[ANNOUNCE] EnCoin - An alternative with a completely different paradigm

[Etlase2]

This was designed from input with several members of this forum. If you think you can help, please email me at the address in the proposal.

It addresses early adopter, 51% attack, double spends, trust, transaction times, and various other issues. It is a work in progress and is only a design document without much hard data to back it up. However, I believe everything discussed in the proposal is possible. The bootstrapping process hopes to succeed by awarding both EnCoins and BitCoins for the same work.

Link to the document: http://www.mediafire.com/file/kpe2fibudg8yfrr/EnCoin%20Proposal%202.3.doc
HTTP link (does not format well in IE): http://pastebin.com/czquukGX

Some talking points:

* EnCoin is based around a constant cost to produce, approximately 10kWh of electricity. In contrast, a BTC's cost to produce has increased by a factor of 2,250 from the 1st to the 7.3 millionth.
* Transaction fees that destroy currency create new demand on existing coins, rather than an ever increasing cost to produce. The fees are required, and they do not go back into the mining pool.
* Supply and demand determine the final sell price, but the network is designed so that it will always be moving back towards an equilibrium where a sell price is the cost to produce plus a reasonable profit margin. As fiat currency inflates, so will the value of EnCoins, so it is a "safe" hedge against inflation. This happens because producing new EnCoins will cost more because 10kWh of electricity is more expensive.
* Initially, EnCoin will award both EnCoins and BitCoins for performing work on the network. It is possible to piggy-back on the BC network, and EnCoin will do so until some time down the road.
* In lieu of dangerous pools, EnCoin has smaller "Network Trusts" that are formed. These Trusts mint coins non-competitively. They agree on what has happened to the network once a day. Agreement is not based on computational power, but by a system of trust.
* Transactions are able to be approved and re-spent in under 1 minute. More likely than not the network will support 15-30 second transactions.
* Only the most recent block in the block chain is required for a client to be up to date. EnCoin stores the balance of every account in each block. While this may sound like a lot of data, it is much more efficient than storing the entire history of every divisible piece of coin that has ever been used. (My gross estimate is about 10MB for every 500,000 accounts--updated once per day.)

2011/09/21 V2.2 UPDATE: Added more technical details and potential issues.
2011/09/23 V2.3 UPDATE: Moved some of the technical details into the main proposal. Network Trusts, Transactions, The System of Trust, Anonymity, and Why EnCoin have been updated.

IRC: irc.freenode.net #encoin

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[Killdozer]

Because of the increasing scarcity of BitCoins in the future, they again may be worth $30 or perhaps even $100 or $1000 USD. But those initial coins will have always cost $0.0016 to create. And there are so many of them in a limited pool that the looming threat of a “cheap coin” sell-off will always exist. This, in this proposal’s opinion, is simply not healthy for a functioning economy.

What does mean for the BitCoin network? It means that the danger of these cheap coins buying up all of the “asks” on the market exchanges is a trivial matter. Since these coins were not actually legitimately worked for on a reasonable scale, they have no intrinsic value compared to the coins of today.

This idea is just nonsense.
There is no other cost for bitcoin that one which it is traded for *right now*. There is no "intrinsic" value, nor are there any difference between bitcoins in different wallets.

For example, say for 30 years ago, mining gold from any already discovered mine costed a lot more than it does today, due to technological advancements. Do you then propose that gold that was mined 30 years ago is somehow worth more than one mined yesterday?

[Etlase2]

This idea is just nonsense.
There is no other cost for bitcoin that one which it is traded for *right now*. There is no "intrinsic" value, nor are there any difference between bitcoins in different wallets.

Did you miss the whole "cost to produce" section? I should have said that in the future they will "cost" not "be worth" $30 or $100 to produce.
If you go by my assumptions, the average bitcoin has cost $1.80 to produce. The average bitcoin is selling for $5. 178% ROI. Not. Sustainable. This gap is only set to widen due to the nature of bitcoin.

