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Author Topic: RFC: Creating a More Widely Adopted Digital Currency  (Read 1807 times)
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October 18, 2011, 07:42:33 PM
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BitCoin was a trailblazer in the field of digital currency.  However, like many 1.0 software releases, issues encountered once the software was released to the public and exposed to a much wider user base exposed unintentional effects and brought into question some of the key design decisions made by its author(s), particularly the emphasis on anonymity of transactions instead of the “security” of transactions.  This RFC proposes some high level changes that address a few of the problems that inhibit Bitcoin from being more widely adopted; please respond with comments or additional RFCs.  The issues I see are:

1)   Endpoint security
2)   User/Transaction “Trust”
3)   High variance in exchange rate over time

Endpoint Security
The reports of “bitcoin malware” and significant bitcoin thefts raised concerns about the fact that bitcoin “wallets” do not require a private key or PIN to initiate transactions.  It is the difference between credit card or cash transactions, which do not require any “password,” and debit card transactions, which require a PIN that would prevent a thief from being able to use a stolen card and often have a person’s picture on them.  Credit card companies can operate the way they do because they have sophisticated fraud countermeasures that take into account many factors including the location, type, and amount of each transaction before authorizing it.  Cash is often stolen, even at great risk and threat of incarceration to the thief.  Since a full anti-fraud heuristic would be impossible to implement, the key question is whether most people want anonymous “digital cash” or something more like a “digital debit card.”

If you go to local merchants, you will notice that fewer and fewer people are paying for their purchases with cash.  They appreciate the convenience of credit/debit cards and the security that comes from knowing they are not liable for fraudulent transactions.  To offer that security, there are three key changes that would need to be made to Bitcoin:

1)   Require a password to be entered before each transaction can be initiated
2)   Authenticate each user’s identity with a certificate authority (more details on this later) at the time a transaction is initiated
3)   Empower certificate authorities to provide password reset services, so balances are not lost if the password is lost (to do this, merely encrypting the wallet with a password doesn’t work, instead the wallet should be encrypted/decrypted by the product of a successful authentication request to the CA)

User/Transaction “Trust”
Given the irrevocability of transactions, you must have complete trust in your counterparty to transact with them using Bitcoin.  In the “physical cash” world, you are both in the same location and know each other’s identity.  You can call on a shared set of police/courts to adjudicate in the case of dishonesty.  No such recourse exists in a Bitcoin transaction, which could involve people in different countries misrepresenting their identity.  Having a set of “trusted” certificate authorities (similar to those that offer SSL certs) that perform identity verification and can provide limited personally identifiable information to counterparties can allow people to make better informed decisions prior to agreeing to participate in a transaction.  To some extent, this is already happening in the Bitcoin universe with the Escrow services.  But, there is too much friction in using an escrow service for every transaction (in the offline world, it is only used for higher value transactions for this reason).  Identity verification is lower friction and could provide the trust needed to encourage more transaction activity.

High Variance In Exchange Rate
In my opinion, the high variance in Bitcoin exchange rates is attributable to three factors: speculation, limited liquidity, and a monetary supply that changes without any regard to the exchange rate.

To discourage speculation, I would recommend that there be a time based “inactivity” fee associated with currency balances that are not being used in transactions (with protections against trading circles, etc.).  By discouraging accumulation of coins, you also have the beneficial side effect of the transaction record better reflecting actual currency for goods or services transaction history rather than non-transaction related currency exchanges.

To address the liquidity issue (particularly given that the “inactivity” fee will discourage trading), there should be system in place for the election of special “market-makers” that are exempted from the inactivity fee in return for providing a minimum level of liquidity to the market.  Unlike financial markets, where the market makers can exit the market without penalty in times of uncertainty, these market makers will lose their inactivity fee exemption if the velocity of their trading activity declines below a certain level.  That should provide a significant incentive to provide continuous liquidity.

The monetary supply problem is more complex.  I like the fact that the Bitcoin monetary supply cannot be arbitrarily expanded or reduced by a central authority.   However, the current decaying expansion formula seems overly simplistic.  Given that the complete transaction record in the Bitcoin system is effectively known, as the prevailing exchange rates would be (based on special transaction records for market-maker activity), and the question is how the system should modulate the monetary supply, it would seem that you can somehow create a formulaic relationship to enforce consistent exchange rates across a basket of global currencies or commodities through modulation of the monetary supply.  The system would be its own central bank and since the relationship to those currencies and/or commodities is “hard coded” with a target inflation rate of 0%, there is no uncertainty about how the system would behave.  The inactivity fee and currency discovery rate would modulate on a periodic basis with the goal of assuring that the currency as a whole experiences neither long term inflation nor deflation.  This would also provide confidence to the market makers.
------
I’ve only had a couple hours to think about this, and I’m sure active forum members have thought about these issues far more deeply than I have.  I just wanted to start the discussion about how to iterate on Bitcoin to create a more widely adopted digital currency.
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October 18, 2011, 07:57:25 PM
 #2

- Bitcoin is only in version 0.4. It's beta software, not even a "1.0" version yet.

