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 Author Topic: Get rid of "difficulty" and maintain a constant rate.  (Read 12891 times)
Bitcoiner
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 July 21, 2010, 03:48:43 PM

...

The reason for doing the above, is not to create an inflationary environment, but to keep the number of coins relative to the user base. Failing to do this, will put deflationary pressure on the currency; remember, increasing the demand (number of Bitcoin users) for the currency, is the same as decreasing the quantity (of coins in a fixed Bitcoin user base). If you want to retain a steady, neutral, value of Bitcoins, then this needs to be considered.

Why would we want to retain a steady, neutral value of Bitcoins? This would mean we would artificially decrease the value of each Bitcoin when more of them were demanded, and artificially increase the value of each Bitcoin when less of them were demanded. This seems completely inverse to what supply & demand is telling you.

Therefore a constant rate relative to the user base would be ideal. ...

Ideal in which sense?

I'm sure an algorithm could be formulated to achieve the above, with the constant rate not being so high as to be inflationary - the target would be to keep the number of coins proportionate to the user base, thus creating 0% inflation*.

How is 0% inflation defined?

[NOTE: There may be an argument for the minting rate to track 'GDP' or some such - perhaps based on the number and value of transactions taking place?

GDP is a poor and unreliable indicator. How would you track the number and value of transactions taking place? How would you quantify non-monetary aspects of the transaction, that can only be measured subjectively by the actual players involved?

If people are economically active enough to have their node minting coins, maybe the user base may be sufficient/better in creating stability. This is probably another debate in itself, but the above point needs to be agreed on first.]

I'm sorry, but I don't agree. I've seen a lot of "we should do this and that" with no backing arguments. I'll need a little more than just assertive statements to be convinced.

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Traktion
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 July 21, 2010, 04:29:03 PM

...

The reason for doing the above, is not to create an inflationary environment, but to keep the number of coins relative to the user base. Failing to do this, will put deflationary pressure on the currency; remember, increasing the demand (number of Bitcoin users) for the currency, is the same as decreasing the quantity (of coins in a fixed Bitcoin user base). If you want to retain a steady, neutral, value of Bitcoins, then this needs to be considered.

Why would we want to retain a steady, neutral value of Bitcoins? This would mean we would artificially decrease the value of each Bitcoin when more of them were demanded, and artificially increase the value of each Bitcoin when less of them were demanded. This seems completely inverse to what supply & demand is telling you.

The point is to retain the same value. With a limited supply, but growing demand, each coin is going to be worth more. Companies, and individuals, want to know that 1 Bitcoin will be worth roughly* the same now as in many years to come. This makes business and personal planning easier.

If the global population was steady and everybody used Bitcoins, having a steady supply makes sense. This isn't where we are though - we have a growing Bitcoin user base, which needs more Bitcoins to match this.

* Don't mistake this to be some CPI, price index type tracking (like central banks have attempted over the last decades) - this is just about total coin and user quantities. The reason price index tracking is flawed, is that it is trying to measure the near impossible, because peoples' propensity to spend or save changes all the time. However, it is simple to consider why price stability is important (future planning) and it also follows that more Bitcoin users fighting for a constant Bitcoin supply is going to affect the price (think supply/demand).

Therefore a constant rate relative to the user base would be ideal. ...

Ideal in which sense?

In keeping 1 Bitcoin worth roughly the same 1, 5 or 10 years later, to help future planning (and therefore, business/savings/security etc) as mentioned above. If you have a growing Bitcoin user base, but a fixed Bitcoin supply, 1 Bitcoin will be worth more YoY. The holder of the Bitcoin would be made more wealthy from doing nothing. This isn't a great basis for a vibrant economy.

The real kicker? The only way demand will grow in the above scenario, will be if the newcomer thinks that there will be someone coming in after him (or they have just assumed 'prices only go up', perhaps because 'there are only so many bitcoins out there'). Classic pyramid/bubble stuff.

I'm sure an algorithm could be formulated to achieve the above, with the constant rate not being so high as to be inflationary - the target would be to keep the number of coins proportionate to the user base, thus creating 0% inflation*.

How is 0% inflation defined?

B = Bitcoins
U = Bitcoin users

Inflation = B/U

In other words, the number of bitcoins should be proportionate to the number of bitcoin users.

[NOTE: There may be an argument for the minting rate to track 'GDP' or some such - perhaps based on the number and value of transactions taking place?

