GEM - as a potential stable value currency

[Red]

[edit]
I'd like to start a discussion about stable crypto-currency. I'm just trying to get a sense if anyone is interested in non-speculative coins. As an example, I've extracted the concepts from EnCoin and simplified them for discussion into a system I call GEM. It is based on creating coins using constant electrical cost (in joules) over time.

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I've been working for two weeks trying to understand the details of Etlase2's EnCoin proposal. Originally I thought the idea of basing coins directly on kwh was impossible. There are simply too many hidden variables to make it possible to monitor an arbitrary peer's energy consumption.

I have recently adjusted my opinion from "impossible" to "plausible within constraints". I would like to discuss these constraints and the resulting economic and social dynamics.

However, I can't in good conscience suggest anyone go read the EnCoin proposal until the the next version is released. Etlase2 is a bit hostile to some of the existing bitcoin design decisions. Reading philosophy mixed with economics only serves to obfuscate the points I want to talk about.

As such, I want to distill his underlying concept (as I see it) into its most important dynamics. To reduce the learning curve, I'll frame my discussion around a theoretical bitcoin code fork (and new block chain) that I'll call GEM.

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I want to put all the GEM dynamics into one thread. But, I don't want to cause an argument cluster-fluck. As such, I'll post the outline of where I'm going, but I'll post the detail sections one at a time. Meaning, if discussion survives the first, we can move on to the second. If not, discussing the second dynamic would be pointless.

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GEM Basics
Premise
Goal

First Order (Monetary) Dynamics
Basing GEM on electricity absent any GEM/$ exchanges.

Second Order (Economic) Dynamics
Springs and Shocks to smooth GEM value convergence.

Third Order (Social) Dynamics
Variation from the existing Bitcoin protocols.
- 10 Minute Timekeeping
- Block Chain Consensus
- Network Partitioning and Reconciliation

Fourth Order (Moral) Dynamics
Detecting Fraud
Outing Fraudsters

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[Red]

GEM Basic Premise

One GEM always represents a fixed number of Joules. (Punny huh!) The price of the Joules used to create a GEM will vary over time and across locations.

1 GEM = (a fixed number of) joules = (a variable number of) $

For reference: (36,000,000 joules) always equals (10 kwh) which currently sells for about ($1)

The actual GEM/joule constant ratio will be an emergent property of the system. See, the "First Order Dynamics" section.


GEM Basic Goal

The goal is a digital currency where GEM value remains stable over time. Meaning, a future "basket of goods (BOG)" costs the same number of GEMs as it does now. Even if the $/BOG ratio changes over time.

If you delay gratification now, you receive exactly the same future gratification value. Nobody should save the value of a cup of coffee, expecting to exchange it for a steak dinner in the future. You are going to get a cup of coffee.

GEMs are not intended as long term investments. If you want to invest in a commodity that might appreciate in value, trade GEMs for BTC, or gold. If you want to earn interest on someone else's effort, you'll have to arrange your own GEM loans and negotiate your own terms.

If you can mine GEMs for $X today and sell them for more than $X in the future, knock yourself out. But consider yourself more an electrical futures trader than a GEM speculator.

[Red]

First Order (Monetary) Dynamics

So how can it possibly be done if it is not something that can be remotely monitored? Well it can't. But it can be increasingly approximated over time.

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Basing GEM on electricity absent any GEM/$ exchanges.

1) All miners use the same current POW difficulty, as in bitcoin.
2) The initial mining proof-of-work (POW) difficulty starts with a wild-ass-guess, scaled so that (36,000,000 joules) mines roughly (1 GEM) on current best-in-class mining rigs. Hitting an exact target is not important.
3) Over time, the mean electrical value of GEMs will tend toward the electrical consumption of the most electrically efficient miner. (MHash/j)
4) Left alone, this electrical consumption would tend to decrease over time according to Koomey's law.
5) To return GEM mining to its original electrical consumption constant,
GEM offsets Koomey's law by doubling the proof-of-work difficulty every 1.57 years.
6) However, the difficulty jump is smoothed using scaled 10 minute increases with each new block.
7) Difficulty never declines.

