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Author Topic: What would be the most effective way to stabilize BTC price?  (Read 8212 times)
P4man
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October 30, 2011, 02:13:39 PM
 #21

IM not sure it would be so hard. The exchange has your identity (if you trade any non trivial amounts), and bitcoins are perfectly traceable. The issue with regulating bitcoins is usually identity, but trading on a (regulated) exchange eliminates that problem. I suspect it would actually be easier to administer than most other commodities.

Of course there would be pitfalls; trade could move quickly to unregulated markets, although Im unsure how much of an effect that would have on the regulated markets.

Anyway, I didnt mean to say regulating would solve the issue in reality, but its one of the few theoretical possibilities at least. A more widespread adoption of bitcoin IMO will not solve the problem, and might even make it worse in the short or medium term if its going through a phase of rapid growth.

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October 30, 2011, 02:59:20 PM
 #22

Of course there would be pitfalls; trade could move quickly to unregulated markets, although Im unsure how much of an effect that would have on the regulated markets.

It would make it as if it were unregulated. Well, honestly, if you could coordinate a regulatory system world-wide, then it would have some influence towards your desired effect. It would have other side-effects as well though (Why would an entity with such power settle with only regulating the exchange?), to the point that there wouldn't be any reason to use a crypto-currency at all in the regulated side of the market. So, IMHO, if it weren't inevitable for the crypto-currency market to stay unregulated, we wouldn't need it in the first place.

Anyway, I didnt mean to say regulating would solve the issue in reality, but its one of the few theoretical possibilities at least. A more widespread adoption of bitcoin IMO will not solve the problem, and might even make it worse in the short or medium term if its going through a phase of rapid growth.

I don't think there can be a concrete solution in the short or medium term that doesn't conflict with the currency's philosophy, and solutions that conflict with it wouldn't work for the reasons mentioned above. Hopefully, with widespread adoption, there will be enough groups with conflicting interests so that their vectors would somewhat cancel out to provide more coherent momenta.
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October 31, 2011, 03:02:39 AM
 #23

Wow, this topic proved to be super interesting.

I'm a little curious given the conversations about market makers and speculators whether an increase in options trading could stabilize daily price fluctuations by providing market driven datapoints in advance and expectations for trade price.  Options and/or futures trading has frequently done just that for other commodities. 

Although in the rare case that goldman sachs decides to manipulate the market, they can do so in any regard. 

There also aren't consumptive reasons for futures trading... except it could actually be used to insulate exchange factors for BTC based commerce.  If you had a very fluid futures market, there might be a mechanism for a measure of price stability and as such, less risk for selling services in BTC.  Obviously futures do not guarantee stability and without consumption based demand targets might be an incredibly risky investment for individual capitalists... just kind of thinking out loud.

I suppose it would be beneficial for the health of the BTC market that they are used actively in commerce.  It would be incredibly costly for any company that sells physical goods to not peg on the dollar given market instability.

Seems a bit of a catch 22... prices won't stabilize much without trade occurring within BTC and doing so is incredibly risky for any businesses making purchases with fiat.
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October 31, 2011, 07:18:20 AM
 #24

  Options and/or futures trading has frequently done just that for other commodities. 

They have done the exact opposite, they jacked up prices and turned commodity markets in to casino's to the point where sellers and end users of those commodities no longer use those markets to hedge against price swings. More on that, and some startling figures here:

http://triplecrisis.com/food-price-volatility/

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Seems a bit of a catch 22... prices won't stabilize much without trade occurring within BTC and doing so is incredibly risky for any businesses making purchases with fiat.

Correct,  except IMO prices wouldnt stabilize even if trade picked up considerably. All it would achieve is higher exchange rate followed by more bubbles and bursts as new speculators gamblers enter this booming market.

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October 31, 2011, 08:16:10 AM
 #25

Options and/or futures trading has frequently done just that for other commodities.

Not really...  Futures and options help protect you against price instability, but they don't actually improve (and can harm) the stability of the overall market.


