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

[benjamindees]

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

Traders already pay transaction fees.

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)?

I realize English is not your native language, but lender/borrower/loan is not the correct terminology.  You would do better to substitute, eg. lender=saver, borrower=trader, loan=Bitcoins.

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[jtimon]

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.

I'm not sure I get.
If you don't need the block chain, maybe you don't need bitcoin in the first place.

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.

Maybe I should say that discourages trade instead of transactions. If you buy 100 cofees for 20 btc you're trading more than if you buy just one.
The point is that your proposal doesn't take time into account. If you buy one coffe with a 0.20 btc you just have recently acquired you will pay the same fees as another one that uses 0.20 btc that aquired a year ago.

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?

As creighto points out, storing "older coins" is more expensive for the network than storing "newer coins". Why only traders have so pay for storing everybody's account?
Since transaction fees will still exist, traders will still pay more than other users for the service the use the most, only they will pay lower fees because they don't have to cover the cost of "storing".

[jtimon]

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)?

I realize English is not your native language, but lender/borrower/loan is not the correct terminology.  You would do better to substitute, eg. lender=saver, borrower=trader, loan=Bitcoins.

No, English is not my native language, so I appreciate any correction in my use of it.
But, but as far as I know...
savers = hoarders + people who store goods for future consumption + investors who don't borrow money + lenders
You don't need to borrow money to be a trader.

[benjamindees]

savers = hoarders + people who store goods for future consumption + investors who don't borrow money + lenders
You don't need to borrow money to be a trader.

Then I'm a little confused as to what this discussion has to do with lending/borrowing.  Can you explain that?

[jtimon]

savers = hoarders + people who store goods for future consumption + investors who don't borrow money + lenders
You don't need to borrow money to be a trader.

Then I'm a little confused as to what this discussion has to do with lending/borrowing.  Can you explain that?

The Demurrage rate would be substracted from the interest rates, thus leading to cheaper loans for borrowers.
That's an effect that most people in this forum consider undesirable. On the other hand, I consider that effect (provided that the demurrage rate is lower than the "liquidity premium" and therefore does not affect the risk premium) desirable.

[Raulo]

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.

It's going to be a problem much sooner than that. Would you buy gold now if you knew that it would likely turn into lead in 40 years?

Even if we somehow collectively solve this problem, there is another one. Contrary to what Satoshi wrote at the beginning, Bitcoin is a quite expensive system to maintain. At the current difficulty and BTC price, miners are paid 25-30 million USD a year (by block inflation) to protect 40-45 million USD Bitcoin market value. The current BTC price/difficulty may be abnormally high but the electricity alone costs a cool 1-1.5 million USD a year and equipment depreciation is 2-3 times of that and it will rise when BTC price/difficulty drops. And Bitcoin is barely safe to an attack because Bictoin need to maintain this capacity constantly and attackers can just use short bursts. I'm not sure that the mainstream banking costs for transaction system and money supply are so high percentwise for the same amount of money supply and trading that Bitcoin offers. The bailouts (which were indeed expensive) went for fixing the lending hole which Bitcoin is not doing.

Bitcoin will either be expensive or attack prone. Both outcomes are not good for the BTC value.

[benjamindees]

The Demurrage rate would be substracted from the interest rates, thus leading to cheaper loans for borrowers.
That's an effect that most people in this forum consider undesirable. On the other hand, I consider that effect (provided that the demurrage rate is lower than the "liquidity premium" and therefore does not affect the risk premium) desirable.

I don't really get why you think it is possible to artificially manipulate the risk-free interest rate without affecting the risk premium.  When a borrower has the option of default, there is no distinction between risk-free interest rate and risk premium -- they are inextricably linked.  And since Bitcoin isn't going to be building debtor's prisons or enforcing wealth redistribution, it would be irresponsible to build such assumptions into the system.

Okay, so you just want to tax savers which would indirectly benefit borrowers.  We get that.  But if the demurrage is close to the actual cost of securing the network, then the effect is nil.  So couching your argument in terms of borrowing and lending just seems out of place.

The bailouts (which were indeed expensive) went for fixing the lending hole which Bitcoin is not doing.

The lending hole was caused by inflation and fractional reserves subsidizing investors.  Bitcoin eliminates that.

[MoonShadow]

As creighto points out, storing "older coins" is more expensive for the network than storing "newer coins". Why only traders have so pay for storing everybody's account?

This is not quite what I intended.  Older coins are not more expensive than newer coins.  Several dispersed transactions holding one person's funds is ore expensive than fewer transactions holding that same total.  It just tends to be more likely for older transactions because savers who have more bitcoin in total than is required for regular trade have a security incentive to spend the most recent matured coins before the older coins.  The default client behavior is to spend the oldest transactions first, but this can be changed; and thus it will if the incentive for savers to keep the bulk of their funds in many older transactions as compared to a few consolidated transactions.  I don't want the costs of storage to be very high, because I still want Bitcoin to favor capital accumulation.  It's just that there still needs to be some incentive for those early adopters to consolidate their holdings rather than keeping 400,000+ BTC in 8000+ transactions of 50 BTC apiece.

