Hayek Money: The Cryptocurrency Price Stability Solution

[Nando1970]

I've been working on the proposal for a cryptocurrency with an embedded smart monetary policy to ensure price stability

http://ssrn.com/abstract=2425270
Last revision: May 8th 2014

Hayek Money: The Cryptocurrency Price Stability Solution

The Bitcoin protocol has enabled competition between digital cryptocurrencies and traditional legal tender fiat currencies. Despite impressive cryptocurrency adoption rate, dramatic deflationary price instability has thwarted affirmation of the cryptocurrency leadership. Price stability can be achieved by dynamically rebasing the outstanding amount of money: the number of currency units in every digital wallet is adjusted instead of each single unit changing its value. The apparent awkwardness of this new monetary policy paradigm is discussed at length, proving that its only real novelty is about fairness and effectiveness. The proposed monetary base adjustment has neutral impact on the overall wallet wealth, as it does not introduce any arbitrary distortion into the intrinsic value dynamics of the wallet. The adjustment is based on a commodity price index determined with a resilient consensus process that does not rely on central third party authorities. It is posited in this paper that a digital cryptocurrency adopting such monetary policy is Hayek Money, so named from the Nobel Prize-winning economist: namely the best money ever devised, the new good money standard providing stable prices for a new economic era.

Ferdinando M. Ametrano

[Bees Brothers]

Thanks for sharing the link. I got it downloaded to read as soon as I get a chance.

[Nando1970]

great.

please notice that while the structure and content are stable, I'm actively fine-tuning the narrative and incorporating some peer-reviewing, so you might be better off downloading just before reading.

I've received some feedback at http://redd.it/24p2qt, but nothing more than quick reactions to the abstract so far. At 35+ pages it is surely not a casual reading, but it can be a rewarding one.

I look forward to comments

[YipYip]

TLDR;


I have 3 words for you "SAY NO TO DRUGS"

[Nando1970]

TLDR

I will work on a one page introduction, longer than the abstract, shorter than the whole paper.

I have 3 words for you "SAY NO TO DRUGS"

I especially like the kind used by Satoshi Nakamoto and Friedrich Hayek. Moreover, they might help to cure short attention span ;-)

[Bit_Happy]

Relative stability of Bitcoin vs several commodity prices (i.e. Oil, Gold and silver, etc) will probably occur naturally in the near to medium-term future. Fiat inflation will give us the illusion of higher BTC prices, but our real wealth will be fairly stable since the cost of living is so much higher every year.

During the early years BTC prices have dramatically outperformed gold, but that trend might slow down until stable.
Bitcoin still provides a current chance to do much better than gold. Given a clear choice many people will not actually want anything too "stable".

[Nando1970]

Relative stability of Bitcoin vs several commodity prices (i.e. Oil, Gold and silver, etc) will probably occur naturally in the near to medium-term future. [...] During the early years BTC prices have dramatically outperformed gold, but that trend might slow down until stable.

This is an unfounded claim. Cryptocurrencies have been adopted so far by "just" some hundreds of thousands of people for a very limited part of their wealth. If billions of people are going to use it, cryptocurrency value is going to skyrocket beyond imagination. Price instability is going to be as dramatic in the coming years as it has been in the last years.

Bitcoin still provides a current chance to do much better than gold.

I agree. This has little to do with the core of my paper.

Given a clear choice many people will not actually want anything too "stable".

Sorry but you are off-track here.  Stable price does not mean stable value (please read the paper if this point is not clear). A stable price currency has always been the holy grail of every economic theory. Hayek Money is such a monumental achievement.

[Nando1970]

Current Bitcoin volatility is perfectly normal

at 128% annual volatility I am seriously worried about your definition of normal :-)

[Nando1970]

The paper made it into the shortlist for the Blockchain Awards of the Bitcoin Foundation Conference 2014, category Visionary Academic Paper.