GDP is a poor and unreliable indicator. How would you track the number and value of transactions taking place? How would you quantify non-monetary aspects of the transaction, that can only be measured subjectively by the actual players involved?

It's why I suggested there may be an argument. I'm fairly certain that the number of Bitcoin users would be the better metric. However, the swarm would surely know how many transactions were taking place, should this be a useful metric.

If people are economically active enough to have their node minting coins, maybe the user base may be sufficient/better in creating stability. This is probably another debate in itself, but the above point needs to be agreed on first.]

I'm sorry, but I don't agree. I've seen a lot of "we should do this and that" with no backing arguments. I'll need a little more than just assertive statements to be convinced.
[/quote]

Just think it through. I'm sure there are papers on this, but it's just a logical chain of thought - new users competing for existing coins will create additional demand, per coin. Either new users simply won't bother to use Bitcoins or they'll buy in, hoping the price will continue to rise... until one day it doesn't and the value crashes.

If you want Bitcoins to be the best money, then the supply needs to flex with the user base (demand). If you just want them to become a digital commodity, then expect there to be swings in demand and value, which would make it less preferable as money.
Bitcoiner
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 July 21, 2010, 06:34:50 PM

...

The reason for doing the above, is not to create an inflationary environment, but to keep the number of coins relative to the user base. Failing to do this, will put deflationary pressure on the currency; remember, increasing the demand (number of Bitcoin users) for the currency, is the same as decreasing the quantity (of coins in a fixed Bitcoin user base). If you want to retain a steady, neutral, value of Bitcoins, then this needs to be considered.

Why would we want to retain a steady, neutral value of Bitcoins? This would mean we would artificially decrease the value of each Bitcoin when more of them were demanded, and artificially increase the value of each Bitcoin when less of them were demanded. This seems completely inverse to what supply & demand is telling you.

The point is to retain the same value. With a limited supply, but growing demand, each coin is going to be worth more. Companies, and individuals, want to know that 1 Bitcoin will be worth roughly* the same now as in many years to come. This makes business and personal planning easier.

How does it make business and personal planning easier?

If the global population was steady and everybody used Bitcoins, having a steady supply makes sense. This isn't where we are though - we have a growing Bitcoin user base, which needs more Bitcoins to match this.

Again, why? It's not enough to say "we should do this because we should."

* Don't mistake this to be some CPI, price index type tracking (like central banks have attempted over the last decades) - this is just about total coin and user quantities. The reason price index tracking is flawed, is that it is trying to measure the near impossible, because peoples' propensity to spend or save changes all the time. However, it is simple to consider why price stability is important (future planning) and it also follows that more Bitcoin users fighting for a constant Bitcoin supply is going to affect the price (think supply/demand).

Ok, I'm glad to see that we see eye to eye about CPI and related measures. However, first, how does maintaining a Bitcoin/user ratio maintain price stability, and second, why is it more desirable than a fixed supply?

Therefore a constant rate relative to the user base would be ideal. ...

Ideal in which sense?

In keeping 1 Bitcoin worth roughly the same 1, 5 or 10 years later, to help future planning (and therefore, business/savings/security etc) as mentioned above. If you have a growing Bitcoin user base, but a fixed Bitcoin supply, 1 Bitcoin will be worth more YoY. The holder of the Bitcoin would be made more wealthy from doing nothing. This isn't a great basis for a vibrant economy.

The real kicker? The only way demand will grow in the above scenario, will be if the newcomer thinks that there will be someone coming in after him (or they have just assumed 'prices only go up', perhaps because 'there are only so many bitcoins out there'). Classic pyramid/bubble stuff.

He's not made wealthier for doing nothing. He's made wealthier for making the decision to hold Bitcoins in expectation of increasing demand. This is not "doing nothing". At every moment he must make a decision, "Should I continue to hold on to my Bitcoins? Or are my needs and purposes better served by spending them in exchange for something else?"

There is also no guarantee that he will be made wealthier. If too many people hoard, then it will be hard to buy Bitcoins, which means that less people will use Bitcoins, which means that the value of Bitcoins will go down, which means that the hoarders ultimately lose out. The value of Bitcoin is not set in stone; it is determined by what people are willing to exchange for it. This is a self-correcting equilibrium.

I'm sure an algorithm could be formulated to achieve the above, with the constant rate not being so high as to be inflationary - the target would be to keep the number of coins proportionate to the user base, thus creating 0% inflation*.

