completely self-contained; it must be able to base its decision-making purely on internal information, not on external information that must be supplied by humans (who may be unreliable.) This rules out decision making based on prices or exchange values, which are external parameters. However, there are patterns of system behavior that are characteristic of certain types of conditions (bubbles, busts, stable conditions) which might well, if expertly characterized, form the basis of an algorithm which could begin to implement a flexible monetary policy.