It is not pegged to the cost of energy, more like derived from it as well as hardware costs and time costs. I hesitated to even bring it up again because it was non-stop in the encoin threads about how this wasn't possible, "you can't force the market", blah blah. But it's important to get a sense of how the value of a coin could be derived. With encoin I came up with a tongue-in-cheek phrase that "1 enc costs about 1 enc to produce." Meaning that, long-term, whatever the coin is worth is about what it will cost you to make one.
This can vary when demand outstrips supply in the case of a network expansion, or supply outstrips demand in the case of panic selling or loss of confidence or what have you. But when demand outstrips supply, as the currency production is unbounded, the people can quickly create new currency to return it to the equilibrium level. If supply outstrips demand, an opportunity for arbitrage arises. So, long term, the price should simply oscillate around a common cost to produce.
But this does not directly take into account the many factors that go into this such as the general price of world electricity changing and efficiency gains in hardware, but that is where the ingenuity of the encoin and decrits proposals come in.
This was an important, though slightly flawed, step to bringing the possibility of a stable value currency to reality based only on competition between miners.
The current difficulty for creating coins is a value of 100 which causes the average coin to be produced in 50 coin-hours.
The Network originally had 100% of computers producing coins using 150W of electricity to produce a coin in 50 coin-hours, 50 * 150W or 7.5kWh per coin.
50% of the computers producing coins now use 125W of electricity while 50% continue to use 150W, while both produce coins at the same rate.
...
When the block award returns to 6 coins, the difficulty will be 108.5, or 54.25 coin-hours to make the same coin as before. 54.25 * 137.5W ~ 7.5kWh.
But it was not ideal for several reasons that do not apply to Decrits and I don't want to go off on that tangent.
SO, I will go point by point through the money creation section to explain why everything is the way I proposed it.
- Money creation starts with a big block of coins available to be minted based on the amount transaction fees over the last year (with a large minimum amount), divided by 12 to get a base line.
This is so that network GDP plays a factor in how difficult it is to begin a new mint block and how much must be mined before the coins are awarded. Because transaction fees are a percentage, this will scale smoothly as the network activity increases.
- To begin minting coins, minters must put their name into the coin minting queue which must include a proof of work equal to 10% of the standard coin award's value (e.g. if each user is assigned to mint 2 coins, he must give a solution equal to 0.2 coins to join the queue).
This reduces spam to join the mint queue, gives proof that you are capable of finding solutions, gives proof to the network that a lot of hashing power is ready to create coins, and involves a slight risk. It is possible, though unlikely, that you may never get to mint coins for this block. (Bought a fancy ASIC? whoops!)
- Once enough minters have joined the queue, minting can begin (this formula will be based on the total number of coins available to be minted for this block).
This will likely be when there are enough minters in queue to be assigned 20% of the total coins in the block.
- When minting begins, the cost of the solution to join the queue will drop to 7.5%, and after a significant portion of the coins have been mined (25% or so), the cost to join will drop to 5%.
This adds to the risk of being among the first to join the queue. It also makes less powerful systems able to join more easily and slow down the production of hyper-efficient minters.
- When the block begins, only 50% of the queued users will be selected to create coins.
Adds to the risk. The other 50% essentially lost the a battle of luck because now everyone can join for 7.5% instead of 10%.
- While each minter creates coins individually, they are assigned together with a group of 39 other minters with which they compete. The first 10 users in each group will receive a slight bonus to their award,
The bonus is to encourage increasing the difficulty when it makes sense. If your rig is very efficient, reap the rewards of running at a mh/s that is 10% greater than the network average or so.
- and once the 10th solution is given, all 10 users will be assigned to new groups to create more coins.
This mitigates risk to the network. You can buy that fancy 1GH/s ASIC, but if you only get ten coins from each block, it is so insanely ridiculously not worth it. In the mean time you spend a lot of time waiting around doing nothing.
- This process continues for each set of 10 except that the 3rd and the 4th set of 10 are only added back to the queue and not immediately given a new group.
Again encourages increasing the difficulty via competition when it makes sense.
- Go really slow (over 3 standard deviations or whatever testing seems fair) and you will be booted out of the queue and lose your 0.2 coin investment.
This means an investment like FPGA will have to be large to keep up with the "average" system of GPUs. 1 FPGA won't be enough to keep up, you'll need 10, for example. High startup, zero other utility, encourages using standard PCs and status quo hardware and only upgrading when it is for standard computer upgrading reasons. This reduces the hardware tax on the economy significantly.
- Coins will not be deposited into the minting accounts until after the entire block of coins has been minted and they will be awarded over time based on the days that the coins were mined
Mitigates risk to the network.
- The difficulty will be adjusted after each block and given a weighted adjustment based on the last 10(?) difficulty changes.
Mitigates risk by making it very difficult to maliciously increase the difficulty. After 1 mint block of much higher than normal difficulty, everyone will be aware that the difficulty is being manipulated and can join the next queue to de-manipulate it before permanent damage is done. This is because of the next sentence: "Difficulty only goes up, never down."
- E.g. a 10% increase in difficulty means that a 2.0 coin award would be reduced to about 1.818 coins (100/110% * 2.0)
Mitigates risk, immediately prices in some portion of new hardware efficiency gains, meaning it is less profitable to upgrade hardware for the sole purpose of being better at creating money--reducing/removing the hardware tax again. It is worth discussing whether or not the coin multipliers in the next two sections are reduced by the same amount, meet in the middle, or equal the original coin awards (I like meet in the middle).
- After the bootstrapping period is over, by default each coin block will be multiplied by 5x to all existing accounts
Mitigates risk in holding currency. Even if new hardware comes out that is 500% more efficient and super cheap etc etc but has the same MH/s output as GPUs, existing holders of currency do not have to run out and buy this hardware just to compensate for the reducing value of their holdings. A new value of the currency will be established (stable long term but chaotic because of unforeseen present conditions), but no one will lose actual value because the more new currency created, the more existing currency is rewarded. It is a balance and it is another hardware tax--you don't get the new coin pie all to yourself. Additionally, it is possible to mitigate the value change of the currency by forcing an increased difficulty after so many mint blocks are created in a row with low difficulty increases and not much prior increase in transaction activity. If, for example, coins were worth about $3 and the new hardware can produce them for $1, rather than tripling everyone's coins over time until a new level was reached, the difficulty could be forced upwards so that maybe it only drops to $2.50 and everyone only gets a 20% increase in coins or so. It would be a form of disinflation I suppose. Something worth discussing, but it does have the potential to be abused. This scenario is also pretty unlikely.
Either way, while this would temporarily upset the economy, once it is accounted for it won't have any lasting effects, and a situation like this should be quite rare.
- and by 5x as a lottery to transactions
Encourages trade, gets more money in circulation when demand is high
- What this does is reduce the actual amount of energy spent in creating new money so that the people using the money profit instead of the electric company.
This is significant. Instead of it costing X energy and hardware to create Y amount of currency, it costs X/10 to create the same value in Y currency. This allows for a very quick, very cheap expansion of the money supply to coincide with an expansion in demand for money. It seriously reduces the energy and hardware tax on the network.
I can't type anymore at the moment. I said good day!