When bitcoins reach equilibrium and sell for about $2, do you think anyone will want to mine anymore when they cost $3.60 to sell for $2? Or are we going to continue to believe that the only price that matters is what it sells for, not how much it cost to make?

[johnj]

This idea is just nonsense.
There is no other cost for bitcoin that one which it is traded for *right now*. There is no "intrinsic" value, nor are there any difference between bitcoins in different wallets.

Did you miss the whole "cost to produce" section? I should have said that in the future they will "cost" not "be worth" $30 or $100 to produce.
If you go by my assumptions, the average bitcoin has cost $1.80 to produce. The average bitcoin is selling for $5. 178% ROI. Not. Sustainable. This gap is only set to widen due to the nature of bitcoin.

When bitcoins reach equilibrium and sell for about $2, do you think anyone will want to mine anymore when they cost $3.60 to sell for $2? Or are we going to continue to believe that the only price that matters is what it sells for, not how much it cost to make?

Wouldn't it go

High ROI -> More Miners -> Higher difficulty secures blockchain -> Bitcoin is 'safer' -> More people use it -> price goes up -> Rinse/repeat?

[Etlase2]

Wouldn't it go

High ROI -> More Miners -> Higher difficulty secures blockchain -> Bitcoin is 'safer' -> More people use it -> price goes up -> Rinse/repeat?

At what point do you think a ROI is sustainable? It wasn't at $30, a 1,560% ROI, it wasn't at $15, a 733% ROI; what makes you think it will be at 178% ROI?
If the amount of people mining today were to suddenly double, a bitcoin would cost $7.20 to produce. At a "reasonable" and immediate 33% ROI, coins would sell for about $9.50, or a 420% ROI for the "average" bitcoin's cost to produce. How many people do you think can be duped into this system? Typical businesses attain 5-10% ROIs, so I don't know how long you can get people to believe that this is possible.

We're going to see it in action as soon as the BTC award halves and half the mining network drops out (or the price suddenly doubles, which do you think is more likely), making the network half as secure. Instills a lot of confidence in the network, imo.

[JohnDoe]

Can we get a TL;DR? I read up to point 3 but you didn't answer your own question so I'm unwilling to go through the rest of the proposal.

[Lolcust]

Okay, this is officially weirder than "inflation/deflation" argument applied to infinitely divisible abstract programmatic constructs.

[johnj]

Wouldn't it go

High ROI -> More Miners -> Higher difficulty secures blockchain -> Bitcoin is 'safer' -> More people use it -> price goes up -> Rinse/repeat?

At what point do you think a ROI is sustainable? It wasn't at $30, a 1,560% ROI, it wasn't at $15, a 733% ROI; what makes you think it will be at 178% ROI?
If the amount of people mining today were to suddenly double, a bitcoin would cost $7.20 to produce. At a "reasonable" and immediate 33% ROI, coins would sell for about $9.50, or a 420% ROI for the "average" bitcoin's cost to produce. How many people do you think can be duped into this system? Typical businesses attain 5-10% ROIs, so I don't know how long you can get people to believe that this is possible.

We're going to see it in action as soon as the BTC award halves and half the mining network drops out (or the price suddenly doubles, which do you think is more likely), making the network half as secure. Instills a lot of confidence in the network, imo.

Ahh, I see.  You're forgetting the mining rewards drop off.  So the ROI naturally curves itself.

[Lolcust]

Actually, what would happen when subsidy drops to zero is a fascinating subject of discussion. Completely impervious to rational analysis it seems, too (since a lot will be defined by irrational actions by large groups of people)

[Etlase2]

Ahh, I see.  You're forgetting the mining rewards drop off.  So the ROI naturally curves itself.