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Constraints:
a) If processor efficiency outpaces Koomey's law, there will be intrinsic inflation. Before: (1 Donut = 1 GEM)  After: (1 Donut > 1 GEM)
b) If processor efficiency falls behind Koomey's law, there will be intrinsic deflation. Before: (1 Donut = 1 GEM)  After: (1 Donut < 1 GEM)

Note: Extrinsic inflation and deflation (over/under mining) will be discussed in the next section.

This intrinsic inflation or deflation will tend to be predictable rather then wildly dynamic. If efficiency isn't following the current Koomey ratio, it is likely following a close cousin.

There exist no automated solution for detecting or remedying intrinsic inflation or deflation. Monitoring processor efficiency requires external human observation. In cases where technology makes extreme deviations from Koomey's predictions, I see only two possibilities. Either, everyone must tolerate the inflation/deflation, or, everyone must tolerate developers modifying the protocol ratio.

Consequences:
a) Mining rigs lose profitability over time. Since difficulty is monotonically increasing, eventually it will cost more in electricity for a given rig to mine then the resulting GEMs can be traded for.
b) Computationally speedy rigs mint faster. Electrically efficient rigs last longer. The electrically efficient displace the electrically inefficient regardless of computational speed.

[Red]

If stability is not why you are mining, I totally get that. I don't have a problem with competitive mining.

I'm just trying to sort out if anyone thinks stability is a feature. Is there a market for such a thing?

I think this is a similar idea to suggester's thread. However, after 18 months maybe sentiments have changed?

[bulanula]

If stability is not why you are mining, I totally get that. I don't have a problem with competitive mining.

I'm just trying to sort out if anyone thinks stability is a feature. Is there a market for such a thing?

I think this is a similar idea to suggester's thread. However, after 18 months maybe sentiments have changed?

Yep. Anyone who sees Bitcoin at $30 then at $5 will think immediately it is a scam. Price stability will make it much more adoptable by merchants etc. to be used as a real currency not just a nerd / speculator toy.

[Red]

Yep. Anyone who sees Bitcoin at $30 then at $5 will think immediately it is a scam. Price stability will make it much more adoptable by merchants etc. to be used as a real currency not just a nerd / speculator toy.

I agree that value stability makes coins seem much more like traditional money to the average user. I'm just wondering if there are any "average users" actually using any of the coins.

Is there a forum anywhere that teaches people how to just use bitcoins to buy stuff? I mean how does the average Joe with a $10 bill learn the wonders of buying a cheeseburger with bitcoins?

[ripper234]

Yep. Anyone who sees Bitcoin at $30 then at $5 will think immediately it is a scam. Price stability will make it much more adoptable by merchants etc. to be used as a real currency not just a nerd / speculator toy.

I agree that value stability makes coins seem much more like traditional money to the average user. I'm just wondering if there are any "average users" actually using any of the coins.

Is there a forum anywhere that teaches people how to just use bitcoins to buy stuff? I mean how does the average Joe with a $10 bill learn the wonders of buying a cheeseburger with bitcoins?

Come on, people, get real.
Bitcoin are still at the very early adopter phase.



This means two things:

1. They are still, very difficult to use, even with the progress we're seeing in the last few months, #1 being wallet encryption. This will change with time.
2. They (IMHO) are still profitable as a long term investment, and this is the prime reason newcomers will start buying/mining them, beyond academic curiosity.

As time passes, we'll see more and more legitimate uses, but it will become progressively easier and safer to do so, and in parallel less lucrative to invest in.

[ripper234]

Yep. Anyone who sees Bitcoin at $30 then at $5 will think immediately it is a scam. Price stability will make it much more adoptable by merchants etc. to be used as a real currency not just a nerd / speculator toy.

I agree that value stability makes coins seem much more like traditional money to the average user. I'm just wondering if there are any "average users" actually using any of the coins.

Is there a forum anywhere that teaches people how to just use bitcoins to buy stuff? I mean how does the average Joe with a $10 bill learn the wonders of buying a cheeseburger with bitcoins?

