Demurrage, transaction fees, storage fees & comparison to commodity money.

[jtimon]

Most of you probably know that I'm an advocate of demurrage for different reasons, but the point that the security of the network can rely on it because of this tragedy of the commons in storage is new to me and an interesting concept.
I've been learning a lot about austrian economics lately because I realize that I lack some knowledge that most people have in this forum, and that my discussions here would be much productive for everyone.
I just saw a video that explains very well the austrian fears of reducing interest:

http://www.youtube.com/watch?v=jFqtTj7TeO0

What I claim is that a small demurrage will increase investment without decreasing saving.
Demurrage would move the interest curve down (but just vertically). Of course, if the demurrage is too high, money would not only not suitable for hoarding but also for lending, because no borrower would demand that money.
When reducing interest by printing, the central bank is competing in the credit market against the real savers, but these new savings are stolen from every owner/lender through inflation. Inflation discourages lending and the interest rates (of the real savers) go up. If they can't compete with the central bank, they will get out of the credit market.
On the other hand, demurrage is a fee on hoarding, so spending and lending are promoted while giving the borrower an advantage to negotiate the interest.

-How users benefit from demurrage?
Through a more secure network and lower transaction fees.
-Is demurrage a fee on saving?
No. It is a fee on hoarding. You can save by lending, investing or just storing goods for your future consumption.
-Is demurrage inflationary?
Yes and no. With the same monetary base, prices would be higher with demurrage than without it because velocity is greater. But with a fixed monetary base prices would drop with growth too. Also, as interest rates are lower, the cost of production would be reduced.
-Who would want to use money with demurrage more?
Entrepenuers that borrow to invest, because they would benefit from the lower interest rates without paying much demurrage fees, because they would spend the money from the loan quickly.
-Why merchants would accept money with demurrage?
Because they have potential clients with that kind of money willing to pay with it.
-Wouldn't they prefer to be paid in a similar currency without demurrage?
Of course. They would also prefer to be paid the double of the offered price instead of just the price they ask for the good. The prices for the demurrage currency would be just higher, but they would accept it.

Note that my proposal for demurrage is different than the one of creighto.
He proposes that the current miner charges the demurrage fee at the moment of the transaction and only in certain situations.
I propose the demurrage fee to be charged every block to every account and the total demurrrage paid to be added to the reward.
This distributes the payment to the miners for their collective storage service in a more uniform and predictable fashion. The block reward is kept while having a stable monetary base (after the demurrage fees equal the reward). The monetary base would in fact be more stable that without demurrage because the lost wallets would eventually evaporate through it.

[benjamindees]

What I claim is that a small demurrage will increase investment without decreasing saving.

At the cost of increased risk.

Which eventually negates any perceived gains that can be attributed to demurrage.

And which in the end only serves to transfer wealth from everyone, to risk takers.

Does any of this sound familiar?

[jtimon]

What I claim is that a small demurrage will increase investment without decreasing saving.

At the cost of increased risk.

I don't get why. Can you explain it?

I assume is increased risk for the lender. As I see it, the risk premium is still there in the interest. The demurrage would be subtracted from the basic interest (liquidity premium) first. The lenders would still charge for the risks taken.
The demurrage fee is paid for liquidity, not for not taking risk. If the demurrage rate equals the liquidity premium, the (ideal) totally safe investments would have zero interests, but the saver could still avoid risks. What he cannot do anymore is profit without taking risk, but you don't need profit to save. You just need to postpone consumption.
If you save with a demurrage currency you gradually lose value, just like Robinson's fishes rot. It's not a stupid thing for him to lend them without interest. He has to value the risk of not being paid back too.

And which in the end only serves to transfer wealth from everyone, to risk takers.

I think the transfer is from "everyone" to miners. They get directly the same amount that is charged to holders.

[benjamindees]

As I see it, the risk premium is still there in the interest.

Loans aren't always paid back.  Forcing someone to make a loan alters the interest rate and the risk premium, you say so yourself.

