Local exchange and stabilization

[cryptofo]

  First time poster here.  I just wanted to share some thoughts.  My intentions are only to contribute as I would like to see bitcoin succeed.  I come in peace. 
 
  I have been following the progress of Bitcoins for a while and am very impressed, intrigued and excited.  Well done Satoshi.  A true contribution. 

I have been researching alternative currencies for some time, specifically local/regional currencies and I would like to share some thoughts.   In my humble opinion, all currencies at their core are simply an accounting method.  Regardless of the inherent commodity value, scarcity, or monetary policy (i.e. politically driven fiat), when it all boils down to brass tacks, it’s simply a way to keep track of who has what and how much of it they have. 

  I think cryptographic decentralized digital currency is brilliant.  I think it is a natural revolutionary evolution.  The greatest challenge IMO is the valuation and stabilization of the bitcoin.  At this point it’s as though it is designed purely for speculation.  I’m going to list some (not all) of the attributes associated with Bitcoins.
  1.   Globally distributed
  2.   Digitally distributed
  3.   Distributed without national/political bias
  4.   Exchanged anonymously
  5.   Mined by cpu
  6.   The mine will run dry in x number of years (as I understand)
  7.   Limited supply

  For a second, let’s not look at these as pros or cons, but just that they are. 

  Attributes 1, 2, 3, and 4 - The fact that they are distributed globally, digitally and equally, without bias (sort of) gives them a specific characteristic.  If a nation can be viewed as a user group and a national currency is the exchange medium of a given user group and if the Bitcoin user group was a nation, it would be “the nation of international cryptoanarchist libertarian geeks”.  That’s not meant to be derogatory or characteristic of any individual.  I for one am proud to call myself a cryptoanarchist libertarian geek, but that’s not my point.  My point is that a currency is reflected by, if not defined by its user group.  I’m ok with that.  I think we are a smart and forward thinking group and we can add value to the currency.  However, therein lies a paradox.  We as a group choose to remain anonymous.  Don’t get me wrong, I’m not suggesting otherwise, anonymity is our golden asset, but it poses some challenges.  A national currency reflects the economic activity of a nation.  This can be represented by indicators such as GDP, inflation rates, interest rates etc. Regardless of the accuracy or truth of these indicators, they at least give a common idea as to the health of a group, economically.  Here are a few indicators I think would be useful.

  1.    Number of transactions over a given period
  2.   $ amount
  3.   # of unique addresses
  4.   Avg. $ per transaction

  I think we can derive some info from the block chain, but there is existing concern to how that affects our privacy.  You can never predict where the value of a currency is going for sure, but without any indication, I fear that we could be subject to wild swings.  This is my greatest concern.  Right now, Bitcoins are like a penny stock.  They are very cheap.  The exchange rate could double or triple next week and then cut in half the next.  There is the argument that the BTC appears to be finding equilibrium, but my contention would be “why?” and “in relation to what?” If I would like to purchase something tangible, say a basket of apples, I run the risk of bitcoins depreciating (or appreciating) by the time I pay for it.  Therefore I feel that stabilizing the exchange rate is our biggest and most important challenge.  I share my thoughts.

  Considering that bitcoins are distributed digitally and globally, it makes it extremely difficult to establish an exchange rate to be used for tangible things or local exchange, at least initially.  However it does make it a perfect currency for all things not local or tangible, such as digital labor and digital products (i.e. Coding, web development and ebooks etc).  That said here are some things I feel would greatly contribute to the growth, acceptance, use, value and “velocity of exchange” of Bitcoins.

  1.    “vworker.com” type exchange site that deals in bitcoins
  2.   Drupal/wordpress plugins to allow payment for digital goods via bitcoin (shopping cart, ecommerce etc.)

  I know these are lofty requests and obvious suggestions to put out there, but I can’t do them myself.  I’m not a coder.  I’m sure someone is already working on something to facilitate this type of application; I just want to share my emphasis on the value in their development. 
  With that in mind, I would like to make a request to anyone willing to develop something specific.  This I feel would be an invaluable bridge from the digital to the physical world.  I would be willing to pay bitcoins for it.
*An Arduino Library to interface Bitcoin with Arduino*.

 Basically, this would be a way to call bitcoin for confirmation to activate a motor or flow meter.  This would give us the ability to build a bitcoin vending machine, soda fountain, fuel pump etc.  If someone can write it, I’ll build it and put it on YouTube.  This would also be a very impressive “trick” to get bitcoin some attention.