A max limit doesn't make any sense, however.  The fee needs to be roughly equivalent to the problem in order to encourage the desired behavior; which means that it needs to increase relative to the age of the transaction.

[goatpig]

I'm not sure I get.
If you don't need the block chain, maybe you don't need bitcoin in the first place.

The block chain secures the network. But it doesn't HAVE to be used to trade, it's merely the main frame. If you enforce rules on the block chain that people regard as unfair, they will naturally stray away from it, using escrows or key swapping to trade instead, and that will reduce the traffic on the block chain, thus reducing miners' fee, and reducing the security overall. As it stands, use of the block chain is voluntary, so you can't go around pushing rules on it.

Maybe I should say that discourages trade instead of transactions. If you buy 100 cofees for 20 btc you're trading more than if you buy just one.

You miss the point. Right now whether I pay .20 BTC or 20 BTC, I'm paying the same fee. Fee is based on transaction size, not volume. What is charged is the amount of data that needs to be added to the block chain for the transaction to take place. That is of course logic. But if you feel you need to modulate fees based on another criteria than block chain load because the payout is too low, then I say let things settle naturally and watch miners charge fees based on volume too.

My point still stands, flat fees always hurt small trades. Once again that will push people towards escrows, who will offer cheaper transfers while not paying a cent to the miners.

The point is that your proposal doesn't take time into account. If you buy one coffe with a 0.20 btc you just have recently acquired you will pay the same fees as another one that uses 0.20 btc that aquired a year ago.

I do not think time of entry is a legitimate cause for higher fees. You people are presenting hoarders as some sort of free loaders on the economy that only take and don't give anything in return... The network has grown to what it is thanks to long time holders. Not thanks to miners, not thanks to speculators, but thanks to long time investors alone, who took a chance and invested into Bitcoins. You are offering to chastise these people for the very action that bears the economy.

As creighto points out, storing "older coins" is more expensive for the network than storing "newer coins". Why only traders have so pay for storing everybody's account?

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.

Maybe you should take a little more time in reading the people you refer to. Traders are the ones making the block chain heavier, certainly not hoarders.

Nevertheless, the whole idea that hoarders just sit on their money and NEVER participate in the economy is preposterous.

[goatpig]

It's just that there still needs to be some incentive for those early adopters to consolidate their holdings rather than keeping 400,000+ BTC in 8000+ transactions of 50 BTC apiece.

How is that an issue?

[MoonShadow]

Bitcoin will either be expensive or attack prone. Both outcomes are not good for the BTC value.

It's only so expensive now because the economy that it represents is so small, and the inflation rate is so high.  That ratio will change with the growth of the economy and the first block reward cut.

[MoonShadow]

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.

Maybe you should take a little more time in reading the people you refer to. Traders are the ones making the block chain heavier, certainly not hoarders.

Traders are also already charged for this privilege.

Nevertheless, the whole idea that hoarders just sit on their money and NEVER participate in the economy is preposterous.

I don't contest that, which is why I thought the idea (someone else's) to charge the demurrage rear-loaded upon eventual spending was brilliant.

[elewton]

While I don't particularly like the conclusion, I understand the argument.

Does it not come back down to the market?  If I understand it correctly, miners will eventually produce diverse rulesets for the trades they are willing to process and the fees they will be charging.

If it becomes an issue, the client can integrate a feature which allows choice between ruleset pools upon transaction.  Miners can switch between ruleset pools as they please.

[MoonShadow]

It's just that there still needs to be some incentive for those early adopters to consolidate their holdings rather than keeping 400,000+ BTC in 8000+ transactions of 50 BTC apiece.

How is that an issue?

Because as the network grows, the resources required to store those many old transactions grow at least as much.  New clients must download and verify each of those transactions for as long as they persist.  A single transaction with 400,000 BTC costs exactly the same amount to store as the same transaction with 50 BTC; but one person with holdings totaling 400,000 BTC spread across 8000 transactions imposes 8000 times as much burden of resources upon the network.  The idea is to encourage that person to consolidate his holdings into fewer transactions, without forcing him to do so, as he can still choose to leave them where they are if he is okay with 8000 times as much storage fees as is necessary.  It also has the effect of partially compensating the miners for the resources that those many transactions consume; not just 8000 times as much disk space, but 8000 times as much bandwidth for every new client that connects to that node to download the existing blockchain.  Currently, it still doesn't matter; because the miners are more than compensated for these things with the block reward and blockchain pruning is not yet implemented anyway.  I'm just thinking ahead.

[MoonShadow]

While I don't particularly like the conclusion, I understand the argument.

Does it not come back down to the market?  If I understand it correctly, miners will eventually produce diverse rulesets for the trades they are willing to process and the fees they will be charging.