Come on, people, get real.
Bitcoin are still at the very early adopter phase.



This means two things:

1. They are still, very difficult to use, even with the progress we're seeing in the last few months, #1 being wallet encryption. This will change with time.
2. They (IMHO) are still profitable as a long term investment, and this is the prime reason newcomers will start buying/mining them, beyond academic curiosity.

As time passes, we'll see more and more legitimate uses, but it will become progressively easier and safer to do so, and in parallel less lucrative to invest in.

It is way premature for any attempt at a "completely fair currency" like GEM, because there's no way it could acquire the critical mass of users.
Perhaps after the Bitcoin revolution hits mainstream ... although by then it would be too late, because Bitcoin's value has stablized.

This is why I don't see a future to any new currency that early adopters can't profit from.

[Red]

Bitcoin are still at the very early adopter phase.

I respect this opinion. But that was what everyone was saying when I was here more then a year ago. Bitcoins were 5 for a dollar then.

I am not trying to dog bitcoin. It is what it is, and in that regard it is awesome. Bitcoin was the first master planned scarce COMMODITY. Some people still think bitcoins should be used as money. Others still think it is a highly implausible foundation for monetary policy. 

However, you go on to make a very pragmatic argument.

2. They (IMHO) are still profitable as a long term investment, and this is the prime reason newcomers will start buying/mining them, beyond academic curiosity.

This should be a clue that things are well beyond the early adopter phase. A year ago in that phase people said things like, "I have no idea if this will become anything. but its cool! Why don't we throw all our excess coins in a fountain?" Nothing pragmatic in early adopter sentiments.

As time passes, we'll see more and more legitimate uses, but it will become progressively easier and safer to do so, and in parallel less lucrative to invest in.

Still waiting on "legitimate" uses, but I was encouraged to hear of even "illegitimate" uses like Silk Road. At least some people are trying to use bitcoins as actual money! Where do those folks get their training? I don't see a lot of chatter among them here.

[Red]

I appreciate the direct answer to my question!

It is way premature for any attempt at a "completely fair currency" like GEM, because there's no way it could acquire the critical mass of users.
Perhaps after the Bitcoin revolution hits mainstream ... although by then it would be too late, because Bitcoin's value has stablized.

This is why I don't see a future to any new currency that early adopters can't profit from.

Clearly you are correct. GEM couldn't acquire a critical mass of users recruiting only from this forum.

But what about Silk Road bitcoin users and the like? They are not attempting to profit as early adopters. They are attempting to profit from actual business. Surely they don't like selling $100 of product and only receiving $90 by the time they get the coins to the exchange. (Exaggeration for effect)

[bulanula]

Yep. Anyone who sees Bitcoin at $30 then at $5 will think immediately it is a scam. Price stability will make it much more adoptable by merchants etc. to be used as a real currency not just a nerd / speculator toy.

I agree that value stability makes coins seem much more like traditional money to the average user. I'm just wondering if there are any "average users" actually using any of the coins.

Is there a forum anywhere that teaches people how to just use bitcoins to buy stuff? I mean how does the average Joe with a $10 bill learn the wonders of buying a cheeseburger with bitcoins?

Good point. Maybe someone should create like a guide or something etc. !?

[ripper234]

Bitcoin are still at the very early adopter phase.

I respect this opinion. But that was what everyone was saying when I was here more then a year ago. Bitcoins were 5 for a dollar then.

Amm ... Bitcoin prices a year ago seems to be a fraction of what they're now. BItcoins were 5 dollars then? Where???

2. They (IMHO) are still profitable as a long term investment, and this is the prime reason newcomers will start buying/mining them, beyond academic curiosity.

This should be a clue that things are well beyond the early adopter phase. A year ago in that phase people said things like, "I have no idea if this will become anything. but its cool! Why don't we throw all our excess coins in a fountain?" Nothing pragmatic in early adopter sentiments.

My belief (that Bitcoin is under-valued right now) is obviously not shared by the market. The market thinks its value is $4-5. So, if I'm right, and the market is wrong, Bitcoin will be worth a lot more in ten years.