  Attributes 5, 6, and 7 – My other concern is in regards to the general supply of bitcoins.  I think it is genius the way they are generated and limited and the fact that there is no central server is extremely liberating.  However, I see some challenges.  Suppose bitcoin were to take off over the next few years and steadily gain in value.  I think it gives an unfair advantage to those who got in early and had access to server farms.  I think there are already a few Rockefellers out there.  We then have classes inherently built into the bitcoin hierarchy.  And what about when bitcoins stop generating?  Then we have “the haves” and “the have nots”.  I know generating bitcoins is not the only way, or even the best way to acquire them, but it’s like a commodity, you can acquire gasoline by working for dollars then paying for it or you can be Standard Oil and get in early.  Also what happens if some or maybe a large number of bitcoins get corrupted or lost somehow? 

  At this point, this is the nature of the beast.  My fear is that, at some point it could be realized that some infrastructural modifications could add stability and value to Bitcoin and Satoshi would say “hey, we’ve redesigned Bitcoin, but we’re going to have to start over” or it would be too late and bitcoin would be devalued by another digital, anonymous, cash currency that incorporated some features that bitcoin can’t.  I can’t say I really understand exactly how bitcoin works as for as what the blockchain looks like and if features like this would even be possible, but here are some features that I feel could add value to Bitcoin as a platform.

  1. The ability to set up a bitcoin network within the bitcoin network.  Basically a local bitcoin sub-network defined by a given batch # with selected properties.  For instance, suppose I wanted to start a farmers market that operated on bitcoins, but I only have 500 bitcoins.  There are 50 people in the farmers market that all exchange with each other.   For the sake of example each exchanger provides a grocery that each person wants and they are all of equal value.  Each exchanger has 10 bitcoins and those 10 bitcoins buys them enough groceries for the week, because that’s what we’ve agreed they are worth and that’s all we have.  They can be divided almost forever so that’s ok with us.  Suppose that is $100 worth of groceries.  So every week these 50 people exchange 10 bitcoins (.2 bitcoins per exchange) inflow and outflow and end up with 10 bitcoins to start the next week.  Never ending cycle.  This is, of course, a simplified example but it’s only to illustrate a point.  In this model we would currently be exchanging $100 worth of groceries per person in the form of bitcoins, but we are really just exchanging groceries.  The value is dictated by the people growing and exchanging the groceries and depending on how they are exchanged past that point gives them real value exponentially. Bitcoin is just the accounting method. Now if we were to do this with the current bitcoin infrastructure, anyone could buy 500 bitcoins off the exchange for 35 bucks and purchase the entire farmer’s market.  And in order to purchase enough bitcoins to equal the current $ exchange rate would be 71,428 BTC equaling $5000.  Now if we want to use those 71428 btc and value them accordingly as our local currency, fine, but then we are subject to the exchange rate against the $.  If something happened and the bitcoin currency lost value by 90% someone could again purchase BTCs for pennies on the dollar and come in and buy the whole farmers market.  Furthermore if every county in the United States decided to do this it would require 224,357,142 BTC.  The ability to exchange with the open bitcoin market would be a valuable attribute, but it would have to be established on the individual basis.

  2.  The other feature would be to allow the option for bitcoins, specifically for a locally defined sub network, to diminish gradually at a definable rate through time.  Similar to the way grain receipts would gradually loose value in the Middle Ages to account for spoilage.  This would discourage hoarding and encourage spending and the velocity of exchange.  This would also solve the problem of lost bitcoins that would eventually expire and regenerate into new bitcoins.         
I’ll leave it at that for now.  I have some more ideas, but I don’t want to get too long winded.  I look forward to any responses.  I’ll also post an arduino library thread to see if I can get some feedback.   

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[Red]

Well written! You've struggled with some of the same issues I have. I invite you to comment on some of the other threads as well. For example the GETS thread and the commodity thread.

The arduino idea is quite cool!

[MoonShadow]

 Attributes 5, 6, and 7 – My other concern is in regards to the general supply of bitcoins.  I think it is genius the way they are generated and limited and the fact that there is no central server is extremely liberating.  However, I see some challenges.  Suppose bitcoin were to take off over the next few years and steadily gain in value.  I think it gives an unfair advantage to those who got in early and had access to server farms.  I think there are already a few Rockefellers out there.  We then have classes inherently built into the bitcoin hierarchy.