How is 0% inflation defined?

B = Bitcoins
U = Bitcoin users

Inflation = B/U

In other words, the number of bitcoins should be proportionate to the number of bitcoin users.

Ok, now we have a metric. You are proposing that the ratio of Bitcoins to users should remain constant. Why would this be superior to the current system? How would you determine the # of users? How would you distribute the coins?

[NOTE: There may be an argument for the minting rate to track 'GDP' or some such - perhaps based on the number and value of transactions taking place?

GDP is a poor and unreliable indicator. How would you track the number and value of transactions taking place? How would you quantify non-monetary aspects of the transaction, that can only be measured subjectively by the actual players involved?

It's why I suggested there may be an argument. I'm fairly certain that the number of Bitcoin users would be the better metric. However, the swarm would surely know how many transactions were taking place, should this be a useful metric.

If people are economically active enough to have their node minting coins, maybe the user base may be sufficient/better in creating stability. This is probably another debate in itself, but the above point needs to be agreed on first.]

I'm sorry, but I don't agree. I've seen a lot of "we should do this and that" with no backing arguments. I'll need a little more than just assertive statements to be convinced.

Just think it through. I'm sure there are papers on this, but it's just a logical chain of thought - new users competing for existing coins will create additional demand, per coin. Either new users simply won't bother to use Bitcoins or they'll buy in, hoping the price will continue to rise... until one day it doesn't and the value crashes.

If you want Bitcoins to be the best money, then the supply needs to flex with the user base (demand). If you just want them to become a digital commodity, then expect there to be swings in demand and value, which would make it less preferable as money.

I can't read your mind; I'm sure you are convinced that what you are proposing is a great idea, but you need to formulate this in writing. You make statements such as "Bitcoins will be the best money if the supply flexes with the user base", but that doesn't actually explain anything to me. You are telling me what you think, but not why you think that way.

If the value crashes because people speculated and drove the value too high, then what's wrong with that? That's how things should work. Would you prefer that oil prices still be near \$200 a barrel? Some speculators lost out, again, so what?

"If you just want them to become a digital commodity, then expect there to be swings in demand and value, which would make it less preferable as money."

How would fixing it to the # of users alleviate this, and how could we accurately measure this? Why are swings in demand and value a bad thing? If anything, they are how a market, through the collective actions of individual players, allocates capital most efficiently. This is based on the axiom that every trade is made in order to make each individual player better off. If Bitcoins rise and fall in value, there are good reasons for it, and we should not try to "hide" this or fight against it.

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NewLibertyStandard
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 July 21, 2010, 07:43:58 PM

An electronic currency such as bitcoin is a poor candidate for stable value. Because bitcoins don't have inherent value, they work well in a system where they have a relatively stable price in the short term and can be transmitted easily and reliably, but in the long term can fluctuate in either direction to meet supply and demand. A vitally necessary commodity such as water works much better as having a constant value. The value may somewhat shift during conflicts or when new ways of producing it become prevalent, but in comparison to something like Bitcoin, it's value will be retained very well over time. There you have it. You should invest in companies that provide clean water, buy a water tower or buy and sell bottled water.

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Traktion
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 July 22, 2010, 12:46:16 AM

Bitcoiner, I'll post up a reply tomorrow (it's late here), but I've covered some of the points in the other thread. To summarise in one sentence, fluctuations will always happen in a free market, but restricting supply when demand is growing will not help matters.

As I said before, if you want Bitcoins to behave like digital commodities, that's fine. It may not make it the most stable currency though, which is surely what most people want from their ideal money.

[A bit of a tangent - BTW, this is also why a basket of commodities is often said to be better than a single commodity, as backing for money - they all fluctuate, but the hope is, overall they will be relatively stable, with some increasing in supply as demand dictates (like grain, drinking water etc). I have sympathy for that argument too, for similar reasons to the above.]
QuantumMechanic
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 July 22, 2010, 07:46:49 AM

You get more wealthy for doing nothing, just for being one of the first users of Bitcoin. The more people join, the less they gain from this, until there are few new entrants. It's like a pyramid scheme in that sense - you're being rewarded for doing nothing.

Notice that you can say the same thing about all speculative buying.  Speculators perform the valuable function of finding market prices which, ideally, reflect economic realities.

Currencies need market prices which reflect economic realities, too - economic realities being the present and expected future degree of usage of the currency.
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