Dynamic Democratic Bitcoin

[iya]

Here's a new idea on how to make Bitcoin (or a future alternative/fork) more sustainable.
The problem is detailed in a number of previous threads and scattered posts, e.g.:
Current Bitcoin economic model is unsustainable
Thought Experiment: Is Bitcoin a Ponzi scheme?

If you don't think it's a problem, either ignore this thread or assume, for the sake of argument, that it could become a problem.
I want to mention that I don't see any immediate need for action, because it does not affect some important use cases, like exchanging your local currency for BTC to buy some stuff. Incidentally that makes Bitcoin similar to your local fiat currency: don't hold more than necessary.

There have been a number of alternatives proposed, e.g. dynamic amounts per block based on user growth or energy costs.
It's not clear which has the most merit, and trial and error would be slow and costly.

The miners are already in charge, because ultimately they decide which client to run. Why not streamline the process and let them vote directly on the best policy?
We can take advantage of the inherent feature of the blockchain as an unalterable public register:

• Each block keeps track of configurable parameters: DIFFICULTY and PAYOUT / block
• Each miner can set them as preferred
• The actual current value, to be respected, is the median of the previous 1000 blocks
  - Even this adaption speed and other parameters could theoretically be made variable
  - Maybe a few more constraints or averaging, so the actual values reflect the broadest possible consensus while still being adaptable

The aim is to enable maximum sustainable user growth, economy growth and protection against double spending with reduced electricity costs.
So, would it work?

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[asdf]

If you don't think it's a problem, either ignore this thread or assume, for the sake of argument, that it could become a problem.

If I don't think [what?] is a problem? I know I'm supposed to read the referenced literature (tl;dr), but you could at least restate "the problem" in your post, for clarity.

I think the problem you're addressing is the "deflationary spiral" theory; because bitcoin is appreciating in value so fast, no one will spend it. Well, this theory is self contradictory and, as such, a myth, which I shall debunk ONCE AND FOR ALL!

In an economy with fixed money supply, deflation is a direct function of economic growth.
No growth = stable prices.
Growth = falling prices.
Contraction = rising prices.

The value of bitcoin is fundamentally a function of the number of bitcoin in circulation over the total value of good and services available for bitcoin. If nobody spends their bitcoin, because they rise in value so fast, then people will stop offering goods and services for them, or they'll lower their prices and encourage sales. If the former happens then the value of bitcoin will go down; people stop hording and spend them. So, logically, if people don't spend their bitcoins then they'll spend them?!?! If the later happens then the economy putters along as normal with lower prices and increased sales.

To be more concise: The economy is either growing or it isn't. If deflation retards economic growth then prices must rise ( in an economy with fixed money supply ). prices can't rise and fall at the same time. So, you see we have a control system with negative a feed back loop not the positive feedback loop that the deflationary spiral envisions. This is inherently stable/sustainable.

deflation is not a problem! Well, that's my theory anyway.

The aim is to enable maximum sustainable user growth, economy growth and protection against double spending with reduced electricity costs.
So, would it work?

like bitcoin ;-)

[FooDSt4mP]

Merchants will not lower their bitcoin prices much below the value of the other currencies they can get for what they are selling.  If people aren't spending, they will lose interest, and when they revamp their website they won't want to spend a lot of money on BTC support.  If merchant support starts to fade out, the coins lose their value, much like inflation of the money supply.  This will drive people to spend since they are scared by the value of their BTC falling.  Three cheers for negative feedback!

Lack of spending does hurt the economy, but not in a way that will completely fracture the economy.  Those merchants that are more tied to other currencies will have the hardest time surviving such spending lulls.  Merchants that can support themselves and purchase raw materials with bitcoins will just ride the wave, and if they are smart buy low and sell high using their preferred method of value storage (inventory, gold, livestock, plants, USD, honey, etc.).

