[rthomas6]

I am convinced that many problems with Bitcoin would be solved if we could come up with a way to tie mining difficulty to the currency's demand instead of only to the mining computing power. Instead of ensuring a predictable generation rate, this could ensure a predictable value. When demand wanes, the currency is harder to mine and becomes more scarce, and when demand surges, the currency becomes easier to mine and more available. This would stop some of the volatility in BTC prices. You could plan the rough change in value over time, and build it into the algorithm, perhaps making gains unlimited at first, then making it very deflationary for several years, and gradually easing gains to something like 0-2% deflation per year. A currency with a known long term future value is obviously very useful, and a stable value is also more useful.

I can't think of a decentralized way to measure demand, though, so maybe this is not possible.

[swalsh]

I proposed a way of tying the difficulty level to the quantity theory of money a while ago on economics and alt currency forums of bitcoin talk.

I think if you're going to be successful, you'll have to find a different set of early adopters. Bitcoin is as much ideological as anything, and while some people don't want to see another alt currency because of their level of investment, others just generally don't believe there's anything wrong with the system today.

Anyways, i'd love to actually develop the idea... but I didn't want to spend time on "just another altcoin" unless I had faith it might get some adoption.

[rthomas6]

I did toss out a less thought-out version of the idea on bitcointalk and /r/bitcoin a while back, and you're right, they were not interested. Those communities seemed to think that a non-predetermined amount of coins meant the same thing as a fiat currency. But maybe if something like this is actually built, people that believe in more mainstream economic ideas would get attracted to it and start to use it?

[XorNot]

Once you acknowledge mainstream economic thought (or at least mainstream academic economic thought) might actually be a useful field of study, you've pretty much defeated the point of running Bitcoin with a non-central bank model.

Bitcoin appeals to people who have decided it's outrageous they have to invest their money in productive enterprise to get more of it, and it specifically appeals to greed which says "get in early and get rich easily!"

[dragonwriter]

> Once you acknowledge mainstream economic thought (or at least mainstream academic economic thought) might actually be a useful field of study, you've pretty much defeated the point of running Bitcoin with a non-central bank model.

Perhaps the specific non-central bank model used by Bitcoin, but there could be alternatives to a traditional central bank that might be used in an alternative currency that wouldn't have the same problem, so I wouldn't rush to say that that acknowledgement rules out non-central bank models generally.

[dllthomas]

A protocol that automatically grows the monetary base in response to demand and shrinks it when demand declines kinda is a central bank.

[oscilloscope]

Doesn't Peercoin behave this way to some degree?

http://en.wikipedia.org/wiki/PPCoin#Money_supply

[wmf]

This doesn't sound much more stable than Bitcoin. If demand increases, say, 10x in one year the money supply cannot increase correspondingly.

[jljljl]

Can you share a link to the forum post? I think this is a really interesting idea, and I'd like to see what you proposed and bounce some ideas around, as well as see the altcoin community's objections.

I wonder if there is another community that would be more interested in such a currency's adoption.

[hershel]

Can you please link to your solution ?

[Aqueous]

I think the jury will be out on this until BitCoin achieves a saturation point where its deflation due to rapidly fluctuating demand stops and its deflation due to being limited in supply starts. Which means, not for a while. We won't really know how deflationary BitCoin is intrinsically until the noise in our graph goes down - i.e., it stops being so susceptible to speculative bubbles. Maybe this never happens, but I think as there is more regulatory uncertainty it will.

Any coin that tries to adddress the problem of deflation right now will also have to go through a cycle of gaining widespread adoption before we know whethre or not the monetary policy built into the coin works. PeerCoin if it ever gains wide adoption will almost certainly seem just as volatile as BitCoin as it becomes more widespread. And we wont know until it becomes widespread if it successfully combats deflation.

[maratd]

> You could plan the rough change in value over time, and build it into the algorithm, perhaps making gains unlimited at first, then making it very deflationary for several years, and gradually easing gains to something like 0-2% deflation per year.

You want inflation, not deflation. The value of the currency should decrease at a 2% clip per annum.

This would make it into a realistic currency, where people get annual raises in their salary, prices gradually climb making merchants happy, etc.

You need to conform to basic human psychology for wide adoption. And don't worry about the miners, they will mine regardless, even if it's worth less and less each year ... now the speculators? Those will be gone and good riddance.

[rthomas6]

I can see this once it's up and running with a large market cap, but in my opinion you need the deflation in the beginning to attract users. There's much less of an incentive to use the new 'coin if it doesn't appreciate over time.

[saalweachter]

Well, that's the problem.

If the digital currency doesn't have any significantly attractive qualities outside its use as a store of value, it's a shitty currency.

If you can make a currency that people will use on a day to day basis, voluntarily, despite having 4% inflation (which is a much better target, economically -- the 2% is the weaksauce compromise with the anti-inflationists), then you've created something which has real utility.

