I agree that bitcoins need to be backed by something.
To me this means that bitcoins need to be readily convertible into the thing backing them.
The problem I see is making it decentralized. With a single choke point a government can shut the whole thing down, which defeats the purpose. Physical metal is excellent in terms of decentralization because it's impossible to track and impractical to confiscate, but it doesn't travel over the internet very well.
Here is a wacky outline of an idea: A trusted party buries an ounce of gold at a random location in the Nevada desert and records and encrypts and digitally signs the location into a token. Then through some cryptographic magic, this information is passed along in encrypted form as the token is spent. To redeem the digital currency for gold, some other cryptographic magic allows the token to be decrypted and there is a public registry of redeemed tokens to prevent spending a redeemed token as if it were not redeemed. And as with bitcoin, also a registry of transfers to prevent multiple spending.
You would have to trust the initial burying/certifying party, just as you would have to trust the backing account holder or the reserve against which a note is written. But if they are out of the loop when the redemption occurs then it is not feasible for a government to kill the currency by holding the backing hostage.
I don't know if cryptographic protocols exist that would enable the magic as I outlined it. Maybe we'll have to invent one.
Topic: How we could "back" bitcoins with something of value - page 3. (Read 4102 times)
Gold has unique physical properties. It "backs" itself.
Backing btc requires a central organization to implement, which defeats the purpose of btc.
Backing btc requires a central organization to implement, which defeats the purpose of btc.
You propose backing Bitcoins with something of value, and then suggest the USD as that backing? One of the primary draws of Bitcoin is that it's an alternative to the dollar, which is manipulated at whim by the Federal Reserve System. The dollar is fiat - it's mandated to have value by the coercion of government. Bitcoin is not fiat, because it is chosen openly in a free market as money.
Further, your proposal is not actually backing Bitcoin in the meaningful sense of the term. For something to be "backed" it means there is a guarantor of another good for the one in question. When the dollar was backed by gold, the US government guaranteed to hand you a fixed amount of gold for your dollar. Unless I misread your proposal, no party is guaranteeing payment of dollars in return for Bitcoins.
Further still, the notion of "backing" is silly, unless you're using something like paper as a substitute for another good that has "real" value. Bitcoins has "real" value by itself, because it offers a revolutionary distributed payment system, and is allegedy secure, and is fast, and almost free to use, etc.
Further still again, gold is not backed by anything, and yet remains a great and valuable money commodity.
A great money doesn't need backing, because it IS valuable in its own right. Bitcoin is indeed valuable, for the distributed payment mechanism (among other features) mentioned above.
Further, your proposal is not actually backing Bitcoin in the meaningful sense of the term. For something to be "backed" it means there is a guarantor of another good for the one in question. When the dollar was backed by gold, the US government guaranteed to hand you a fixed amount of gold for your dollar. Unless I misread your proposal, no party is guaranteeing payment of dollars in return for Bitcoins.
Further still, the notion of "backing" is silly, unless you're using something like paper as a substitute for another good that has "real" value. Bitcoins has "real" value by itself, because it offers a revolutionary distributed payment system, and is allegedy secure, and is fast, and almost free to use, etc.
Further still again, gold is not backed by anything, and yet remains a great and valuable money commodity.
A great money doesn't need backing, because it IS valuable in its own right. Bitcoin is indeed valuable, for the distributed payment mechanism (among other features) mentioned above.
Although the Bitcoin concept, software, and community are valuable, the actual bitcoins people own are not backed by anything of value like gold, silver, rice, gasoline, kilowatt-hours, or even dollars. I have noticed myself pointing this out quite a bit so I wanted to propose a potential solution to this perceived problem so I am not just being critical.
My approach in this post to "back" bitcoins with something of value is guided by a desire make Bitcoin a better currency without really changing the existing Bitcoin system. In particular, the approach presented keeps the total Bitcoins over time curve unchanged. Unfortunately, preserving this curve makes it difficult to back the currency in the classical sense, but it is still possible to "back" bitcoins by giving each bitcoin a guaranteed minimum value.
The one change I find necessary to make would be to make it so miners don't get all the newly created bitcoins. I would still have a portion of the new bitcoins go to miners, but I would have the other portion auctioned off with the proceeds going towards backing bitcoins. I am assuming it would be possible to offer less incentive to mining without compromising the security of the network, but if I am incorrect in my assumption then the existing Bitcoin transaction fee system can be used to help incentivize mining to fulfill their key role of securing the network while still allowing some of the new bitcoins to be auctioned.