What he cannot do anymore is profit without taking risk,

Why is profiting without risk a bad thing?

If we each start off with an ounce of silver, and you eat yours on the theory that it will protect you from disease, while I put mine in a sock drawer, why should I be punished for profiting by not taking risk?

I think the transfer is from "everyone" to miners. They get directly the same amount that is charged to holders.

Yes, but miners perform the integral function of preserving the integrity of the block chain, and (according to the proposal of market-based fees at least) if they don't, no one will be willing to transfer wealth to them.

Instead what you're proposing is that we force everyone to transfer wealth to investors who might as well spend it on hookers and blow for all you know.

[jtimon]

As I see it, the risk premium is still there in the interest.

Loans aren't always paid back.  Forcing someone to make a loan alters the interest rate and the risk premium, you say so yourself.

Loans aren't forced. One can store goods for future consumption, buy IOUs to his providers, invest the money in their own business. Demurrage, if lower than or equal to liquidity premium (if you allow me to use that term) won't affect the risk premium.

What he cannot do anymore is profit without taking risk,

Why is profiting without risk a bad thing?

If we each start off with an ounce of silver, and you eat yours on the theory that it will protect you from disease, while I put mine in a sock drawer, why should I be punished for profiting by not taking risk?

Purchasing any asset has risk. If the price of silver goes up, you're profiting from arbitrage, but the demand for silver could drop and make you lose money, so that's a risk.

I think the transfer is from "everyone" to miners. They get directly the same amount that is charged to holders.

Yes, but miners perform the integral function of preserving the integrity of the block chain, and (according to the proposal of market-based fees at least) if they don't, no one will be willing to transfer wealth to them.

Instead what you're proposing is that we force everyone to transfer wealth to investors who might as well spend it on hookers and blow for all you know.

There's no transfer to investors. Their financial costs would drop, but as competitors force them to reduce profit, the prices of their products will drop accordingly. Miners would perform the same function but they would rely less on transaction fees because of their demurrage fee inputs.
Borrowers can always spend their money on hookers, even with high interest rates.

[benjamindees]

I propose the demurrage fee to be charged every block to every account and the total demurrrage paid to be added to the reward.

Okay so I somehow glossed over this.  You want a uniform demurrage that's based on, what exactly?  Per account?  Balance?  I don't really see any justification for either...

Demurrage, if lower than or equal to liquidity premium (if you allow me to use that term) won't affect the risk premium.

Then how do you calculate the liquidity premium and build that into your centrally-managed system?

Regardless, doing so would just create an arbitrary magic number that is actually worse than centrally-managed interest rates.  It would bear no connection whatsoever to the real economy, let alone the problem at hand which is the ongoing cost of storage and block processing proportional to threats against the network.

I don't see what the problem is with a market-based approach.

What he cannot do anymore is profit without taking risk,

Purchasing any asset has risk.

Doesn't holding Bitcoins qualify as risk?

There's no transfer to investors. Their financial costs would drop, but as competitors force them to reduce profit, the prices of their products will drop accordingly.

Or they will collude, make riskier investments and simply lose more often.  But since I now understand you technically want to subsidize miners rather than investors, this argument is somewhat moot.  None of your assertions about reduced cost of borrowing would pan out, since all the demurrage fees would be spent by miners competing for new blocks.  You'd just be subsidizing mining hardware.

[goatpig]

I don't get what all the excitement is about. A coin that is held on for a long time is a coin that is not part of the market. As such, it increases the value of all the coins that are effectively in circulation. The logic behind hoarding is that the coins keep on valuating so they should be held on for as long as possible. And that on its own helps valuate the each other BTC in circulation even more. So stop panicking already.

Also that demurage idea is worthless. You impose that on me and ima make myself some nice and tidy stacks of 100 BTC per private key and just trade the keys directly while I fill in the smaller amounts with coins from a spending account which are freshly traded...