I don't understand what you mean. When the mining rewards drop off, the cost to produce new bitcoins increases. This means once it hits 25 BTC per block, you are going to have to convince people it is worth mining bitcoins at $7.20 a pop when they were just selling for $5 a month or two ago, and perhaps still. Every time the cost to produce new BTC increases, those with existing BTC benefit because exchanges make no distinction between a BTC mined for $0.00016 or a BTC mined for $7.20. People mining BTC for $7.20 are going to start looking pretty stupid unless people keep buying in to BTC. And if that happens, the danger of small, original coin sell-offs keeps increasing because they will have a larger impact as the ROI on those coins is even higher.

[johnj]

Ahh, I see.  You're forgetting the mining rewards drop off.  So the ROI naturally curves itself.

I don't understand what you mean. When the mining rewards drop off, the cost to produce new bitcoins increases. This means once it hits 25 BTC per block, you are going to have to convince people it is worth mining bitcoins at $7.20 a pop when they were just selling for $5 a month or two ago, and perhaps still. Every time the cost to produce new BTC increases, those with existing BTC benefit because exchanges make no distinction between a BTC mined for $0.00016 or a BTC mined for $7.20. People mining BTC for $7.20 are going to start looking pretty stupid unless people keep buying in to BTC. And if that happens, the danger of small, original coin sell-offs keeps increasing because they will have a larger impact as the ROI on those coins is even higher.

Wait, weren't people mining before bitcoin got big at a loss?

I think people will continue to mine -regardless- of the ROI due to some of the (currently) unique properties of Bitcoin.  And that's outside the speculative investment of mining. 

[istar]

Looks very interesting.

I the early adoptor thing is unfortunatly a potetial big problem for Bitcoin.
If people think it is a problem, it is a problem.

Hope someone will code this.

[Lolcust]

Why would the danger of "original coin sell-off" be greater if price of a single coin increases ("people keep buying in") ?

Also, "first adopter problem" is people just being sore lol

[Etlase2]

Wait, weren't people mining before bitcoin got big at a loss?

Yes, but to be frank, that small group of people that gradually got larger were getting in at the top of the "pyramid." The only possible loss was a few dollars of electricity here and there. Now that there are 60k people, 60k x a few dollars of electricity is a very large sum of money.

I think people will continue to mine -regardless- of the ROI due to some of the (currently) unique properties of Bitcoin.  And that's outside the speculative investment of mining. 

Some people will, for sure. But to expect the current 60k miners to keep on truckin when the BTC award halves is folly.

I believe that EnCoin can piggy-back on the popularity of BitCoin though to provide an actual medium of exchange rather than a speculative investment. BitCoin has exploded in popularity, but no businesses are buying in except (semi-)illicit ones, or ones that provide services to the BitCoin network only.

I am not against starting EnCoin with some specific award modifiers such as 2x, 1.5x, and so on for the first X blocks to garner additional interest. These extra coins will reward early adopters, but will not give them the catastrophic power to control the network that BitCoin has endowed its early adopters. The impact of those coins will be reduced across the network as a whole as it gets more popular, whereas the reverse is true for BitCoin.

[Lolcust]

Some people will, for sure. But to expect the current 60k miners to keep on truckin when the BTC award halves is folly.

Depends on what assumptions you make as to market behavior in face of this change.

Do bear in mind that it is incredibly trivial for a bitcoin merchant to have his prices respond to market fluctuations in near-realtime.

[johnj]

Some people will, for sure. But to expect the current 60k miners to keep on truckin when the BTC award halves is folly.

Depends on the ROI  

Edit: I see where you're coming from.  but I think it's one of many possible scenarios, and an unlikely one at that.

[Etlase2]

Why would the danger of "original coin sell-off" be greater if price of a single coin increases ("people keep buying in") ?

Also, "first adopter problem" is people just being sore lol

:sigh: I really don't want to turn this into an early adopter debate.