Seems a bit of a catch 22... prices won't stabilize much without trade occurring within BTC and doing so is incredibly risky for any businesses making purchases with fiat.
Correct,  except IMO prices wouldnt stabilize even if trade picked up considerably. All it would achieve is higher exchange rate followed by more bubbles and bursts as new speculators gamblers enter this booming market.

+1.  I think this is a design flaw in Bitcoin's economics.

My proposed solution is to use dynamic inflation levels (by increasing coins generated in mining) to prevent excessive price growth against a currency basket until there's enough stored value to provide inherent stability.  This would eliminate: 1) wild speculation in the form of "you need to buy as many coins as you can NOW to own a slice of the world's future currency!"; 2) the "early adopters are unfairly benefiting from the pyramid" problem.

Speculators don't like it because my altcoin is only mildly deflationary during the growth phase (as opposed to Bitcoin's highly deflationary nature).  However, I think it will allow a much more stable value store - by undermining speculative bubbles, you don't have to worry about buying in at the top and getting screwed like the guys who bought BTC at $30.

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October 31, 2011, 08:23:38 AM
 #26


My proposed solution is to use dynamic inflation levels (by increasing coins generated in mining) to prevent excessive price growth against a currency basket until there's enough stored value to provide inherent stability.

Interesting idea. But how would you cope with deflation?

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October 31, 2011, 09:21:58 AM
 #27

I assume you mean devaluation.

Short answer: Same as Bitcoin: you don't.  Smiley  You can't prevent devaluation of an unbacked currency if everyone decides to abandon it.

Longer answer: I would use a feedback mechanism to detect large devaluations and temporarily reset the target exchange rate to a lower level during the rebound.  This is to prevent losing control of the speculation-damping mechanism.  So, after a crash, it will gradually rise back to the target exchange rate, instead of having a sharp rebound.  (This is a bit oversimplified.  Instead of switching to a "recovery algorithm", it would just be implemented as a weighting factor in the regular inflation-rate algorithm.)

This would actually deal with the current situation better than Bitcoin: during rapid devaluation, it would greatly reduce the generated coins to much lower than 50BTC per block, thus reducing the devaluation rate.  It wouldn't prevent a blowoff as large as we've had the last few months, but the goal is to never have a bubble that big in the first place.

Overall, this would be a very heavily-smoothed, slow-responding mechanism.  This is not meant to provide short term stability or hold a specific exchange rate.  It is only mean to respond to long term trends, to prevent the get-rich-quick problems.

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October 31, 2011, 10:13:12 AM
 #28

Drastically reducing the block rate could leave the network vulnerable though.. I also dont quite see how you would put this in code, I mean, who will determine the exchange rate? But its an interesting idea nonetheless.

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October 31, 2011, 10:55:26 AM
 #29

The target block rate wouldn't change.  Only the number of coins generated per block would change.

Mining is a great technique for decentralized consensus.  My idea is to mine the exchange rate into the block chain.  Miners can use any source they want.  The rest of the network would evaluate the price quote.  A little tolerance would be allowed due to different data sources, but blocks with obviously wrong quotes would not be relayed, and the next miner would fork the chain from before the block with the lie.

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October 31, 2011, 11:34:15 AM
 #30

The target block rate wouldn't change.  Only the number of coins generated per block would change.

So therefore the profits of the miners, and therefore the hashrate, which could leave the network vulnerable.

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Mining is a great technique for decentralized consensus.  My idea is to mine the exchange rate into the block chain.  Miners can use any source they want.  The rest of the network would evaluate the price quote.  A little tolerance would be allowed due to different data sources, but blocks with obviously wrong quotes would not be relayed, and the next miner would fork the chain from before the block with the lie.

Woha. Out of the box thinking there Smiley. Not sure this is a good idea though. Miners would have no incentive to set honest exchange rates, they want to maximize their ROI. They will collude to manipulate it and the result could be far worse than what we have now.


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October 31, 2011, 11:39:48 AM
 #31

To think that stability will be found at a single digit 'floor' is beyond absurd.

Indeed. It makes holding bitcoins without engaging into short term speculative hysteria so much more rewarding.