- Version 0.4 does have wallet encryption. It now requires a password to send coins.

- Your idea to "remove speculation" is absurd. Speculation is good, both up and down - it's the ability of people to bring pricing information forward into the present. It's crucial for efficient markets to be able to adjust prices based on time-preferences and "value wagering." If you succeed in riding a currency of speculators you've succeeded in making it worthless.

- Your proposal to charge a fee on inactive coins is absurd. With no ability to save coins, there is little ability to desire them in the first place. Saving is a healthy part of an economy, and market price fluctuations due to savers and spenders provides important indications for how producers ought to channel their scarce resources.

- Your proposal to manipulate market price by accelerating or slowing inflation is also absurd. Again, prices are our friends. Stop messing with prices - yours is the same mistake made by every government who tries to centrally plan its economy.


Bitcoin remains king - I have yet to hear a proposal for a better-designed currency, and to surpass Bitcoin would require not just marginal improvements, but vast ones.

Don't be so quick to dismiss a beautifully-working system in favor of a completely untested hypothetical improvement. Bitcoin will be more widely adopted with time - the ecosystem being built around it is very much alive and strengthening each month
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October 18, 2011, 08:01:13 PM
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- Bitcoin is only in version 0.4. It's beta software, not even a "1.0" version yet.

- Version 0.4 does have wallet encryption. It now requires a password to send coins.

- Your idea to "remove speculation" is absurd. Speculation is good, both up and down - it's the ability of people to bring pricing information forward into the present. It's crucial for efficient markets to be able to adjust prices based on time-preferences and "value wagering." If you succeed in riding a currency of speculators you've succeeded in making it worthless.

- Your proposal to charge a fee on inactive coins is absurd. With no ability to save coins, there is little ability to desire them in the first place. Saving is a healthy part of an economy, and market price fluctuations due to savers and spenders provides important indications for how producers ought to channel their scarce resources.

- Your proposal to manipulate market price by accelerating or slowing inflation is also absurd. Again, prices are our friends. Stop messing with prices - yours is the same mistake made by every government who tries to centrally plan its economy.


Bitcoin remains king - I have yet to hear a proposal for a better-designed currency, and to surpass Bitcoin would require not just marginal improvements, but vast ones.

Don't be so quick to dismiss a beautifully-working system in favor of a completely untested hypothetical improvement. Bitcoin will be more widely adopted with time - the ecosystem being built around it is very much alive and strengthening each month


Injecting these highly subjective an unsupported politics into software will be the downfall of cryptocurrencies.

OP has some good ideas
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October 18, 2011, 08:06:14 PM
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I have a discussion thread on creating an alt-currency with value stability. Perhaps you'd like to comment.

Endpoint security is a simple mod. Private keys shouldn't be kept where they are so accessible.
User Trust (I believe) should be handled outside the system. However there is nothing that prevents parties from turning their address's public key into a full certificate signed by an existing certificate authority.
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October 18, 2011, 08:18:23 PM
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Again, prices are our friends. Stop messing with prices - yours is the same mistake made by every government who tries to centrally plan its economy.

There needs to be some level of price stability to encourage actual commerce.  Given the wildly fluctuating value of Bitcoin today, it is impossible to use it for commerce at scale if inputs need to be purchased using other currencies.  Even if it were possible, long-term hedging would be incredibly expensive.  If your goal is to create a new asset class that has value, which derives almost exclusively from speculation, Bitcoin is perfect and you have already succeeded.  But, how much actual commerce occurs using Bitcoin?

Usually, the reason why governments intervene to affect prices is to provide the stability and confidence that businesses need to be able to use those currencies for commerce.  Hyperinflation and deflation have real deleterious effects on commercial activity and creating a "virtual economy" that suffers from either problem is most definitely a non-optimal solution.
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October 18, 2011, 08:31:34 PM
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There needs to be some level of price stability to encourage actual commerce. 

The manner in which you phrase that indicates you believe price stability comes from "effective central control."  On the contrary, "price stability" is a natural occurrence in any market that is left alone to mature.