Unfortunately, as far as I know, no merchant today can support themselves and purchase raw materials with bitcoin, so unfortunately all merchants are in the first category.  At this stage in the game, spending lulls can hurt the small, but growing confidence in the economy.

[iya]

@asdf
No, the problem is not deflation, it's more of game theoretic nature. I think the standard inflation policy is not pareto efficient, but I'm no expert in this.

At a Pareto efficient allocation (on the Pareto frontier), the marginal rate of substitution is the same for all consumers.

Do you think this is true for the current Bitcoin economy?

While the Bitcoin economy and number of users grows exponentially in the beginning, the money growth is linear/geometric. Thus the price of BTC/USD can only grow. A good strategy is to get in early and hold on to your Bitcoins until you think the economy will no longer be able to grow significantly. The first early adopter who then checks out will crash the market and make the most profit. Late adopters cannot rationally invest into Bitcoin, because of this. Symptoms include: most Bitcoins are never spend and huge cumulative mining costs.

If we now have 10k users, once there are 20k who like the idea of Bitcoin and realize this problem, they have an incentive to start their own blockchain, which would face the same problem eventually if it uses the same rules.

Under free competition, only the currency with the most merit will survive. Bitcoins main problem is that proof of work is not a marketable good and its inherent value is zero, but this cannot be changed. What can be changed is the inflation policy. The problem is how to get the best long term growth potential?
In my above system, miners should have an interest to choose the best known policy dynamically, but it would be nice if that can be proved.

[ffe]

Under free competition, only the currency with the most merit will survive. Bitcoins main problem is that proof of work is not a marketable good and its inherent value is zero, but this cannot be changed. What can be changed is the inflation policy. The problem is how to get the best long term growth potential?
In my above system, miners should have an interest to choose the best known policy dynamically, but it would be nice if that can be proved.

Bitcoin has value beyond proof of work or the equivalent electricity content. It is a very efficient medium of exchange and hopefully for that reason there will always be demand for it. If too many people start using bitcoin as a store of value (by hoarding it) you can argue this will tend to decrease its value as a medium of exchange but as mentioned above this is self-limiting. As the overall value drops that releases bitcoins and its value as a medium of exchange will stabilize.

This dual nature of bitcoin will make it difficult for a competing e-coin to establish itself. A large population that is holding wealth in bitcoin will not give it up. A new user considering where to transfer his wealth will choose the established bitcoin.

This is reinforced by the fact that many channels will exist for using bitcoin as a medium of exchange and a newcomer will only compete with difficulty. Note that due to the divisibility of bitcoin, large amounts of hoarding will not hinder bitcoin exchanges. This is especially true if the use of bitcoin is transitory such as an exchange between two currencies in two different countries. Who cares what the bitcoin exchange rate is if I'm only going in then back out a few minutes later.

It's only when you start thinking of bitcoin as the unit of account for the wider economy that deflation / inflation or the total number of coins produced is important. I've concluded so what? Bitcoin will probably never be the unit for setting salaries or prices in the real economy. Business loans will not be denominated in bitcoin and interest rates will not be driven by inflation or deflation in bitcoin. Total demand in the economy will be something that cannot be nudged up or down by producing or destroying bitcoin.

So bitcoin is not a good unit of account but it will be a great store of value and (assuming we ever make it very easy to go into or out of bitcoin) a great medium of exchange. The inflation / deflation policy is fine as is.

[iya]

The inflation / deflation policy is fine as is.

It's not fine because there are redistributive effects, and they are (relatively) stronger than those from inflation by central banks.
This means adoption will slow down, the exchange rate will not stabilize and Bitcoin will not be a good store of value.
It's a good medium of exchange, but competitors do have a chance to beat it.