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October 31, 2011, 12:17:32 PM
 #32

Historical charts show quite a bit stability between 0.06 and 0.07  Roll Eyes

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October 31, 2011, 12:40:26 PM
 #33

So therefore the profits of the miners, and therefore the hashrate, which could leave the network vulnerable.

Correct.  That's one reason that the inflation rate algorithm has to respond slowly and smoothly.  Gradual changes don't break the network - we've seen a 10x devaluation of Bitcoin over the last 4 months, greatly cutting into mining profits, but the difficulty is able to drop fast enough to compensate.


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Woha. Out of the box thinking there Smiley. Not sure this is a good idea though. Miners would have no incentive to set honest exchange rates, they want to maximize their ROI. They will collude to manipulate it and the result could be far worse than what we have now.

That's why the relaying nodes get a veto: they drop dishonest blocks.  Miners don't want their blocks to be orphaned, so they have incentive to mine blocks that get the best propagation possible.  In fact, getting price quotes from several sources and averaging them will lower their orphaned block rate by reducing the chance that a relay node using a different quote source will drop their block.

It's possible the relay network could be subverted by a large number of colluding relay nodes.  Thus there's a second check:  future miners refuse to include dishonest blocks in newly mined blocks.  If you want your generated coins to mature, your blocks have to be legitimate.

To prevent a 51% collusion attack, a third safety is possible: create a "decentral bank".  This would be a second mining system where people perform proofs-of-work solely to manage monetary policy, which means authenticating price quotes and the inflation rate.

The fourth safety is the strongest: anyone can verify that the price quotes in the block chain are correct, and the inflation rate responds very slowly and smoothly.   If it becomes apparent that the system is being gamed, we'll have time to figure out why and how before coins start being generated excessively. We then release a new version that adjusts whatever is necessary to close the loophole.  In the worst case, we revert to 50BTC per block.

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October 31, 2011, 01:00:41 PM
 #34

So therefore the profits of the miners, and therefore the hashrate, which could leave the network vulnerable.

Correct.  That's one reason that the inflation rate algorithm has to respond slowly and smoothly.  Gradual changes don't break the network - we've seen a 10x devaluation of Bitcoin over the last 4 months, greatly cutting into mining profits, but the difficulty is able to drop fast enough to compensate.

But your proposed system would amplify the problem many fold. If you'd have a long period of sustained devaluation, your algorithm would or should approach zero coins per blocks, essentially making all mining unprofitable. Thats very different as with bitcoin. With bitcoin the hashrate follows the exchange rate, it will never approach zero unless the price of the entire chain approaches zero. In your system the hashrate would follow the derivative (in the mathematical sense) of the exchange rate, and approach zero with just the smallest constant devaluation. Sounds very risky to me.

Moreover, although this is only a secondary effect, but with bitcoin you still get to mine for those 50BTC per 10 minute, and regardless of their value and profitability, Im sure some miners will speculate on future valuation gains. So you will see  people mining bitcoins even if its not profitable, as a form of speculation,  but if you cant even mine any decent amount of coins as in your proposed system, then pretty much no one would.

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To prevent a 51% collusion attack, a third safety is possible: create a "decentral bank".  This would be a second mining system where people perform proofs-of-work solely to manage monetary policy, which means authenticating price quotes and the inflation rate.

I like that idea better. Although you would need an incentive for those  miners. One that doesnt create reevalution Smiley.

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The fourth safety is the strongest: anyone can verify that the price quotes in the block chain are correct, and the inflation rate responds very slowly and smoothly.   If it becomes apparent that the system is being gamed, we'll have time to figure out why and how before coins start being generated excessively. We then release a new version that adjusts whatever is necessary to close the loophole.  In the worst case, we revert to 50BTC per block.

Hmmm..  not much of a solution IMHO. You're saying if you dont like the monetary policy, then fork, and hope the rest will follow. You've clearly given this some thought, you found nothing better ?

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October 31, 2011, 02:09:38 PM
 #35

But your proposed system would amplify the problem many fold. If you'd have a long period of sustained devaluation, your algorithm would or should approach zero coins per blocks, essentially making all mining unprofitable. Thats very different as with bitcoin.