The danger of an original coin sell off is greater as the cost to produce a single coin increases because that means it takes more effort to produce a single coin. As it takes more and more effort to produce a single coin, the effect of effortless coins flooding the market is greater. When those coins hit the market, who will want to produce new coins any more? If BitCoins are so popular that 1 million people are mining in the future for 12.5 BTC per block (0.0000125 BTC per person per block), the effect of 25k original coins hitting the market will be, in essence, as if 2 billion coins just hit the market. The market will crash, and 25k is a small percentage of the original amount of coins.

In EnCoin, the cost to produce coins will remain stable and the threat of this is non-existent.

[Lolcust]

Why would the danger of "original coin sell-off" be greater if price of a single coin increases ("people keep buying in") ?

Also, "first adopter problem" is people just being sore lol

:sigh: I really don't want to turn this into an early adopter debate.

The danger of an original coin sell off is greater as the cost to produce a single coin increases because that means it takes more effort to produce a single coin. As it takes more and more effort to produce a single coin, the effect of effortless coins flooding the market is greater. When those coins hit the market, who will want to produce new coins any more? If BitCoins are so popular that 1 million people are mining in the future for 12.5 BTC per block (0.0000125 BTC per person per block), the effect of 25k original coins hitting the market will be, in essence, as if 2 billion coins just hit the market. The market will crash, and 25k is a small percentage of the original amount of coins.

In EnCoin, the cost to produce coins will remain stable and the threat of this is non-existent.

I suspect that the effect of said sell-off will largely depend on market environment.

You seem to imply that price of coins shall not rise proportionally (at least) upon subsidy reduction for miners. Yes, that would be a catastrophic scenario (with or withou sell-off), but I find no rational argument can be made for or against it

Should the coin price actually rise, the sell-off's devastation potential shall not be that high (and it seems to me that a significant portion of first-adopters have already cashed out).

You seem to be running with some version of efficient market hypothesis in mind, right ?

[Etlase2]

I suspect that the effect of said sell-off will largely depend on market environment.

Funnily enough, I don't. It's not as if this has never happened before. BitCoins were worth $30 at one point, you know.

You seem to imply that price of coins shall not rise proportionally (at least) upon subsidy reduction for miners. Yes, that would be a catastrophic scenario (with or withou sell-off), but I find no rational argument can be made for or against it

Should the coin price actually rise, the sell-off's devastation potential shall not be that high (and it seems to me that a significant portion of first-adopters have already cashed out).

The price will likely rise, I wholeheartedly agree. It is the intention of the design of BitCoin that the price will rise. But you are wrong about the sell-off's devastation not being high. The price has absolutely nowhere to go but down in a sell-off. If you take my (not so extremely unlikely) example of 1 million people mining 12.5 BTC, you will see that an average person "earns" 0.054 BTC per month at a cost of $17.28 (200Wh x 24 x 30 x 0.12/kWh). This means the cost to produce 1 BTC is $320. Since 54k BTC are produced a month at this point, a 25k sell-off is the equivalent of 333 MILLION BTC-hours of effort. What took 1 million people two weeks to produce was conjured out of thin air by one person. Assuming no profit margin, 8 MILLION DOLLARS of demand was just eliminated from the economy. It is hard to say how the price will be affected, but it certainly won't be in a positive direction.

How many times will it take for people to get burned before they stop mining is the question. And once that happens, the security and value of BitCoin goes out the window.

[Lolcust]

1) There are different countries with different electricity costs.

2) A sell-off, should one happen (that is, should an early adopter with a substantial pile of coinage still exist at this point and choose, for some reason, to part with the entire stash instead of just the part he needs to hire some hookers and buy some wine or something), would of course drop the price, however, whether that would be permanent and how would market adjust is not subject to rational analysis at this point.

Value, as a concept, is mostly voodoo (gold value being prime example)

Predicting valuation behavior of large crowds is thus not verily likely.

However, I have nothing against your coin in principle, assuming that it can be implemented "in code", which is somewhat outside my ability to argue about (though it seems much more complex than bitcoin, which is a feat)