As time passes, we'll see more and more legitimate uses, but it will become progressively easier and safer to do so, and in parallel less lucrative to invest in.

Still waiting on "legitimate" uses, but I was encouraged to hear of even "illegitimate" uses like Silk Road. At least some people are trying to use bitcoins as actual money! Where do those folks get their training? I don't see a lot of chatter among them here.

Regarding price stability - if any merchant (e.g. Silk Road users) want to user Bitcoin as an anonymous tool right now, but without being exposed to its volatility, they can immediately and automatically sell any Bitcoin they earn. Although ... I admit this is currently not perfect since Bitcoins can be tracked (there isn't yet a good laundry service), so they run the risk of their Mt. Gox account being seized at one point, and further connections made. It's much safe for them not to sell Bitcoins right now, but that mandates a certain exposure to an unstable currency.

I hope it's just a matter of time.

[Red]

I respect this opinion. But that was what everyone was saying when I was here more then a year ago. Bitcoins were 5 for a dollar then.

Amm ... Bitcoin prices a year ago seems to be a fraction of what they're now. BItcoins were 5 dollars then? Where???

I said "5 for a dollar" or 20 cents each. I think the week before bitcoin got slashdotted, the coins were between 500 and 50 for a dollar. There was no exchange, just people making deals in the forum. Meaning, the real "early adopters" were throwing them around like candy.

I'm not saying they'll never go up from their current prices. I just think bitcoin is well past the early adopter section of your bell curve.

Regarding price stability - if any merchant (e.g. Silk Road users) want to user Bitcoin as an anonymous tool right now, but without being exposed to its volatility, they can immediately and automatically sell any Bitcoin they earn. Although ... I admit this is currently not perfect since Bitcoins can be tracked (there isn't yet a good laundry service), so they run the risk of their Mt. Gox account being seized at one point, and further connections made. It's much safe for them not to sell Bitcoins right now, but that mandates a certain exposure to an unstable currency.

I guess this answers my question and supports my premise at the same time.

It seems like few are using bitcoin as a currency, but those who are have to use it like a poor western union. (dollars in, dollars out) If people are not speculators, there seems little reason to hold BTC in your wallet just-in-case you might want to buy something.

[ripper234]

I said "5 for a dollar" or 20 cents each. I think the week before bitcoin got slashdotted, the coins were between 500 and 50 for a dollar. There was no exchange, just people making deals in the forum. Meaning, the real "early adopters" were throwing them around like candy.

I see, my bad.

I'm not saying they'll never go up from their current prices. I just think bitcoin is well past the early adopter section of your bell curve.

I'm a rather vocal spokesmen for Bitcoin among my social circle. I've been blogging about it for the last six months.
I've posted status updates to Facebook and Google+. I talked to a numerous amount of people about it personally.

Still, less than a handful of the people I know actually put any significant money into it. Most of my friends are hackers or geeks in some sense of the way or another, so imagine how little "ordinary Joes" have been exposed to it.

So in my subjective experience, there is still plenty of room for Bitcoin to grow into. Not as a ponzi scheme, but as something even late adopters will benefit from ... but of course, the earlier you join, the higher the rewards ... and risks.

Also, many short-sighted people will continue to lose money by buying in, watching the price decline, and deciding "this is it" and quitting. Bitcoin should be treated as a long-term investment, that you're willing to fully lose, not as something where you can game the market and extract some money from the next fool ... because you can't (on average).

Regarding price stability - if any merchant (e.g. Silk Road users) want to user Bitcoin as an anonymous tool right now, but without being exposed to its volatility, they can immediately and automatically sell any Bitcoin they earn. Although ... I admit this is currently not perfect since Bitcoins can be tracked (there isn't yet a good laundry service), so they run the risk of their Mt. Gox account being seized at one point, and further connections made. It's much safe for them not to sell Bitcoins right now, but that mandates a certain exposure to an unstable currency.

I guess this answers my question and supports my premise at the same time.

It seems like few are using bitcoin as a currency, but those who are have to use it like a poor western union. (dollars in, dollars out) If people are not speculators, there seems little reason to hold BTC in your wallet just-in-case you might want to buy something.