The funny part is that Nakamoto's paper is included too. Hey! Einstein is not supposed to be nominated for the Albert Einstein award! There is no competition. Now if only Satoshi would show up to receive the Award...

Since Satoshi appearance is unlikely, and instead I will be attending the conference, I could appreciate if the large silent majority of my enthusiastic supporters joins forces and votes for my paper at
https://docs.google.com/forms/d/1XGPghf1OsdgTmrsiEscWqcPjssfDX3u8IE-PBOLebc4/viewform

If you would rather vote for Satoshi, I might concede to your preference.

No disrespect for the other shortlisted paper "On the origins of Bitcoin" by Konrad Graf: [url]http://konradsgraf.com/blog1/2013/10/23/on-the-origins-of-bitcoin-my-new-work-on-bitcoin-and-monetar.html[url]

[bitcoinboy163]

bitcoin haven't achieve an ideal price yet,it's too early to talk about price stability.

[Catastrough]

Jeff Fong wrote a piece called From Hayek to Satoshi and Beyond talking about how Bitcoin fits in the picture, I think you'll find it relevant
http://letstalkbitcoin.com/hayek-to-satoshi-and-beyond/

[teukon]

It seems you are simply describing the need for a reliable way of measuring the present value of 1 bitcoin (which is undeniably more volatile today than most goods/services/assets/currencies that most people care about).

With easy access to such a value, merchants would be able to update their prices automatically, and loans and salaries could incorporate reference to the value so that they too dodge Bitcoin's volatility.

These are not new ideas, but certainly good ones.

However, you go further to suggest that people should think in terms of a "rebased" bitcoin, even to suggest that bitcoins themselves should be an implementation detail, hidden from the user.  I'm not sure what you feel this change in mindset achieves.  Everyone benefits from seeing that prices in this new unit are relatively stable, but they suffer from not knowing how many of these units they will have in the future.  This doesn't address the volatility concerns; it merely shunts them into another realm.

Why is it important that people see "200 stablecoins" rather than "200 stablecoins worth of bitcoin" in their forward payment agreements?  It seems as though you're willing to give up a lot to obtain this simplification.

Minor error: you have two section 3.1s.

[Nando1970]

@Catastrough

thank you, I was aware of the article, and I appreciate it a lot. Nonetheless it suffers two major misunderstandings:

1) fully automatic non-discretionary (auto-pilot, as Jeff Fong calls it) monetary policy does not need to be bitcoin's fixed inelastic supply. I am advocating a fully automatic non-discretionary elastic monetary policy for cryptocurrencies, and defining such cryptocurrencies as Hayek Money.

2) the issuer concept was relevant in the Hayek world, and that is why he was naturally thinking about banks. In the cryptocurrency world, as long as the protocol implementation is open source free software, the issuer concept is severely demoted to be almost irrelevant. It only makes residual sense in order to ascertain the existence and reliability of a developer team in charge of maintenance.

you go further to suggest that people should think in terms of a "rebased" bitcoin, even to suggest that bitcoins themselves should be an implementation detail, hidden from the user.

I actually write about stablecoin and basecoin, recognizing that redefining bitcoin will surely be impractical. A new cryptocurrency is probably needed... but I would love to salvage bitcoin from the decline of non-Hayek Monies ;-)

I'm not sure what you feel this change in mindset achieves.

I am already having such an hard time in selling this unfamiliar but very easy idea, that I would be tempted to say I do not advocate a mindset change at all. Instead the implementation details should be not disclosed with people not familiar with the nature of monetary policy, and the Hayek Money experiment should be carried out until complete success. Only later details should be revealed ;-)

Everyone benefits from seeing that prices in this new unit are relatively stable, but they suffer from not knowing how many of these units they will have in the future.

