Some currencies have tried to be stable by having a centralized authority which backs up the coin for something of worth. The problem is, sometimes these centralized authority spontaneously evaporate (
https://daology.org/proposals/dcda223aa190358023cc066208f820614df3f310).
In
https://bitcointalksearch.org/topic/m.14800985, I described an idea for a pegged cryptocurrency, based off another coin for arbitrage. The problem was that getting information from the outside world is really hard. I realized that we do have information from the outside world: the difficulty.
In particular, the difficulty reflects the value of the coin being mined.
Therefore, I propose the following:
There will be two coins, StableCoin (or just SC) and VolatileCoin (or just VC). StableCoin will have a stable price. When there is a price pressure on StableCoin, VolatileCoin's price changes instead.
How is this accomplished? Miners will mine VC, getting some reward each block. They also get transaction fees. The smallest unit of SC is the hash (similar to the satoshi in bitcoin). The average number of hashes miners have to do mine a block can be determined from difficulty. An exchange rate (or ER) is determined, by setting hashes = the miner reward (it's okay if some or all transaction fees are in SC, you just need a little bit of algebra.)
What is the significance of ER? StableCoin can be converted on the blockchain to VolatileCoin according to the ER, and vice versa, using a special transaction.This isn't simply a trade; if you convert SC to VC, SC is being destroyed, and VC is being created.
What this means is that the actual exchange rate on markets between SC and VC must be ER, or arbitrage will occur to correct it.
A hash will always be equal in value to the amount of electricity required to do a hash (which we presume to be stable). Since a hash is just a unit of SC, that means SC is also stable. The only way for this to fail is if the value of VC falls to *exactly* zero, since this would cause a division by 0 error.
Some notes: You must make sure that no coin is merge mined with VC, or miner reward (in VC) won't equal the number of hashes. One thing you *can* do though is make it so that the hardware used to mine VC can be used to mine other coins (such as BitCoin), but not at the same time. This makes is easier for miners to respond to price changes in VC.
So, what do you guys think? Would this work? If not, in what manner exactly would it fail (keep arbitrage in mind). I haven't taken any Econ courses, so I'm wondering what someone who has will think of this idea (I have some ideas about how this coin might fail, but I'm sort of a fish out of water without basic Econ experience.)
Also, if anyone wants to steal this idea, go ahead. If no one does, and no one finds any obvious flaws in this design, I may look into actually starting this coin. Having stability in your currencies value is a huge win, and is necessary both for long term savings and day to day use. Although you can achieve stability by having a big economy, the above shows how you can "cheat" the system and get stability with a relatively small economy potentially. (If you do steal the idea, PM me. I would love to see what actually happens.)