Miners will always earn transaction fees, so it will never hit zero.  We can also set a minimum reward to guarantee security during an uncontrollable crash.

In Bitcoin, the 50BTC per block only lasts another year or so; then your earnings are cut in half.  It keeps decreasing in the future.  Will Bitcoin still be secure once we're past the initial currency distribution phase?

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Quote

To prevent a 51% collusion attack, a third safety is possible: create a "decentral bank".  This would be a second mining system where people perform proofs-of-work solely to manage monetary policy, which means authenticating price quotes and the inflation rate.

I like that idea better. Although you would need an incentive for those  miners. One that doesnt create reevalution Smiley.

That's included, but I didn't want to go into it here since it's a pretty complicated subject and better suited to the Alternate Cryptocurrencies section.  I'm trying to stay somewhat on the "stability" topic.  Smiley

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Hmmm..  not much of a solution IMHO. You're saying if you dont like the monetary policy, then fork, and hope the rest will follow. You've clearly given this some thought, you found nothing better ?

You can't make major changes just because we don't like it - the fork wouldn't be followed.  This option only works if the system is clearly broken and a fix is widely agreed to be necessary - in which case it will be quickly adopted.  Again, have a look at Bitcoin for precedent: with the rise in price, 0.01 transaction fees were becoming a burden; Bitcoin 3.23 changed it to 0.0005.  Or look at the plan if SHA256 is broken: cut off block chain at whichever block the developers consider to be the last before the break, change to a new hashing algorithm, then resume the network with the new client.

That's just the nature of distributed networks.  If you can convince a majority of the network that your change is necessary, it's adopted.  If you can't, they go on without you. 

In any case, the fourth "nuclear option" safety is only invoked if we fail at getting the design right.  The better solution is carefully tuning the algorithm so it can't be gamed in the first place.

Also: the dynamic inflation is only intended to get us through the initial growth phase.  If this works as intended, that value growth will be much more even than Bitcoin's price chart.  If it takes off as a currency there will be a very large number of coins available to miners for a long time; then the goal is to gradually weaken the stabilization as the market cap grows.  If it ever becomes so large that it becomes a reserve currency it will end up completely floating; the end game would either be a fixed money supply (all mining profits from fees) or a small, fixed rate of inflation.  (There are other options, but again it's well beyond the scope of this thread.)

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October 31, 2011, 02:42:03 PM
 #36

Miners will always earn transaction fees, so it will never hit zero. 

Even with bitcoin, transaction fees might as well be zero atm. YACC (yet another crypto currency) will take forever to just reach current bitcoin status, becoming that much more popular than bitcoin today, so that miners could live off transaction fees seems utopian.

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In Bitcoin, the 50BTC per block only lasts another year or so; then your earnings are cut in half.  It keeps decreasing in the future.  Will Bitcoin still be secure once we're past the initial currency distribution phase?

At least Bitcoin will be secure for several years to come, as secure as its value rather than its growth, and have a chance to grow as an economy, while being secure. If transactions dont pick up over the next 4 or 5 years to keep enough miners in business, well, it probably doesnt matter anyway. But unlike bitcoin,  I dont think your scheme would overcome the first few years while being even remotely secure, and that insecurity will have an impact on adoption. Catch 22.

You have some good idea's, but I dont think it would work

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October 31, 2011, 03:22:57 PM
 #37

That's why the relaying nodes get a veto: they drop dishonest blocks.  Miners don't want their blocks to be orphaned, so they have incentive to mine blocks that get the best propagation possible.  In fact, getting price quotes from several sources and averaging them will lower their orphaned block rate by reducing the chance that a relay node using a different quote source will drop their block.

It's possible the relay network could be subverted by a large number of colluding relay nodes.  Thus there's a second check:  future miners refuse to include dishonest blocks in newly mined blocks.  If you want your generated coins to mature, your blocks have to be legitimate.

To prevent a 51% collusion attack, a third safety is possible: create a "decentral bank".  This would be a second mining system where people perform proofs-of-work solely to manage monetary policy, which means authenticating price quotes and the inflation rate.