Today you know the number of unit currency you know, but prices change, right? Well at least in my proposal the situation is specular, probably unfamiliar, but not worse.
In reality I try to make clear in my paper (sec 6.2) that what I am suggesting is completely equivalent to what every central bank does today, just adapted to the blockchain as a multiplier of the monetary stock. The only difference is that when central banks create new money they do not distribute it to everybody. When they tighten the monetary base they remove currency units from those who need to borrow. Pretty unfair, and they want everybody not to realize the extent of this theft disguised as service to the economy.
Bitcoin does not suffer from this theft, but completely gives up on monetary policy losing price stability.
I will try to make this point clearer in the next paper revision.

This doesn't address the volatility concerns; it merely shunts them into another realm

I am going to expand section 6.4 to better answer this point. Please check back at http://ssrn.com/abstract=2425270 on monday for a revisited version of the paper.

Minor error: you have two section 3.1s.

thank you I will fix it in the next forthcoming version.

[teukon]

you go further to suggest that people should think in terms of a "rebased" bitcoin, even to suggest that bitcoins themselves should be an implementation detail, hidden from the user.

I actually write about stablecoin and basecoin, recognizing that redefining bitcoin will surely be impractical. A new cryptocurrency is probably needed... but I would love to salvage bitcoin from the decline of non-Hayek Monies ;-)

Agreed.  I don't mean to misrepresent you.  I'm just attempting to simplify as much as possible while attempting to communicate the kernel of the idea.  I fear very few people will read your entire paper.

Everyone benefits from seeing that prices in this new unit are relatively stable, but they suffer from not knowing how many of these units they will have in the future.

Today you know the number of unit currency you know, but prices change, right? Well at least in my proposal the situation is specular, probably unfamiliar, but not worse.
In reality I try to make clear in my paper (sec 6.2) that what I am suggesting is completely equivalent to what every central bank does today, just adapted to the blockchain as a multiplier of the monetary stock. The only difference is that when central banks create new money they do not distribute it to everybody. When they tighten the monetary base they remove currency units from those who need to borrow. Pretty unfair, and they want everybody not to realize the extent of this theft disguised as service to the economy.
Bitcoin does not suffer from this theft, but completely gives up on monetary policy losing price stability.
I will try to make this point clearer in the next paper revision.

I won't argue that it's worse, but for precisely the same reason, I don't see it as better.

I assure you that the different mindset is no problem for me.  I'm dropping all potential problems to do with marketing, adoption, understanding in an attempt to understand why this is being proposed at all.

I agree that stablecoin would be superior to an otherwise equivalent one which distorted the distribution of purchasing power when the supply was altered.

What I'm missing is why we want stable prices.  If you can sell me on that point in this context, you might sell me on the coin.  I really feel it is not enough to say "you know, we want stable prices because loans, salaries, forward payments, et cetera; all the usual jazz".  What you are proposing as a money is very different from things which have historically been used as money.  I can hold a dollar note, I can hold an ounce of gold, I can hold a bitcoin (not physically, but hold as in own and directly control).  I cannot hold a stablecoin.  I cannot have a holding of stablecoins in the traditional sense.  If I have a stablecoin today, I may find it becomes 0.8 stablecoins tomorrow.  I'm not saying this is a bad thing (again, functional equivalence to Bitcoin saves you here), but for me this is a sufficiently fundamental difference to warrant revisiting why these great economists desired stable prices.

This doesn't address the volatility concerns; it merely shunts them into another realm

I am going to expand section 6.4 to better answer this point. Please check back at http://ssrn.com/abstract=2425270 on monday for a revisited version of the paper.

I will if I remember.

[Nando1970]

I will if I remember.

You will. I know it. And in case I'll remind you.