Comparison between early adopter Alice and late comer Bob:

	MRSBTCUSD = MUUSD / MUBTC = (∂u/∂USD) / (∂u/∂BTC)
Assuming	MUUSD(Alice) = MUUSD(Bob)
But	MUBTC(Alice) < MUBTC(Bob)
Thus	MRSBTCUSD(Alice) > MRSBTCUSD(Bob)

MRS = Marginal rate of substitution
MU = Marginal utility

[ffe]

The inflation / deflation policy is fine as is.

It's not fine because there are redistributive effects, and they are (relatively) stronger than those from inflation by central banks.
This means adoption will slow down, the exchange rate will not stabilize and Bitcoin will not be a good store of value.
It's a good medium of exchange, but competitors do have a chance to beat it.

Comparison between early adopter Alice and late comer Bob:

	MRSBTCUSD = MUUSD / MUBTC = (∂u/∂USD) / (∂u/∂BTC)
Assuming	MUUSD(Alice) = MUUSD(Bob)
But	MUBTC(Alice) < MUBTC(Bob)
Thus	MRSBTCUSD(Alice) > MRSBTCUSD(Bob)

MRS = Marginal rate of substitution
MU = Marginal utility

This is like saying that because early adopters discovered the South African gold mines first, gold is not stable and use of gold will decline in the rest of the world. nonsense.

The rest of the world just accepted that some owners in Africa will become very wealthy and bought African gold just fine. Look; there's nothing that says bitcoin will be "fair" to late adopters and having Alice be wealthier than Bob in the end is not a problem that needs solving by breaking the current implementation of bitcoin.

[ffe]

It's not fine because there are redistributive effects, and they are (relatively) stronger than those from inflation by central banks.
This means adoption will slow down, the exchange rate will not stabilize and Bitcoin will not be a good store of value.

It’s not clear why redistributive effects mean adoption will slow down. I guess in my last post I assumed  you mean these effects were not “fair” or “optimum” in some way and that will turn off new adopters. If there is a more concrete dampening effect on uptake please clarify.

I don’t mean to sound too negative. You did ask us to pretend there is a problem. I understand there were many choices Satoshi could have made with respect to bitcoin growth. I think the most important decision, however, was that the supply of coin over time is pre-programmed. If we set a precedent that that decision can change then we lose confidence that it won’t change again. If it can be changed once it will be changed again because we always run into problems with the economy where alternative solutions are hard.

[asdf]

@asdf
No, the problem is not deflation, it's more of game theoretic nature. I think the standard inflation policy is not pareto efficient, but I'm no expert in this.

I would agree with that. Inflation is wealth redistribution which, if you believe that the market allocates capital most efficiently, is definitely pareto inefficient.

At a Pareto efficient allocation (on the Pareto frontier), the marginal rate of substitution is the same for all consumers.

Do you think this is true for the current Bitcoin economy?

I don't understand. The Pareto efficiency theory is not specific to any monetary system, as far as I can tell. So, yes?

While the Bitcoin economy and number of users grows exponentially in the beginning, the money growth is linear/geometric. Thus the price of BTC/USD can only grow. A good strategy is to get in early and hold on to your Bitcoins until you think the economy will no longer be able to grow significantly. The first early adopter who then checks out will crash the market and make the most profit. Late adopters cannot rationally invest into Bitcoin, because of this. Symptoms include: most Bitcoins are never spend and huge cumulative mining costs.

If bitcoin reaches market saturation then who cares about late adopters. There's already maximum adoption!

Once again, if bitcoins are never spent and there are no new investments, then where does the exponential growth, which makes hording so lucrative, come from? This is a self contradicting argument. Don't you see the negative feedback loop?

If we now have 10k users, once there are 20k who like the idea of Bitcoin and realize this problem, they have an incentive to start their own blockchain, which would face the same problem eventually if it uses the same rules.

This may be an incentive to start a new blockchain. It doesn't mean it's a good idea. Best of luck to them.

Under free competition, only the currency with the most merit will survive. Bitcoins main problem is that proof of work is not a marketable good and its inherent value is zero, but this cannot be changed.