[rthomas6]

To have that, the currency must be widely accepted. To have THAT, you need widespread adoption. But to have widespread adoption, you need a reason outside of its immediate utility for people to voluntarily use the currency. There are existing cryptocurrencies that are pretty close to what you're describing (freicoin), but they are not popular because there's no incentive for adoption. So if you don't have the beginning deflation, you need some other method of bootstrapping.

[johndevor]

> You need to conform to basic human psychology for wide adoption.

I don't think inflation is a part of basic human psychology.

[maratd]

> I don't think inflation is a part of basic human psychology.

Regardless of your thoughts, it is.

Most jobs do not experience constant annual productivity gains, but everyone wants a raise at the end of the year and feels like shit when they don't get it. Nominal inflation allows you to give them a raise without impacting your bottom line. Win/win.

Most merchants what to see their prices go up, it signals to them that there is demand for their goods. A steady, slow, increasing demand for their goods makes them feel good. Even if the costs of operating their business are going up at a similar clip, it makes them feel good that they can increase their prices. Having to keep your prices the same or drop them is frustrating, as if you're not making progress. Win/win.

A steady, slow pace of inflation is ideal.

It allows for short term saving, like for a downpayment on a house, but discourages unhealthy hoarding over long periods of time. Again, win/win.

Look, I get it, Economics is an art, etc. but this stuff has been established over a long period of time and it works.

[johndevor]

> Most jobs do not experience constant annual productivity gains, but everyone wants a raise at the end of the year and feels like shit when they don't get it.

End-of-the-year raises can happen in a deflationary economy too, that's not really associated with the inflation / deflation debate. The amount of the raise can be less in nominal dollars but the employee gets the same real purchasing power.

> Most merchants what to see their prices go up, it signals to them that there is demand for their goods.

Price doesn't signal that there is demand for their goods, demand signals that there is demand. Price is a reflection of demand / supply, not the other way around.

> it makes them feel good that they can increase their prices.

But don't they, similarly, feel bad when they see everybody elses' prices also increase? They know that their paycheck gets less and less at other stores.

I think it's hard to draw a connection between feelings and economics.

> It allows for short term saving, like for a downpayment on a house, but discourages unhealthy hoarding over long periods of time. Again, win/win.

We live in a time of unprecedented levels of debt, both personal and national. I'd argue that such debt isn't all that healthy for the long-term growth of an economy.

[maratd]

> The amount of the raise can be less in nominal dollars but the employee gets the same real purchasing power.

1. 99% of people out there have no idea what purchasing power is.

2. The 1% that do either lack the ability or the will to calculate it.

3. It's entirely irrelevant, because in a deflationary environment you will be receiving a pay cut. Remember, most people do not experience productivity gains which necessitates a pay cut. If you're flipping burgers, you're flipping the same amount of burgers you did last year. If your productivity didn't increase and your boss gave you a raise or even kept your salary the same, he's taking money out of his pocket for you. Very nice boss you have there ... also, a very rare creature.

4. Now that you're cutting people's wages ... you've seriously pissed them off.

> Price doesn't signal that there is demand for their goods, demand signals that there is demand. Price is a reflection of demand / supply, not the other way around.

I'm glad you know what a demand curve is. I actually know how to calculate one since I have a formal education in economics and actually took econometrics.

I also ran a pretty successful retail outfit that had revenue in the millions.

Do you know how many times I calculated a demand curve? Zero.

It would have been a waste of time. Because I'm not the only player in the market. I don't have the data.

What data do I have? More people are buying my shit. I'm running out of stock. Let me increase my prices. My prices increased, now people are buying the same amount of shit they did before. I am making more money. I feel good. Oh crap, my supplier increased his prices. My supplier is an asshole. But people are buying my stuff, I just increased prices, things are good!

99% of merchants operate in this way. Yes, I knew the changes were nominal. They still made me feel good. Inflation wins.

> But don't they, similarly, feel bad when they see everybody elses' prices also increase? They know that their paycheck gets less and less at other stores.

No normal human being makes the connection between prices and their paycheck. Not even economists. Yes, that's the rational conclusion. The world doesn't work that way.

When I get a raise, I'm happy with my boss and about my work. When I see prices rise at the store, I'm pissed at the store. There is zero connection there, even though it's obviously all connected.

People aren't computers.

> I'd argue that such debt isn't all that healthy for the long-term growth of an economy.

While I would probably agree with you, the inverse of saving is not debt. It's the lack of saving. You can skip saving a single dollar and still be debt free.

[tlrobinson]

So in a deflationary currency you'll have:

"More people are buying my shit. I'm running out of stock. Maybe I won't decrease my prices this year. My prices didn't decrease, now people are buying the same amount of shit they did before. I am making more money. I feel good. Oh crap, my supplier didn't decrease his prices this year. My supplier is an asshole. But people are buying my stuff, I didn't have to lower prices, things are good!"

[johndevor]

> No normal human being makes the connection between prices and their paycheck. Not even economists. Yes, that's the rational conclusion. The world doesn't work that way.