In the meantime here's my revised thoughts about volatility.
Even Hayek Money, the best money ever devised, is powerless at eradicating the volatility of the value of money: volatility is an intrinsic property of demand dynamics. The variation of demand over time cannot be artificially governed: nobody can alter this matter of fact and oppose the resulting change in value. Rebasing the monetary stock supply can absorb the volatility impact of variable demand, steering its instability effect away from prices and toward wallet amounts instead. The relevance of such elastic supply of money should not be underestimated, as it will trigger a virtuous loop for volatility too: as long as the currency keeps constant value, a sudden large variation of its demand will become unlikely. Moreover, the availability of stable prices will surely help the growth of the economy using that given money, providing a further benefit in terms of a reduction of the demand/supply variability. In the case of cryptocurrencies the noise due to the variable adoption rate and the need to resort to fiat currencies will be progressively reduced. The only remaining volatility contribution would then just be the variability of the cryptocurrency adoption rate, and this is exactly what is sterilized by Hayek Money through elastic supply of money.

All of this boils down again to the recognized necessity of stable prices.

What I'm missing is why we want stable prices.  If you can sell me on that point in this context, you might sell me on the coin.  I really feel it is not enough to say "you know, we want stable prices because loans, salaries, forward payments, et cetera; all the usual jazz". [... Hayek Money] is a sufficiently fundamental difference to warrant revisiting why these great economists desired stable prices.

I love the genuine character of your question, as I am under the impression most economists are just cheap jazz, or I cannot understand how they could live 40+ years with the government monopoly of money without a squeak.
Unfortunately, me too, I'm not up to Miles Davis, John Coltrane, or Dave Brubeck, and I am under risk of rehashing the usual jazz. While I ruminate about possible more convincing explanations I really challenge you to think harder about how comfortable you would be about entering into a bitcoin mortgage. This is not a rhetorical question, I am really asking. I would love to exploits any discovery you might progressively make along this line of thinking to improve the effectiveness of my own arguments.

What you are proposing as a money is very different from things which have historically been used as money.

No, it is not. Without dismissing your point, which I acknowledge as "new unfamiliar paradigm": the elastic supply of money is no novelty at all, as it is exactly what every central bank has been doing for every fiat currency. The variability of the number of fiat currency units in our wallets is already happening, mutatis mutandis and with the aggravation of severe unfairness, even if the man on the street is not aware. Read on in section 6.2.

The statement of bitcoin problem is: in the successful attempt of getting rid of any monetary authority using the Bitcoin protocol, the bitcoin currency has inadvertently thrown away also the flexibility of an elastic monetary policy. At this point the line of reasoning should hopefully be self-evident: in order to target purchasing power stability, the cryptocurrency outstanding amount must be dynamically rebased in a fully automatic non-discretionary way. If not self-evident, this idea has appeared at least consequential not only to me, but also to Kevin Dowd that has recently and independently written: “The ideal – one is tempted to say, the gold standard in this area – would be one or more cryptocurrencies that were able to achieve stable purchasing power through elastic but fully automatic and hence non-discretionary supply schedules when real demand changes, and which also have the ability to maintain state-of-the-art security”. Dowd ends his Hayek Money prophecy with a wish I wholeheartedly supports: “Going further, the ultimate possibility for those who believe in private money is that cryptocurrencies might eventually become so widely accepted that they drive government currencies out of circulation and expel the government from the monetary system once and for all”. Moving to elastic supply, the goal of getting rid of monetary authorities is never abandoned, only made easier by a better stronger cryptocurrency.

[Taek]

I think that Hayek's assumptions greatly over simplify how economics work. People want wallet stability, not price stability. If I put $200 worth of bitcoins into a wallet, I expect to get $200+ out in 3 months. But if, to adjust for the change in price, my wallet gets zapped of 1/2 it's coins, I'm not going to care that the price of Bitcoin is the same, I'm going to care that my wallet is now worth $100.

Unless I'm misunderstanding something, merely rebasing wallets every day (or 30 days) does absolutely nothing to address stability.

[teukon]

Thanks for the detailed response.

The relevance of such elastic supply of money should not be underestimated, as it will trigger a virtuous loop for volatility too: as long as the currency keeps constant value, a sudden large variation of its demand will become unlikely.

You've lost me here.  Why would variation in demand for a cryptocurrency be at all affected by this price stabilising mechanism?  The same uncertainties and speculative opportunities would exist.