Right now I believe this is true. I think the most important reason to hold Bitcoin right now is as an investment, nothing more. Oh, and because it's fun!
This will change.

[Red]

So how would the reward algorithm look like? Sounds like it's the same concept as this but looked from another angle. What differences in dynamics can you see between both methods?

I think what you are saying is very similar to what I'm suggesting. I see two slight differences.

You are optimizing against computational speed (MHash/s), I'm optimizing against computational efficiency (MHash/ws). (One watt second = one joule) This in practicality is a very minor difference. Moore's Law and Koomey's Law are both exponential and very close cousins.

You are benchmarking against combined instantaneous hashing speed of all nodes. I am benchmarking against time. I think in both cases, we are both making the same presumption that future technology improvements follow Moore's/Koomey's exponential curve.

I wish I could tell you the differences I see. Quite frankly, I didn't have a complete grasp of what you were suggesting at the time. That was mostly because I didn't have a complete grasp of what I am suggesting at that time either!   You're curve idea might very well turn out to be better.

There is lots I don't like about what I'm suggesting. Personally, I hate the idea of burning all that electricity just to make a GEM. However, once I realized the math might lead to stability, I thought it might make a good starting place for discussion.

7) Difficulty never declines.

What's the rationale behind this?

I'm basically benchmarking efficiency against time. Time doesn't go backwards so efficiency never gets worse. Once a mining rig is built that can mine 1 GEM for (X) joules, that rig will never mine 1 GEM at (>X) joules in the future.

Won't this make extrinsic inflation extremely hazardous?  

I deal with that in the next section. Basically by adding a transaction fee to NULL, to exert constant downward monetary pressure. And subsidies to compensate for the fee when it would be counter productive.

Are we ready for that discussion? I'd like to have it if only to compare and contrast with your idea. I think each could help clarify the dynamics of the other, possibly leading to easier explanations of why one is better than the other.

[Red]

So in my subjective experience, there is still plenty of room for Bitcoin to grow into. Not as a ponzi scheme, but as something even late adopters will benefit from ... but of course, the earlier you join, the higher the rewards ... and risks.

OK, admit it. What you wrote was funny! It's not a ponzi scheme. It's multi-level marketing!

[ripper234]

So in my subjective experience, there is still plenty of room for Bitcoin to grow into. Not as a ponzi scheme, but as something even late adopters will benefit from ... but of course, the earlier you join, the higher the rewards ... and risks.

OK, admit it. What you wrote was funny! It's not a ponzi scheme. It's multi-level marketing!

Imagine you're now in Feburary 2004:

So in my subjective experience, there is still plenty of room for Facebook to grow into. Not as a ponzi scheme, but as something even late adopters will benefit from ... but of course, the earlier you join, the higher the rewards ... and risks.

Is this better?

[Etlase2]

There was a risk to joining facebook in 2004? There was a risk to joining bitcoin in 2009?

[ripper234]

There was a risk to joining facebook in 2004? There was a risk to joining bitcoin in 2009?

There was a risk in investing money and time in Facebook's development.

Right now, if you'll ask 99 out of 100 people, they'll say "there's a risk to invest in Bitcoin in 2011. It's a ponzi scheme. It will not be worth anything within a few years.".

So yes, there's a risk, and appropriate rewards. My subjective belief is that (Risk X Potential Reward) in Bitcoin currently outweighs any other investment I know.

[Etlase2]

There was a risk in investing money and time in Facebook's development.

So how does anyone other than satoshi bear that risk for bitcoin? How do people joining a website or mining some coins for a couple dollars in electricity bear a risk? ohnoos I wasted $3 to mine 50k coins...

So yes, there's a risk, and appropriate rewards. My subjective belief is that (Risk X Potential Reward) in Bitcoin currently outweighs any other investment I know.

And your subjective belief is completely unclouded by the fact that for that reward to increase, bitcoin needs more suckers who need to be convinced that they too will earn this wonderful return.

<ripper furiously responds with a link to the bitcoin wiki that adamantly states that bitcoin is not a pyramid/ponzi scheme as proof that it's not!>