This really shouldn't be a concern, as we are still in a highly 'inflationary' period.  Those "Rockefellers" can only be so by saving their bitcoins until that day comes, which will not happen overall.  No one saves a fortune to die from hunger, those bitcoins will be spent.  Classes are, themselves, not really an issue here.  Classes are a cultural phenomenon, and a naturally occuring one at that.  Those cultural classes are not natural on the Internet.

  And what about when bitcoins stop generating?  Then we have “the haves” and “the have nots”.

In 120 years, we may have such class division.  Likely not so much within a future Bitcoin economy than we do presently in our managed fiat currency economies.  

 I know generating bitcoins is not the only way, or even the best way to acquire them, but it’s like a commodity, you can acquire gasoline by working for dollars then paying for it or you can be Standard Oil and get in early.

Standard Oil is a funny choice to represent this point, since Standard Oil didn't come to dominate because they were first, or even early.  They came to dominate because they were *cheapest*.  They had the most efficient distribution system ever devised at the time.  They were the Wal-Mart of energy in their own day.

 Also what happens if some or maybe a large number of bitcoins get corrupted or lost somehow?  

Deflation happens, that's why it's good that Bitcoins are so divisable.

  

  1. The ability to set up a bitcoin network within the bitcoin network.

I'm afraid that what you are suggesting here would break Bitcoin.  As an alternative, you could look into the LETS systems discussed elsewhere, and potentially 'back' the LETS with some number of bitcoins.

  2.  The other feature would be to allow the option for bitcoins, specifically for a locally defined sub network, to diminish gradually at a definable rate through time.  Similar to the way grain receipts would gradually loose value in the Middle Ages to account for spoilage.  This would discourage hoarding and encourage spending and the velocity of exchange.  This would also solve the problem of lost bitcoins that would eventually expire and regenerate into new bitcoins.        

This is already considered in the Bitcoin system.  Bitcoin will continue to 'inflate' at a predetermined rate for about 120 years.  The max number of bitcoins is a function of the 64 bit number itself, and the declining rate of inflation chosen specificly to exploit that binary number to maximum effect.  The current appreciation of the value of a bitcoin is only a function of the expansion of the economy that Bitcoin represents at a rate higher than the inflation rate, which is still over 100% APR.  (as expressed annually, that rate will hit 100% APR near it's first anniversary, 50% APR near it's second anniversary, and 25% on it's third.  However, the inflation rate APR % will be about 6.25% on it's fourth anniversary)  Despite this high initial rate, Bitcoin cannot inflate indefinately, and a declining rate was chosen that fits well into the technical constraints of that 64 bit number.  (A bitwise shift, as I understand it; so the number of 50 coins per block currently was not chosen arbitrarily)  As for the 'lost bitcoins' issue, how would you identify which are lost, and which are simply saved, without a non-anonymous record of who has what?  That, also, would break the system for a great many.

[FreeMoney]

http://www.bitcoinwatch.com/

Daily total transfers and market prices.

[kiba]

Standard Oil is a funny choice to represent this point, since Standard Oil didn't come to dominate because they were first, or even early.  They came to dominate because they were *cheapest*.  They had the most efficient distribution system ever devised at the time.  They were the Wal-Mart of energy in their own day.

Standard Oil was never able to completely dominated the oil industry. By the time the anti-trust lawsuit was successful, it only have a marketshare of 64%. This was because they did not tried to undercut their competitor by outpricing them out of the market.

Even if was a monopoly, Stanard Oil earned it.

[kiba]

 Attributes 5, 6, and 7 – My other concern is in regards to the general supply of bitcoins.  I think it is genius the way they are generated and limited and the fact that there is no central server is extremely liberating.  However, I see some challenges.  Suppose bitcoin were to take off over the next few years and steadily gain in value.  I think it gives an unfair advantage to those who got in early and had access to server farms.  I think there are already a few Rockefellers out there.  We then have classes inherently built into the bitcoin hierarchy.

Those who got in early do so at the risk of bitcoins not taking off. Their generation of bitcoins would be quite useless if the bitcoin economy is not successful. So for those bitcoin miners, it is in their interest to invest in the economy. The more they invest in the economy, the potential for big pay day. However, useless activities mean that they either lose their bitcoins or their USDs. Eventually, it will even out the bitcoiners who invest not so wisely from the so wise.

Those who sit on their bitcoins and expect to get rich are mere gamblers.