[jtimon]

As you say, the problem would be that magic number for the demurrrage rate. I don't know what would be enough to "subsidize miners". I think that it shouldn't go above the liquidity premium, which I doubt is even possible to calculate accurately. You'd need a perfect risk calculating machine to then subtract the premium risk from the interest. Also a perfect index for "general prices". It would be definitely easier to calculate the minimum "needed" reward for the miners, but that would have to be done somehow for the market based proposal too.

Instead of subsidizing miners, I would say you're getting them paid for a service they're providing collectively.

One problem I see with the market-based approach is that the fees are paid depending on time, but are received by miners as transaction fees, with blocks giving more fees than others in terms of demurrage. It would be distributed less uniformly between blocks.

Doesn't holding Bitcoins qualify as risk?

Yes. With competing currencies, holding one of them has a risk. I lately tend to think about money as if it were only one currency with a stable monetary base. My fault.

Although demurrage fees go to the miners, they benefit borrowers (and consumers indirectly) because the advantage for the lender of money being time resistant disappears from negotiations.
I don't think that many of you would agree with me in that demurrage would have desirable effects beyond improving the security of the network by warrantying a minimum reward for miners. But I would be happy if at least you don't see any undesirable effects neither.

[Raulo]

I don't get what all the excitement is about. A coin that is held on for a long time is a coin that is not part of the market. As such, it increases the value of all the coins that are effectively in circulation. The logic behind hoarding is that the coins keep on valuating so they should be held on for as long as possible. And that on its own helps valuate the each other BTC in circulation even more. So stop panicking already.

A coin held reduces the velocity of money. Hence less fees for the miners (any increased BTC valuation does not help because due to competition with mainstream banking, the fees has to be competitive with mainstream banking and cannot go up in dollar terms). Therefore, less difficulty, with less difficulty Bitcoin network is more prone to attack, less stable and less valuable.

No hoarder has any individual incentive to pay the fees and therefore, the fees will indeed be small, difficulty low, BTC valuation low, and everybody loses. This is known as tragedy of the commons.

[goatpig]

any increased BTC valuation does not help because due to competition with mainstream banking, the fees has to be competitive with mainstream banking and cannot go up in dollar terms

If Bitcoin remains a simple store of value, speculation over it's exchange rate will maintain a decent level of transactions. At the same time, anyone who needs to realize his profit will have to exit out of BTC. Same goes for hoarders. Unless you support the deflationary spiral baloney where hoarders just hold onto their coins forever.

If Bitcoin has a vendor base, then this problem is moot. What do you think vendors will rather support? 1% fee taken off of their profit to sell in Bitcoin, or the 4-7% credit card companies charge to use mainstream banking? Don't you think vendors would be naturally attracted to Bitcoin since the low fee and reduced intermediaries allows them to beat their concurrence?

BTC is a far superior currency than the mainstream fiat is, so it deserves a higher tx fee. But let's assume the fee has to remain in line with fiat txs, then we still have a huge margin in front of us, since it seems you are grossly underestimating the transaction fees and delays imposed by that system.

Lastly, the market will simply adjust one way or another. Include demurage and miners will lower their fees, while hoarders will counter it with private key trading.

[smooth]

You impose that on me and ima make myself some nice and tidy stacks of 100 BTC per private key and just trade the keys directly while I fill in the smaller amounts with coins from a spending account which are freshly traded...

This doesn't work because:

a) it requires the recipient to trust you not to double spend, and

b) the future transaction fee on those 100 BTC will devalue the private key you are trading.  Even with trust, no one would accept an "old" BTC key that's going to pay a transaction fee to circulate at face value (unless they wanted to pay a premium to keep the transaction completely hidden from the world -- that's a different issue).

[MoonShadow]

Also that demurage idea is worthless. You impose that on me and ima make myself some nice and tidy stacks of 100 BTC per private key and just trade the keys directly while I fill in the smaller amounts with coins from a spending account which are freshly traded...