Here is an example of what this backing might look like if bitcoins were to be “backed” by dollars. In the total bitcoins over time graph, bitcoins are currently being created at a rate of 2,625,000 per year. Suppose over the course of the next year it were decided that half of these 2,625,000 bitcoins needed to keep being given to miners to keep the network secure, and that the other half could be sold at auction. If the average market price received at auction for the year were $20, then the amount of revenue added to the backing fund during the course of that year would be $26,250,000. Since at the end of that year the total number of bitcoins would be around 9,200,000 bitcoins, then the amount of guaranteed backing per bitcoin at the end of that one year would be $2.83. Note: This isn't the market value of bitcoins, but rather the guaranteed minimum value of each bitcoin promised by the backing account. Over time this guaranteed backing amount would keep increasing with each new bitcoin sold at auction until all 21,000,000 bitcoins were created.
Here is an example of how this backing might be implemented in practice. The backing account could be an mtgox account where each day the newly created bitcoins designated for auction would be sold on mtgox and the proceeds from the sales go to the bitcoin backing fund. The guarantee part of the backing could take the form of an open buy order by this mtgox account at the guaranteed bitcoin backing amount which is calculated by taking the total amount of value in the bitcoin backing fund and dividing by the current total number of bitcoins. In the example from the paragraph above, the guaranteed value after one year was $2.83 per bitcoin. Of course, if the current market value of bitcoins were $20 and the guaranteed price was $2.83 then nobody is going to try and sell their bitcoins at the guaranteed amount of $2.83. However, market conditions may change for various reasons and the market price for bitcoins may become the guaranteed price. The reassurance of a guaranteed minimum value is helpful to users, merchants, and developers.
In the example above I backed bitcoins with dollars, but the same approach could be used to back bitcoins with other thing such as gold or silver.
There are still some issues and details that need to be worked out, but I wanted to put the idea out there as a potential solution to a problem I see with the current Bitcoin system.
Even if you think "backing" bitcoins with something of value is pointless, you have to admit that many people desire this feature in a currency so providing a guaranteed minimum can only increase the demand for bitcoins.
My approach in this post to "back" bitcoins with something of value is guided by a desire make Bitcoin a better currency without really changing the existing Bitcoin system. In particular, the approach presented keeps the total Bitcoins over time curve unchanged. Unfortunately, preserving this curve makes it difficult to back the currency in the classical sense, but it is still possible to "back" bitcoins by giving each bitcoin a guaranteed minimum value.
The one change I find necessary to make would be to make it so miners don't get all the newly created bitcoins. I would still have a portion of the new bitcoins go to miners, but I would have the other portion auctioned off with the proceeds going towards backing bitcoins. I am assuming it would be possible to offer less incentive to mining without compromising the security of the network, but if I am incorrect in my assumption then the existing Bitcoin transaction fee system can be used to help incentivize mining to fulfill their key role of securing the network while still allowing some of the new bitcoins to be auctioned.
Here is an example of what this backing might look like if bitcoins were to be “backed” by dollars. In the total bitcoins over time graph, bitcoins are currently being created at a rate of 2,625,000 per year. Suppose over the course of the next year it were decided that half of these 2,625,000 bitcoins needed to keep being given to miners to keep the network secure, and that the other half could be sold at auction. If the average market price received at auction for the year were $20, then the amount of revenue added to the backing fund during the course of that year would be $26,250,000. Since at the end of that year the total number of bitcoins would be around 9,200,000 bitcoins, then the amount of guaranteed backing per bitcoin at the end of that one year would be $2.83. Note: This isn't the market value of bitcoins, but rather the guaranteed minimum value of each bitcoin promised by the backing account. Over time this guaranteed backing amount would keep increasing with each new bitcoin sold at auction until all 21,000,000 bitcoins were created.
Here is an example of how this backing might be implemented in practice. The backing account could be an mtgox account where each day the newly created bitcoins designated for auction would be sold on mtgox and the proceeds from the sales go to the bitcoin backing fund. The guarantee part of the backing could take the form of an open buy order by this mtgox account at the guaranteed bitcoin backing amount which is calculated by taking the total amount of value in the bitcoin backing fund and dividing by the current total number of bitcoins. In the example from the paragraph above, the guaranteed value after one year was $2.83 per bitcoin. Of course, if the current market value of bitcoins were $20 and the guaranteed price was $2.83 then nobody is going to try and sell their bitcoins at the guaranteed amount of $2.83. However, market conditions may change for various reasons and the market price for bitcoins may become the guaranteed price. The reassurance of a guaranteed minimum value is helpful to users, merchants, and developers.
In the example above I backed bitcoins with dollars, but the same approach could be used to back bitcoins with other thing such as gold or silver.
There are still some issues and details that need to be worked out, but I wanted to put the idea out there as a potential solution to a problem I see with the current Bitcoin system.
Even if you think "backing" bitcoins with something of value is pointless, you have to admit that many people desire this feature in a currency so providing a guaranteed minimum can only increase the demand for bitcoins.
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