It is true that a currency (and those using it) benefit from price stability. But if such stability is "crafted" or "managed" to occur, then it is counter-productive and will likely lead to ruin.

Bitcoin - left alone - will find price stability. Any attempt to force it is hubris and will cause market distortions.
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October 18, 2011, 08:34:51 PM
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Injecting these highly subjective an unsupported politics into software will be the downfall of cryptocurrencies.

OP has some good ideas

I mentioned only one quick reference to politics in that post... the rest was economic reasoning (which you're welcome to refute). Further, I'm not "injecting" anything into any software. My comments derive from what Bitcoin is, but Bitcoin isn't derived from my comments.

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October 18, 2011, 08:37:39 PM
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In due time, prices will stabilize. We still need much much more infrastructure for Bitcoins to become mainstream, which will take time to build. What we DON'T need is the interventionism / centralization that prevails in fiat currencies...

I tend to agree with this guy's projection :

http://bitcoin-trader.blogspot.com/2011/10/three-stages-of-bitcoin.html

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October 18, 2011, 08:47:03 PM
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What we DON'T need is the interventionism / centralization that prevails in fiat currencies...

I'm not proposing stability based on interventionism or centralization. I'm proposing stability based on inherent electrical cost in Joules. The cost comes from POW difficulty just like with Bitcoin, but the difficulty is scaled over time by Koomie's law.

That means a variable number of coins are created based upon mining interest. That is kept in check (as it is in Bitcoin) by very real electrical expenses. Miners compete based upon the coin price of the moment. If the exchange price starts to rise, they will mint and sell before other drive the price back down. If the exchange price is below cost, they stop minting.

Clients only see a price that hovers around the break even point of the most efficient miners. The can put $10 into their wallet and know it will buy $10 worth of stuff in the future.
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October 18, 2011, 08:47:34 PM
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There needs to be some level of price stability to encourage actual commerce. 

The manner in which you phrase that indicates you believe price stability comes from "effective central control."

If you go back to my original post, you will see that I said: "I like the fact that Bitcoin has no central authority."  But, that doesn't discount the necessity of price stability to encourage actual commerce.  My proposal involves "central control" by algorithm; I hope that doesn't offend your political sensibilities and cause you to protest with cries of "End the 0110101001010!" :-).
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October 18, 2011, 09:00:23 PM
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Bitcoin remains king - I have yet to hear a proposal for a better-designed currency, and to surpass Bitcoin would require not just marginal improvements, but vast ones.

+100


For that single reason I've decided to only invest time and money into Bitcoin.
I'm in full support of forking and alternate currencies, but Bitcoin will be the only one that gets my money and the majority of my time.
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October 18, 2011, 09:14:54 PM
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to surpass Bitcoin would require not just marginal improvements, but vast ones.

It is not so much about "improvements" as it is about marketing spin. The "best" currency is the first one a billion people can (1) understand and (2) trust.

To me, only place Bitcoin has issues is in convincing the next billion people they *are required* to purchase their future currency from the relatively view people who got to Bitcoin first. Why that needs to be a *requirement* is what will be tough for most future newcomers to understand.

If each of these one billion people brings only $1 each, their billion dollar investment dwarfs all the investments made by all of those who came before. I find people grasp this intuitively.
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October 18, 2011, 09:16:32 PM
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If you go back to my original post, you will see that I said: "I like the fact that Bitcoin has no central authority."  But, that doesn't discount the necessity of price stability to encourage actual commerce.  My proposal involves "central control" by algorithm; I hope that doesn't offend your political sensibilities and cause you to protest with cries of "End the 0110101001010!" :-).

Touche... that was a good joke =)
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October 18, 2011, 09:27:36 PM
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- Your proposal to charge a fee on inactive coins is absurd. With no ability to save coins, there is little ability to desire them in the first place. Saving is a healthy part of an economy, and market price fluctuations due to savers and spenders provides important indications for how producers ought to channel their scarce resources.
This reminds me of a thought I had...price as a consumption indicator in a commodity currency.  It's often said that the interest rate is used as a signal to markets whether there is too much current consumption relative to future consumption (whether people should be saving more vs spending).  When interest rates are low, there are too many savers and not enough spenders.  When interest rates are high, there aren't enough savers.  Of course, central planning to manipulate interest rates screws up these signals.

But in a commodity currency like bitcoin where you have inelastic supply, doesn't the price (or more generally purchasing power) also serve as a similar indicator?  When the price is low, it's an indicator to spend less and accumulate more (trading current consumption for future consumption).  Conversely, when the price is high, it's an indicator to spend more and accumulate less.  Of course, at an individual level, it makes sense (buy low, sell high).