Feel free to do so.  If you can trade keys off network you are not a burden to the network, and someone is going to pay the demurrage fee eventually for them and you.

[MoonShadow]

A hoarder that nicely keeps all his coins in one place and costs the whole network just a few hundred bytes benefits from large difficulty. But pays nothing to keep this difficulty high enough. Without any mechanism for paying for this protection, the difficulty will be set on a level that is too low to protect this collective wealth.  And since nobody has any motivation to voluntarily pay for this protection (because you cannot pay for protection of just your money, you can only pay for protection of everyone's money) the Nash equilibrium will be such that nobody pays and everybody expect everybody else to pay. And one cannot expect that a few billion worth of BTC (let's be optimistic) will be properly guarded by a difficulty level corresponding to a few million dollar compute system.

That's the issue in a nutshell.  I don't really believe that it's a near term problem, as this probably can't even become an issue until the block reward is pretty tiny.  We are talking about 40 years at least.  Still, by that time the system will be too entrenched to introduce any demurrage.  I'm trying to predict a possible issue, long range.

[MoonShadow]

Won't your proposal have the same effect as a small inflation?

No.  Inflation is really the limitless growth of the monetary base, and works like a tax upon the currency's user base.  This hits savers the hardest, and is not relative to their costs.  Demurrage does not devalue the currency overall, and I'm trying to compensate the miners/network for the unfunded costs of long term storage of capital accumulation.  It's not a high cost, really.  But there is a cost, and it would be ideal to have a mechanism that can approximate the costs of capital storage found for other sound money systems.

[MoonShadow]

Note that my proposal for demurrage is different than the one of creighto.
He proposes that the current miner charges the demurrage fee at the moment of the transaction and only in certain situations.
I propose the demurrage fee to be charged every block to every account and the total demurrrage paid to be added to the reward.
This distributes the payment to the miners for their collective storage service in a more uniform and predictable fashion. The block reward is kept while having a stable monetary base (after the demurrage fees equal the reward). The monetary base would in fact be more stable that without demurrage because the lost wallets would eventually evaporate through it.

I think hitting every account for every block is a bit excessive.  Perhaps every account every retarget block instead.  Still, I think that there should be a delay of some kind.  Transaction fees already imply some period of storage.  At least a month, even credit cards give you 30 days "grace".

That said, if there were some way to asses this in an ongoing fashion, that would be preferable from an economic standpoint; I just don't think that is possible from a technical standpoint.

[FreeMoney]

Hoarder: Someone who has done some work for the Bitcoin community and not asked anything in return.

[goatpig]

a) it requires the recipient to trust you not to double spend, and

b) the future transaction fee on those 100 BTC will devalue the private key you are trading.  Even with trust, no one would accept an "old" BTC key that's going to pay a transaction fee to circulate at face value (unless they wanted to pay a premium to keep the transaction completely hidden from the world -- that's a different issue).

a) No problem.

b) Still not a problem. If you can establish enough trust between traders to swap around private keys, you already have enough information to calculate the demurrage on the coin anyways. If I've got a 100 BTC coin with 2 BTC demurrage on it, then ima trade it as a 98 BTC face value coin, and as long as this coin is widely accepted, everyone in the process can skip the demurrage fee. I'm seeing talks of some long term cap on the maximum demurrage fee, once you got a coin that hit the cap, you certainly have no interest whatsoever in spending it through the block chain anymore if you can find someone that'll take the private key instead.

Feel free to do so.  If you can trade keys off network you are not a burden to the network, and someone is going to pay the demurrage fee eventually for them and you.

I don't think it's that simple. My understanding is that demurrage will naturally impact on fees. Miners can and will charge lower fees for "live" coins since they have some sort of "guaranteed" profit through old coins. This is shifting a larger amount of the network cost on long time holders, who by definition have a low motivation to trade their coins. I don't think it's a good idea to lower their trading incentive even more.

