Thanks for all the replies! Many interesting issues have been raised.
Aren't the price of precious metals and energy also fully market driven? Yet if we back bitcoins by one of these commodities, we solve the problem of bitcoin's value being fully market driven?
Yes, we do solve it. Precious metals and energy have value as commodities
, independently of the currency you use to measure
it. So, before using them as currency, they already have value, unlike, say, a paper dollar bill. They, therefore, have intrinsic
value. On the other hand, the paper dollar bill only has value because individuals and institutions attribute value to it. Just like bitcoins.
However, if people loose confidence in a currency backed by gold, for example, one can use the currency to buy back the gold stored at the central bank, therefore revaluing the remaining circulating currency until its market driven exchange rate equals the fixed gold exchange rate. You can't do that with ECCs. Therefore, the system is univocal; it takes energy to produce the ECCs, but you don't necessarily can trade ECCs to buy energy back. The consequence of this was adequately illustrated by CoinOperated.
But what if they over-mine and rush to sell, and then some false rumor spreads and temporarily drives the USD/ECC price to 1/2 of USD/kWh. Sure all mining stops but you still have an overhang of sell demand. The price could languish there for a very long time. It's more likely the bigger the ECC supply gets and you need significant demand depth to pull it up.
Exactly, the ECC would prevent the instability caused by a deflationary currency such as BTC, setting an upper bound for their value. It does not, however, solve the problem of inflation in a currency no one wants to use, like precious metals do.
You need a fundamental conversion back into the fundamental (kWh in this case).
Does anyone still have any doubt on the deflationary nature of bitcoins? As long as people are using it, the price will eventually loop back into parity with energy. I don't see why some occasional slight
inflation would make people not want to use the currency. The problem is really if inflation becomes embedded in the ECC economy, making it entirely worthless for a very long time, in a sort of 0% money supply inflation trap. In this sense, I agree with you.
The way I had thought of it, the tightness of money supply would solve inflation by itself, as is currently the case with bitcoins. Indeed, if inflation remains slight, as would probably be the case for a healthy big economy, I don't think this would be a problem. However, I have to agree this is not an inflation-proof currency. But neither is bitcoin. In fact, the inflation prevention mechanism is exactly the same in the BTC and ECC systems. It's not full-proof, but it's probably
However, if you're able to come up with any mechanism to close the loop in the system, I'd be very interested to hear it.
If/when bitcoin becomes widespread so that is fully monetised, and there are competing crypto-currencies, then the price will be exceedingly stable compared with other assets with perhaps some slight deflation dependent upon the economic conditions of the times.
Are you sure it will be that
stable? I fear, like other have pointed out in the AgBTC/AuBTC discussion, that it will be so valuable, that a permanent deflation will be observed, making it more like an "e-bullion" rather than an "e-currency". No one will be spending it. That's why I agree that an "AgBTC" is needed, that is less
more stable (i.e., non-deflationary) than BTC. My proposed system seeks to avoid the deflation that threatens to make BTC too
How can you have a decentralised-p2p-currency that's "backed" by something?
By spending that thing to make it.
But it is weird because the electricity is just "thrown away" as heat, after completing the computation.
Exactly, it's not "retradable". The loop is not closed, as discussed above.
You would have to increase or decrease the rate of issuance from the miners to compensate for the fluctuations in the exchange rate differentials between energy and bitcoin. The problem with this is that the strength of the network, it's measure of security, is driven by the network difficulty. And the network difficulty is what sets the rate at which transactions are encoded into blocks, presently around 10 mins per block. If you changed the incentive for miners to solve blocks, by varying the reward per block to keep up with some external pricing factor (fixed exchange to energy), then you are changing the incentive structure set-up that ensures network security and network difficulty and therefore security would become unstable. There may be some clever way to stabilise a p2p network crypto-currency having its value fixed to physical assets, but I do not see it right now
If the number of miners and the rate of issuance is so important for transaction security, how will this problem be addressed for BTC, when it becomes too expensive (for everyone) to mine them? BTW, I don't think one has to vary the reward per block to keep up with the amount of energy spent. It's the exact opposite! It should not vary at all. Please tell me if I misinterpreted you.
Could you just remove the 2-week adustment of difficulty? Rather, you adjust the difficulty periodically so that it always consumes about 1 kWh to generate 1 BTC, approximately.
Again, my idea was that you should not adjust the difficulty periodically. That said, I also don't see any way the exact same amount of energy can be spent on a calculation. This depends on the processor's efficiency, which, I assume, has been increasing over time. So, the closest variable to energy spent would be "processor work" (whatever the variable used to measure that is), and 1 ECC would always require the same amount of "processor work" to be created. Therefore, and ASSUMING ONLY SLIGHT VARIATIONS IN PROCESSOR ENERGY EFFICIENCY, it can be made that 1 ECC ≈ 1 kWh. This is the biggest problem I see in implementing my initial idea, but I'm, by no means, a programming specialist.
This may be a way out of the one way problem. If the value of BTC declines below 1 kWh, people will turn off their mining rigs. Natural deflation will set in raising the ratio back to 1:1. If BTC gets abouve 1 kWh, now it is profitable to mine and BTC will gush out until it returns back to 1:1. The feedback may be a little unstable someone needs to model it in matlab.
Sounds like a lot of fun!
I'd love to do it, but don't really have time right now. Perhaps over the weekend, but I don't promise anything. BTW, I don't know which sort of model you have in mind that would need Matlab to be ran.