Bitcoin has value in that it is probably the best form of money in existence. This is the only reason people are using it now. Proof of work is the cost of maintaining the money system. Taxes and bank fees are not marketable goods either.

What can be changed is the inflation policy. The problem is how to get the best long term growth potential?
In my above system, miners should have an interest to choose the best known policy dynamically, but it would be nice if that can be proved.

I don't quite understand how your system is supposed to work, but some important problems come to mind:
- How do you agorithmicaly match inflation with economic growth? (I don't think you can just using the blockchain as input)
- Allowing miners to set inflation policy is a big fat conflict of interest.

I don't think you understand the benefits of a fixed money supply system. Look at the arguments that gold standard advocates make. Bitcoin is great as it is.

[iya]

Don't you see the negative feedback loop?

No, please explain the "negative feedback loop".
Late comers cannot rationally invest in Bitcoins, regardless of its exchange rate.
Early adopters face the same dilemma from the other side: they cannot rationally get out.
It's obviously less clear cut if you are able to predict Bitcoins rise or fall in popularity.

Taxes and bank fees are not marketable goods either.

And thus taxes and bank fees will never become money.

I don't quite understand how your system is supposed to work, but some important problems come to mind:
- How do you agorithmicaly match inflation with economic growth? (I don't think you can just using the blockchain as input)

Having the block reward equal the difficulty will come close, except for future efficiency changes in computing (Moore's Law) or electricity generation (nuclear fusion?)
Why can we not use the blockchain? That's the main idea: to use the median of proposed values, or something similar.

- Allowing miners to set inflation policy is a big fat conflict of interest.

Could you elaborate on that? Because, that's what I was mostly interested in.

Here's why it should would work:

Honest miners have an interest in the currencies success.
Holders of Bitcoins have an interest in low inflation.
Holders of Bitcoins will probably want to be miners or at least have access to reserve mining power.
Newcomers will want to raise inflation, but they can only profit if they also bring more mining power.
Because of the median calculation the parameters can be easily forecast. If vested interests see an attack, they can bring online remote mining power, profit of the slightly rising rewards themselves and simultaneously reduce the reward again.
The only problem is numerical: what if the the chain starts with an inflation of 10^100 coins / block?
The solution is easy: the difficulty should also be the absolute upper limit for reward. I think it would usually not be reached, though.

[goatpig]

I don't understand your point with the rate of adoption. Gold and silver are at their highest in history, and naturally the demand is at its highest too. Your theory about hoarding is inconsistent.

You assume every early Bitcoin adopter would hold onto their Bitcoins for dear life. First of all, this is false, for the volume of daily trading on MtGox is consistent with daily Bitcoin production. This indicates most miners resell their earned Bitcoins. Then, holding onto Bitcoin has a reason to it, that it gains in value with time. This gain in value is due to increased demand. Yet, you propose that the demand will fall when new comers will find themselves unable to acquire Bitcoin, for all the coins have been mined and the miners won't put their earnings on the market. But then won't the price fall, since the demand is shrinking. And then do you expect those Bitcoin "hoarders" to just sit there and not sell?

But even with a constantly high demand, there will still be Bitcoins for sale. Consider gold, and how it is readily available for purchase all over the world. Obviously those gold merchants are making a better profit off of selling gold to the "hoarders" than by hoarding it themselves.

Could you elaborate on that? Because, that's what I was mostly interested in.

Well, if miners had control over the difficulty, they could easily inflate the currency by reducing the difficulty. On the other hand they wouldn't be able to shrink the existing Bitcoin supply, so their only way to deflate the currency would be to slow down the production. As such they could perform the same scam that banks are running on the Treasury bonds: Speed up the production to render the Bitcoin dirt cheap, by out the market, then halt the production, wait for the price to climb and sell for dollars on the penny.

[dauwaz]

I do not think so. Bitcoin is based on the heart of many people in the world. With a certain amount of 21 million coin it is hard to happen to play