This system shouldn't have demurrage because your coins are safe in your wallet. They are exposed when you trade them. The analogy with gold stands in that it costs much less to hold on your gold in some safe place than to move it around. You want hoarders to participate to network fees, then have the fees scale based on tx size AND volume. I move more BTC around, I pay more.

[jtimon]

Note that my proposal for demurrage is different than the one of creighto.
He proposes that the current miner charges the demurrage fee at the moment of the transaction and only in certain situations.
I propose the demurrage fee to be charged every block to every account and the total demurrrage paid to be added to the reward.
This distributes the payment to the miners for their collective storage service in a more uniform and predictable fashion. The block reward is kept while having a stable monetary base (after the demurrage fees equal the reward). The monetary base would in fact be more stable that without demurrage because the lost wallets would eventually evaporate through it.

I think hitting every account for every block is a bit excessive.  Perhaps every account every retarget block instead.  Still, I think that there should be a delay of some kind.  Transaction fees already imply some period of storage.  At least a month, even credit cards give you 30 days "grace".

Hitting every block with a small fee would be the same as hitting every retarget block with a proportionally higher fee. If you charge for each block the fee just have to be smaller for the storing cost to be the same.
The advantage of calculate the demurrage taking into account each block instead of every x blocks is that the storage costs are charged in a more grained (and more fair) fashion.    
The "grace period" it seems logical. Do you have to wait for six confirmation to be able to spend the newly received funds?
The problem would be again that the demurrage reward wouldn't be constant with each block.

That said, if there were some way to asses this in an ongoing fashion, that would be preferable from an economic standpoint; I just don't think that is possible from a technical standpoint.

In fact I think my proposal is easy to implement.
The demurrage fees would be payed (calculated removed from circulation) with each transaction.
The miners would receive the fees not directly from the payer but as "newly created" coins.
It doesn't matter that the holder hasn't pay the demurrage fee yet when a miner receives it, it will be payed with the next transaction so the monetary base remains effectively constant.
In the meantime, your client would discount the demurrage fees from your balance.  

[jtimon]

My understanding is that demurrage will naturally impact on fees. Miners can and will charge lower fees for "live" coins since they have some sort of "guaranteed" profit through old coins. This is shifting a larger amount of the network cost on long time holders, who by definition have a low motivation to trade their coins. I don't think it's a good idea to lower their trading incentive even more.

The demurrage will increase their trading incentive, not only with fees for holding but through lower transaction fees.

You want hoarders to participate to network fees, then have the fees scale based on tx size AND volume. I move more BTC around, I pay more.

This would discourage transactions the same way to every holder no matter how long they hold their money. This do not discourage to hold money but to trade with it.
This would charge traders instead of hoarders.

Hoarder: Someone who has done some work for the Bitcoin community and not asked anything in return.

Yes.
Does the Bitcoin community have to wait indefinitely until he decides how he wants to be compensated?
He is locking part of the total liquidity of the trading system (money) in the meantime.   
Liquidity is a service provided by the trading system.
Why the hoarder have to enjoy that service for free?
Why the lender can charge for that service to borrowers (who probably would enjoy it for little time before he invest his loan) instead of being charged to the holders (who enjoy it) by the maintainers of the trading system (who provide it)?

[goatpig]

The demurrage will increase their trading incentive, not only with fees for holding but through lower transaction fees.

No it won't. You'll simply sit on a coin with capped fee and swap the private keys around, enjoying lower fees on your everyday spending wallet. Overall this will reduce network security long term, because it forces people to design ways to altogether avoid the block chain.

This would discourage transactions the same way to every holder no matter how long they hold their money.

What discourages transactions is trying to buy a cup of coffee for 20 cents with 1 cents fee when you could buy 100 of them for 20 BTC, with the same 1 cent fee.

This would charge traders instead of hoarders.

Traders are the ones who use the system intensively, somehow they should pay less for a service they use the most?