While I ruminate about possible more convincing explanations I really challenge you to think harder about how comfortable you would be about entering into a bitcoin mortgage.

I would be very uncomfortable entering into a pure simple bitcoin mortgage (a loan secured in property for which fixed regular bitcoin payments are specified).  Of course, the reason for this is that I expect the value of a bitcoin to swing wildly relative to the value of the property.  The term of a typical mortgage and value of a typical property would be sufficient to cause me serious problems should the value of a bitcoin soar.

This, however, does not make the idea of having a mortgage where regular payments in bitcoin occur.  The contract could be worded such that, at regular intervals, I pay a number of bitcoins with value equivalent to a fixed number of dollars (for a simple example; as you note in your paper, we can do better).  I'd find such a contract to be much more palatable.

What you are proposing as a money is very different from things which have historically been used as money.

No, it is not. Without dismissing your point, which I acknowledge as "new unfamiliar paradigm": the elastic supply of money is no novelty at all, as it is exactly what every central bank has been doing for every fiat currency.

Certainly, an elastic money supply is not a new idea.  Certainly, there are many examples of the purchasing power of an untouched wallet varying with time.  What seems new to me is having the number of units in an untouched wallet vary.  Given that prices are simply "numbers of units", I very much suspect that classical arguments for the superiority of price stability over price volatility do not translate to stablecoin.

Moving to elastic supply, the goal of getting rid of monetary authorities is never abandoned, only made easier by a better stronger cryptocurrency.

Fear not; it's reasonably clear from your paper that you do not intend to introduce central (corruptible) elements and that you are sensitive to the distortions (and harmful effects thereof) that a central-bank-style monetary inflation can introduce into an economy.  My only criticism is with the claim that Stablecoin would somehow be a "better stronger cryptocurrency" than an otherwise identical coin with inelastic supply.  I would like to be convinced, but have yet to read a convincing explanation.

[aminorex]

There would be improved convenience in transacting, because you know how much things are worth if they are denominated in stablecoin, without checking cross-rates. 

It is more practical to denominate in depreciating USD right now, because of the volatility of BTC.  That is detrimental to the adoption of BTC as currency (but not as a transmission mechanism or appreciating value store).

[montezavo]

Taek, Teukon, and all those that are interested in the issue of monetary design of a cryptocurrency.

I have posted a paper where I address the issue of how to have price AND wallet stability. Have a look and let me know, please

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2458890

Abstract:     

Interest is growing in the monetary implications of digital currencies, see Economist's article http://www.economist.com/blogs/freeexchange/2014/03/bitcoin. The Centre for Financial Stability indicates stable prices as the crucial challenge for successful digital money, and http://ssrn.com/abstract=2425270 designs a cryptocurrency where money supply is automatically regulated. In basic implementation, this breakthrough has however a feature that can hamper its adoption: the mechanism for stable prices implies that the amount of money in every account is continuously modified. The instability of prices typical of bitcoins is transferred to accounts, so that the purchasing power of savings continues to be far less protected from inflation/deflation than in standard fiat currencies.

The solution, in line with the principles of digital currencies, is to give to each wallet's owner the freedom to choose how much risk of instability they want to take, by introducing two types of wallets: Inv wallets and Sav wallets. Money in Sav wallets is protected from instability thanks to the presence of Inv wallets, that take the risk, and the reward, of being target of the monetary policy. This role of channel and cushion for monetary policy is taken by banks in fiat currencies. Such a role is necessary also in digital currencies, where it can be taken by any willing player, allowing for decentralized financial intermediaries and a currency where both savings and prices are stable. In this paper I analyze this and other issues regarding the role financial intermediaries in a digital currency.

Appendices hint at the link between Inv wallets and proof-of-stake, and at the long-term possibility of a currency indexed to block-chain-resident real-estate prices.

[aminorex]

TLDR;


I have 3 words for you "SAY NO TO DRUGS"

Is one of those a fnord?