Follow on: and wouldn't the conclusion then be that since price is a valuable indicator, you wouldn't want to artificially mess with it (i.e. to provide artificial stability)...the more I think about it, the more I'm convinced that trying to create a stable currency of any kind is folly.  It's folly when they try and do it with the USD, and it's folly to try and do it with bitcoin.  The first question you have to ask is "stable against what?" ...better off to just have a price index and set your prices using it rather than any currency used for exchange (i.e. sell your widgets for the cost of 2 loaves of bread..or the cost of your input materials + 5%).

(gasteve on IRC) Does your website accept cash? https://bitpay.com
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October 18, 2011, 09:36:31 PM
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- Your proposal to charge a fee on inactive coins is absurd. With no ability to save coins, there is little ability to desire them in the first place. Saving is a healthy part of an economy, and market price fluctuations due to savers and spenders provides important indications for how producers ought to channel their scarce resources.
This reminds me of a thought I had...price as a consumption indicator in a commodity currency.  It's often said that the interest rate is used as a signal to markets whether there is too much current consumption relative to future consumption (whether people should be saving more vs spending).  When interest rates are low, there are too many savers and not enough spenders.  When interest rates are high, there aren't enough savers.  Of course, central planning to manipulate interest rates screws up these signals.

But in a commodity currency like bitcoin where you have inelastic supply, doesn't the price (or more generally purchasing power) also serve as a similar indicator?  When the price is low, it's an indicator to spend less and accumulate more (trading current consumption for future consumption).  Conversely, when the price is high, it's an indicator to spend more and accumulate less.  Of course, at an individual level, it makes sense (buy low, sell high).

Yeah Steve I think you are correct.

Think of it like this with a commodity currency - when the price falls, money is "cheap" and goods are "expensive." It means buy money and don't buy goods... aka save instead of spend.  When the price rises, money is "expensive" and goods are "cheap."  So, go out and spend more on goods. You can see both are self-corrective phenomenons (this is also why the "deflation death spiral" is a fallacy).

The dynamic gets very clear when you consider money as only one of many available commodities. Buy things when they're cheap, sell them when they're expensive. Works for money the same as any other good in an economy where the money supply is not centrally-planned.

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October 18, 2011, 09:37:49 PM
 #16

A lot of people say that failures on bitcoin businesses are bitcoin failures but bitcoin itself has sound technology that can advance with new cross-compatible software. I've learnt that many so called problems with bitcoin are problems with debit/credit cards too such as the trust problem. Third party verification (With the appropriate software) is an interesting thing I learned about which could give bitcoin another edge on debit/credit cards.

Bitcoin could do with some strong professional development to take it to the next level. The software can be free and open-source but if a business can control the distribution they essentially have majority control on the software (In various manners possible) and could make money from it.

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October 19, 2011, 09:20:35 AM
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Follow on: and wouldn't the conclusion then be that since price is a valuable indicator, you wouldn't want to artificially mess with it (i.e. to provide artificial stability)...the more I think about it, the more I'm convinced that trying to create a stable currency of any kind is folly.  It's folly when they try and do it with the USD, and it's folly to try and do it with bitcoin.  The first question you have to ask is "stable against what?" ...better off to just have a price index and set your prices using it rather than any currency used for exchange (i.e. sell your widgets for the cost of 2 loaves of bread..or the cost of your input materials + 5%).

I think you just attained economic enlightenment! ;-)

free markets work.
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October 19, 2011, 11:36:45 AM
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Follow on: and wouldn't the conclusion then be that since price is a valuable indicator, you wouldn't want to artificially mess with it (i.e. to provide artificial stability)...the more I think about it, the more I'm convinced that trying to create a stable currency of any kind is folly.  It's folly when they try and do it with the USD, and it's folly to try and do it with bitcoin.  The first question you have to ask is "stable against what?" ...better off to just have a price index and set your prices using it rather than any currency used for exchange (i.e. sell your widgets for the cost of 2 loaves of bread..or the cost of your input materials + 5%).

I think you just attained economic enlightenment! ;-)

free markets work.

+1

"Money needs to be depoliticized, and the time has come for the separation of money and state to be accomplished."
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October 19, 2011, 03:53:42 PM
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+1, and +2 for ptshamrock's sig Tongue
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October 19, 2011, 04:07:26 PM
 #20

my 2 bitcents:

If you think you have a great idea for a better 'bitcoin'  then fork it and go, the market will decide if it is better or not..

(hey, there is that free market word again Wink )

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