If it becomes an issue, the client can integrate a feature which allows choice between ruleset pools upon transaction.  Miners can switch between ruleset pools as they please.

That's fine, but it would still be ideal if everyone knew in advance what those rulesets are likely to include.  This means that it would be wise to include storage fees/demurrage sooner rather than later.  It needs to be part of the status quo before the economy grows so large as to solidify that status quo, which in practice means that it needs to be included into the standard clients and miners as a default condition.  Miners could then choose to opt out of charging that fee at their own will, just like they can opt out of limiting the size of the free transaction section of the block now.

[elewton]

The ability to select rulesets now would be nice, since it would allow us to choose between free pools and non-free pools with reasonable estimates of time-til-confirmation.

Unfortunately, it's easier said than done, so unless people are willing to pony up the Bitcoins now to incentivise and empower Gavin et al., I'm not sure it's going to happen soon.

[caveden]

Miners are free to charge more to process older coins.

That doesn't make much sense. They should charge less, precisely because including transactions with old coins help them pruning the chain.

[BitterTea]

Can someone define "hoarding" in a way that is incompatible with "saving"? In my opinion, the two are one in the same. Hoarding is just what one person calls another's saving "too much".

Doesn't a demurrage charge upon spending actually discourage the consolidation of multiple outputs into a single one?

I don't think "encouraging" investing is a good goal for a money. Doing is only an attempt at modifying people's preferences to bring about and end result that you prefer, as opposed to one they prefer.

[caveden]

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.

Here you imply that someone could have "billions worth" of profit by exploiting the >50% vulnerability, but as I said multiple times, that is not that simple.

You can't steal all bitcoins by having control of the chain. All you can do is double-spend. And that's fraud. You'd be vulnerable to the same risks anyone has when committing fraud. If you try to fraud a billion worth contract of any kind, you'll probably sleep with the fishes. And the amount doesn't even need to be that high. The chances of making profit out of such kind of attack are extremely low.

And a non-profit oriented attacker couldn't steal billions worth of money either. It could temporarily pause the network until developers and miners find a way to get around him. The more money at stake, the stronger the incentive to get this scumbag government ostracized from the network.


There really should be a FAQ about the true risks of a >50% attack.

[jtimon]

The Demurrage rate would be substracted from the interest rates, thus leading to cheaper loans for borrowers.
That's an effect that most people in this forum consider undesirable. On the other hand, I consider that effect (provided that the demurrage rate is lower than the "liquidity premium" and therefore does not affect the risk premium) desirable.

I don't really get why you think it is possible to artificially manipulate the risk-free interest rate without affecting the risk premium.  When a borrower has the option of default, there is no distinction between risk-free interest rate and risk premium -- they are inextricably linked.  And since Bitcoin isn't going to be building debtor's prisons or enforcing wealth redistribution, it would be irresponsible to build such assumptions into the system.

What I understand for liquidity premium is this: Interest rate = liquidity premium + risk premium + inflation premium
What I claim is that if demurrage rate < liquidity premium, then risk premium won't be affected by demurrage.
The liquidity premium emerges from the fact that historically monetary systems have defined money to be (nominally) time resistant. If money was made of carrots, for example, instead of gold, money would have a built in demurrage without enforcing it. If time resistance is a necessary quality of money or not is another discussion.
With risk-free loans, the lender still can (and therefore will) charge the liquidity premium and the interest won't be zero, preventing investments that economically viable (in terms of resources although not in terms of capital yield) from happening.
What prevents houses from being treated as consumer/producer goods? Liquidity premium.
If houses were consumer goods, the rent from the entire "life" of the house should just be enough to cover the cost of production (plus profit). If hoses are treated as capital, their price depends on the yield of the house (rent) compared to the yield of money (excluding the risk premium) or the liquidity premium. If a type of capital have a greater yield than money, more of that type of capital will be produced until the yield drops (by competition between the capital of the same type) and equals the yield of money. If a type of capital have a lower yield than money, no more capital of that type will be produced until its yield increases (by increasing demand) and surpasses the yield of money. Therefore the yield of money is the reference (and the limitation) for every capital accumulation. No new house will be built (even if there's demand and enough resources for it) if it won't be at least as profitable as money.
That's a feature built in and "enforced" in dollars, gold and bitcoins.
For Gesell, that liquidity premium built in "regular" money is the only "evil force in capitalism". Most pains come from regulations from the state.
I know I've repeated it many times, but you libertarians and austrians should give a chance to Gesell because his ideas are not incompatible with libertarianism. If they are, I think no Austrian economist have made a serious critique of them.
Please anyone let me know if you have read that.

Okay, so you just want to tax savers which would indirectly benefit borrowers.  We get that.  But if the demurrage is close to the actual cost of securing the network, then the effect is nil.  So couching your argument in terms of borrowing and lending just seems out of place.

If you think the effect of a demurrage close to the actual cost of securing the network is nil, then I don't need to convince you that demurrage won't have evil effects (at least not in this thread), but not everybody here think that way.