That's not true. The world is entirely aware of prices and how their paycheck relates to it. It's called a Cost of Living Adjustment:

http://www.ssa.gov/cola/

http://www.investopedia.com/terms/c/cola.asp

[pbreit]

Reply to rthomas:

Nope. Most economists prefer low but stable inflation around 1-3%.

[oafitupa]

And?

[pbreit]

And if you want to find out why, do a little Googling.

[rthomas6]

Correct me if I'm wrong, but I'm pretty sure most economists theoretically prefer an inflation rate of 0. However, they see inflation as less bad than deflation, so they err on the side of caution by generating a safety margin of inflation.

[aggronn]

http://en.wikipedia.org/wiki/Phillips_curve

this is an old theory and has been refined over time, but its still the basic model taught in economics courses.

[fthssht]

2% per annum clip is nonsense dogma. As close to 0 as possible is probably ideal.

[yxhuvud]

If you can achieve that regardless of how deep a recession becomes, sure.

[richcollins]

When demand wanes, the currency is harder to mine and becomes more scarce

If its harder to mine then its harder to transfer. At some point you're stuck with something worthless.

[rthomas6]

That's true, and a good point. Perhaps instead of varying the mining difficulty, the reward for confirming a new block could be varied. That ensures that as long as there are enough people interested in mining, you won't have this problem. The miners would still get the transaction fees even if the reward level was at zero. If that kills mining interest enough to have insufficient miners, Bitcoin will someday face a similar problem.

[wcoenen]

Instead of trying to come up with a way to measure demand, you could just have each block contain a vote for what the mining reward should be. When the difficulty is adjusted, the block reward could be updated to the median of the votes.

The same could be done for other parameters (like the targeted time between blocks) or maybe even for more complicated things, like what kind of digital signature algorithms are acceptable.

I'd call it "votecoin".

[yxhuvud]

If you bind the amount of xcoins to demand, what is the difference to normal currency? The vast majority of the money that exist right now is created on demand by banks, when there exist people that want to loan and have the ability to pay back the loan.

I wouldn't mind a distributed currency with this property, but you really should be aware that this is the basic operation of the banking system.

[rthomas6]

A slight but significant difference would be that the currency would not create credit or debt when it was created. People will either mine the currency, which is trading a service for the currency, or buy it on an exchange, which is trading one store of value for another. So the economy would be value-based instead of debt-based.

With a commodity like gold, when its value increases, people mine more of it because people want more. This increased supply reduces its value.

To me, the ideal currency is one in which you can get paid for performing a service, and 20 years later, the payment is still worth exactly the cost of that service. A long-term store of value, a way of remembering the value of everything.

[_mhr_]

I'm working on this problem, and I'm going to put out a paper soon that explains my solution.

[wmf]

I have also thought about this topic because I'm not a fan of pyramid schemes or open-loop money supply. Difficulty is already a proxy for demand (or perhaps the demand/supply ratio) because increasing demand increases the exchange rate which increases mining profitability which increases mining. If the block reward was set equal to difficulty then you'd close the loop. I am concerned that such a system would never be adopted in the first place because it wouldn't benefit early adopters and it may also stabilize at a low hash rate which would make 51% attacks too easy.

Edit: I'm not trying to criticize your ideas; I almost completely agree with you.

[rthomas6]

If large deflation was planned in the beginning, it would very much benefit the early adopters. Also you're misunderstanding me a bit: I didn't mean the difficulty would only be tied to demand, but to have it factored in in addition to the current hash rate. Of course difficulty would still increase in proportion to the hash rate. I mentioned elsewhere that it might make more sense to vary the mining reward based on the demand, instead of the difficulty, such that blocks are still verified at a predictable rate, but the reward for each block can change.

[zmanian]

Demand is closely tied to the velocity of money. When the transaction rate on the blockchain is high, coins should be hard to generate. When transaction rate is low, coins should be easier to mine.

[hippich]

May be opposite?

[hershel]

The closest i found to a solution to bitcoin stability is here:

https://bitcointalk.org/index.php?topic=171539.msg1862790#ms...

Although at the beginning it should not be stable , but rising to get people involved with the coin., and at some pre defined point become stable.

[bachback]

This is impossible. The network can never put a limit to its own value. The valuation must come from outside. How should a network possible describe what its worth? The money network should not predict demand. One could in theory have predictors of demand, but that would be an algorithm for pricing a set of cryptocoins.

[swalsh]

pretty easily actually. The block chain gives us a pretty reasonable way to estimate the supply of currency, the velocity of it, and we can kind of estimate price. That's enough. I think if we modified the protocol a bit we could make it even more accurate too.

[bachback]

estimate price. you must be centi-millionaire then.

[jokoon]

> You could plan the rough change in value over time, and build it into the algorithm

Are you sure of what you're saying ? Because bitcoin doesn't seem to work in a very simple fashion already, it's decentralized and it's already a miracle if it's working as the programmer intended.

[rthomas6]

Of course I'm not sure. I do not know if my idea is possible, but if it is and it works, I think it would be more stable than Bitcoin.

[jokoon]

Practical ideas and plain ideas are not the same thing.

[jv22222]

I was thinking exactly the same thing.