Topic: Demurrage, transaction fees, storage fees & comparison to commodity money. - page 6. (Read 16772 times)

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).

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.

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.

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.

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.

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...

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.


Doesn't holding Bitcoins qualify as risk?


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.

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.

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.


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.

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


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?


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.

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.


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

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?

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.

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

It means no externalities.  You're not depending on me to do anything for you, and vice-versa.  Raulo hit the bigger issue, though, which is that your storage of Bitcoins depends upon constant energy usage by the network, which isn't free and which isn't covered by transaction fees.

But it should be easy for miners to impose a higher fee on older coins, right?

It would be interesting to come up with the scale of device needed just to store one person's wealth and process that person's transactions throughout her lifetime.  Saying that something like a 10w solar panel, rechargeable battery and $20 FPGA could replace your banker would be an interesting talking point.

Yes, that was part of the suggestion.

Yes, that's what "premise" means.


Yes, it does.  It is the allocation of resources where the sum is of individual returns is maximized.  Tragedy of the commons is well known (simple) example where the equilibrium is a not a social optimum.

In this particular case, imagine that all transactions are priced equally, but the volume of current transactions slows for whatever reason (say BTC2 replaces BTC in active usage).  Holders of BTC would like to see mining continue so the chain can stay ahead of attackers, and they would pay miners to do it, but there needs to be some mechanism by which they collectively compensate miners, otherwise it won't happen.  

You touch only one aspect of this "storage fee" problem: disk space cost.

But there is subtle and much more important problem completely absent in commodity money. The BTC value depends on the safety of Bitcoin transaction system which depends mostly on difficulty. There is no analogy in gold. It's just like the value of gold depended on how well guarded are other's people gold.

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.

Miners are free to charge more to process older coins. Besides, that "premise" is actually an assertion, and a vague one at that. (Does "social optimum" have a concrete definition, or is it just a rhetorical device?)

The premise is that unless static holders pay something for the service they are receiving from the growing block chain, the resources allocated to maintaining the system will be less than the social optimum.  It's a good idea.

This entire idea is based on the premise that the market can't price transaction fees "properly" for some reason. What is that reason?

And your mother said you couldn't afford it.

I mean put the rule into the default fee structure for inclusion into the fee paying section of the block.  Any transaction that pays less than the minimum is just a tip and still must wait to be included into the free section, if at all.  Not that a transaction that expects a minimum fee fails a validity check and fails to propagate.  Although that could be a form of enforcement of demurrage.

Yes, the minimum fees can be ignored by users, but it is not in the self interests of miners to accept transactions that should be paying a minimum fee based on published fee schedules agreed to by miners.  Some will always accept the transactions regardless, but they are a charity, contributing to blockchain security without expectation of compensation.