Don't be so conceited that there are who are in rich class will remain so in perpetual. Entrepreneurs who win big may displace older business owners.

[MoonShadow]

Even if was a monopoly, Stanard Oil earned it.

That's pretty much what I was trying to say.

[FreeMoney]

All the "have nots" have to do is find one thing that one "have" wants and exchange. Unless you are suggesting that everyone with coins will keep them all no matter what is offered, which is just not true. Or maybe before buying a used book every single bitcoin owner will verify that they are in fact trading with someone who already has bitcoins and not letting one of those dirty "have nots" into the club. A very silly thing to worry about.

Will some people have more bitcoins than others? Absolutely. That's the point. People who provide more of what people want are rewarded.

[EconomyBuilder]

Here's how I see it:

(1) There needs to be an incentive for early adopters.   They are taking a risk because bitcoins might end up very valuable or they might end up worthless, depending on what the future demand for bitcoins is.  So there should some deflation built into the system.

(2) The deflation can't be too big, or it will discourage later adopters who will think they're being scammed by a pyramid scheme.   Also, according to some economists (hotly disputed by others) too much deflation can cause hoarding meaning fewer transactions being made in the currency.   Is it true?  Hopefully we'll get to find out.

Corollary to (2): if you don't like the deflationary monetary policy of the current bitcoin currency, or some other feature of it,  feel free to start your own and see if you can win over the merchants.

[GoldRush]

(2) The deflation can't be too big, or it will discourage later adopters who will think they're being scammed by a pyramid scheme.   Also, according to some economists (hotly disputed by others) too much deflation can cause hoarding meaning fewer transactions being made in the currency.   Is it true?  Hopefully we'll get to find out.

You're confusing two different concepts.  bitcoins are more similar to a commodity than a currency.  When you think bitcoins think gold.  Or the stock price of a publicly traded company.  Holding onto these assets with the expectation that their value will appreciate is not bad for an economy.  In fact, you aren't going to change any economy with bitcoins.

If the price of bitcoins is rising then that means bitcoins are successful.  People are holding them for their value.  That's what you want.  It's not good or bad.  If people worry it's a "pyramid scheme", then it's no different than people worrying about a bubble in the price of gold.  People worry in all markets.  If you didn't have worry then you would not have price discovery.

Don't forget that every time someone buys a bitcoin there is also a seller.  So when someone bets that the value will increase, there is someone else betting the value will decrease.

In other words, it's all good.    I'd measure the success of bitcoins by the number of people that claim to hold them.

[FreeMoney]

I'd measure it by the number of hamburgers they'll pay for a coin ;-)

[Red]

I saw a good definition of success when researching LETS. Int holds for bitcoin as well.

Money is hard to earn and easy to spend.
Bitcoins are easy to earn but hard to spend.

You can judge the success of bitcoin by how easy it is to spend your bitcoins on something that improves your life.

What's the point of owning 100,000 BTC if you can't buy the occasional, wine, woman or song?

[GoldRush]

I saw a good definition of success when researching LETS. Int holds for bitcoin as well.

Money is hard to earn and easy to spend.
Bitcoins are easy to earn but hard to spend.

You can judge the success of bitcoin by how easy it is to spend your bitcoins on something that improves your life.

What's the point of owning 100,000 BTC if you can't buy the occasional, wine, woman or song?

You will have a hard time spending your gold bullion.  I wouldn't make the mistake of then assuming you don't want any gold bullion.

This is an important point that people are missing.  The success of bitcoin will depend heavily on how easily you can convert between bitcoins and the US dollar.  The number of retailers that accept bitcoins is not nearly as important.  We need 3 or 4 competing exchanges.  Once you have that, market forces will do the rest.

[fresno]

The dealers and exchanges ARE the market. Bitcoin is the system of accounting, not the things being accounted for.

Posters here have been confusing the Bitcoin with currencies, with Federal Reserve Notes, and with Euros. Now you want Bitcoin to get your women and booze. No! Find a dealer that has what you want and see what he will take for it. If it's Bitcoins, then you've got a deal.

[Red]

You will have a hard time spending your gold bullion.  I wouldn't make the mistake of then assuming you don't want any gold bullion.

Exactly my point. USD is much more useful as money than gold bullion is.

This is an important point that people are missing.  The success of bitcoin will depend heavily on how easily you can convert between bitcoins and the US dollar.  The number of retailers that accept bitcoins is not nearly as important.  We need 3 or 4 competing exchanges.  Once you have that, market forces will do the rest.