The fourth safety is the strongest: anyone can verify that the price quotes in the block chain are correct, and the inflation rate responds very slowly and smoothly.   If it becomes apparent that the system is being gamed, we'll have time to figure out why and how before coins start being generated excessively. We then release a new version that adjusts whatever is necessary to close the loophole.  In the worst case, we revert to 50BTC per block.

While these kinds of ideas are interesting, they are rather forced. The system I proposed for EnCoin encourages the people using the system to do whatever is best for the system. Separate mining from trading so that mining does not secure the network. Use a merchant-based system of reputation that is increased only via economic activity in the form of losing money to a transaction fee that is refunded based on increased levels of reputation. As more and more merchants want their transaction fees refunded, the limited pool of reputation awarded per day becomes more and more difficult to obtain, thus making it harder and harder for a malicious group from gaining >50% of the reputation. This reputation is used to secure transactions and mining blocks rather than hashing power. Even if an agency gains 50% of the reputation, the "cloudnet" or average peer nodes (who, with the reduced bandwidth at high transaction volumes vs bitcoin should be available to anyone with a decent internet connection) will reject any bad transaction blocks or modifications to the network. Even non-cloudnet peers can detect malicious modifications and will not transact on the bad half of a network split (something that is possible because of a tiny consensus block in lieu of a gigantic block chain).

The goal is a stable price based on encouraging mining only when it is profitable since it doesn't secure the network. There is no limit on the amount of coins per hour or day, but the system will keep track of how quickly the coins were produced to increase difficulty, as well as fostering competition among more efficient machines by occasionally lowering the award so that improvements in energy usage (or even reductions in the price of energy) can be accounted for in the difficulty, then the award increases again with a new difficulty.

The money supply can grow as the economy grows. If the economy outgrows the supply, hoarders/savers are encouraged to sell for the immediate profit because otherwise many will take to mining and bring the price back in line with its cost to produce. Any unrefunded transaction fees are spread out to all holders of coins so that in the rare case of an economic contraction, those who saved had earned interest previously and will continue to earn interest off of those new to the system who do not care that the value may not be what it once was and will still transact. On top of this, merchants are required to hold a certain amount of coins to become reputable members of the tradenet, so that creates demand and a high cost for an agency wishing to subvert the reputation.

I think it is a system that merits more discussion, especially if you are looking to fork bitcoin to solve its many issues. A stable price is key to getting merchants on board, and merchants are the key to a successful economy.

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November 02, 2011, 07:45:51 AM
 #38


Coin generation speed could be adjusted based on economy activities, so if more coin is needed in transaction, more coin will be generated through mining, if more coin is transacted per day, less coin will be generated. But the amount of coin will never get less, not like FED can do tightening. But if that function can be merged into transaction, it will be an automatic approach

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November 02, 2011, 08:24:42 AM
 #39


Coin generation speed could be adjusted based on economy activities, so if more coin is needed in transaction, more coin will be generated through mining, if more coin is transacted per day, less coin will be generated. But the amount of coin will never get less, not like FED can do tightening. But if that function can be merged into transaction, it will be an automatic approach

And just how would you distinguish between a speculative trade and one thats based on an economic transaction of goods or services? If you are going to endlessly increase the money supply based on activity of high frequency trading, I suspect that wont work very well Smiley.

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November 02, 2011, 09:09:51 AM
 #40


Coin generation speed could be adjusted based on economy activities, so if more coin is needed in transaction, more coin will be generated through mining, if more coin is transacted per day, less coin will be generated. But the amount of coin will never get less, not like FED can do tightening. But if that function can be merged into transaction, it will be an automatic approach

And just how would you distinguish between a speculative trade and one thats based on an economic transaction of goods or services? If you are going to endlessly increase the money supply based on activity of high frequency trading, I suspect that wont work very well Smiley.

No, I can not, so does FED. You can not really tell people buying a house for speculation or for consumption

By the way, high frequency trading increased money flow speed, thus will cause money supply decrease.

MV=PY, if V increase, M will decrease, given PY do not change

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