I think this statement is off base. The success of PayPal depends on how easily it converts to the US Dollar (et al). Bitcoin will be a success when you don't have to convert them to anything. That is the point of the exercise. Creating electronic proxies for Dollars has been done to death. It's easy by comparison.

Fresno, bitcoin is designed to be currency-like for use in a currency-like fashion. That's the point if the exercise. Merchants treat and use bitcoins as money. Markets for trading different currencies are secondary to the concept.

Digital accounting and limited edition digital commodities are trivial and uninteresting by comparison.

[silverman]

You might be a little US-centric, Red. Will you say the same thing in six months when the world discovers it's no more valuable than any other bankrupt currency?

[GoldRush]

Digital accounting and limited edition digital commodities are trivial and uninteresting by comparison.

An anonymous digital commodity is clearly not trivial.  Gold is very trivial however.  And you should hold a little physical gold for security.  Something tells me you prefer a fiat currency instead. 

Do you honestly think the US government is going to allow a significant number of retailers to accept bitcoins?  How, exactly, do you ensure compliance with tax laws when people are spending bitcoins?  You don't.  And the IRS isn't going to be understanding about that.

[jgarzik]

Do you honestly think the US government is going to allow a significant number of retailers to accept bitcoins?

Why not?  The currency is public and traceable, and no one seems to have objections to Microsoft Points, FarmVille credits, Linden$, etc.

How, exactly, do you ensure compliance with tax laws when people are spending bitcoins?  You don't.  And the IRS isn't going to be understanding about that.

How, exactly, do you ensure compliance with tax laws when people are spending US paper dollars (cash)?

(rhetorical question...)

[GoldRush]

How, exactly, do you ensure compliance with tax laws when people are spending US paper dollars (cash)?

(rhetorical question...)

Call it rhetorical if you like, but that does not make your point.  The IRS has the ability to audit your bank accounts.  That makes it really hard to cheat on your taxes in any significant way.  Your bitcoin wallet is easily hidden, however.

And no, the IRS is not ok with Linden dollars and the rest.  Congress is already nervous about transactions that use anything other than the US fiat currency.

http://themonetaryfuture.blogspot.com/2010/01/irs-may-push-for-tax-compliance-in.html

You guys are fooling yourselves if you think bitcoin can be successful as a currency instead of a commodity.  If you treat it as a commodity I think it'll survive.  If you try and talk retailers into accepting bitcoins then you are just digging your own grave.

Have you forgotten the raid on the Ron Paul silver dollars?  Their mistake wasn't the silver dollars.  It was the move of retailers in the north-east to accept them instead of the US fiat currency.

http://www.thestreet.com/story/10390631/raid-on-ron-paul-dollar-maker.html

[jgarzik]

How, exactly, do you ensure compliance with tax laws when people are spending US paper dollars (cash)?

(rhetorical question...)

Call it rhetorical if you like, but that does not make your point.  The IRS has the ability to audit your bank accounts.  That makes it really hard to cheat on your taxes in any significant way.  Your bitcoin wallet is easily hidden, however.

And no, the IRS is not ok with Linden dollars and the rest.  Congress is already nervous about transactions that use anything other than the US fiat currency.

http://themonetaryfuture.blogspot.com/2010/01/irs-may-push-for-tax-compliance-in.html

Your link does not substantiate your argument that "IRS is not ok with Linden dollars and the rest".

It should surprise no one that the IRS wants to tax income generated by US citizens.
It should surprise no one that it is likely illegal to not report bitcoin income to the IRS.

And none of this changes bitcoin's viability in any way.  The IRS just wants you to report income, regardless of currency, or even if there is no currency involved at all.

[edited to add barter link]

You guys are fooling yourselves if you think bitcoin can be successful as a currency instead of a commodity.  If you treat it as a commodity I think it'll survive.  If you try and talk retailers into accepting bitcoins then you are just digging your own grave.

Have you forgotten the raid on the Ron Paul silver dollars?  Their mistake wasn't the silver dollars.  It was the move of retailers in the north-east to accept them instead of the US fiat currency.

http://www.thestreet.com/story/10390631/raid-on-ron-paul-dollar-maker.html

Again, your link does not substantiate your arguments.  That guy was a nutter trying to sue the US mint.

OpenCoin has a nice legal report on the currency that's worth reading.