Topic: [Idea] Simple mechanism to "back" Bitcoin's price with goods and services (Read 687 times)

Why? It would not need any technical modifications of the code, because the system would not be implemented in the core protocol, but in merchant platforms (e.g. BitPay-style), Bitcoin e-shop plugins and/or decentralized marketplaces like OpenBazaar.

This system of this company has some similarities to what I propose, but it's not the same thing.

In the system I propose, the merchant sets a fixed price guarantee for a good or service and has the full control over it. The guarantee is not coded into the software, but given e.g. on the merchant website and is part of the (legally binding) contract between buyer and seller.

The system the ICO-funded company you mention would be similar to "smart property tokens" that are backed by a good or service by the merchant, but can be freely traded, but in this case the price of the token measured in Bitcoin is not necessarily stable. It would very likely be more stable measured in USD or other fiat currencies.

This can't be done in bitcoin since its against everything that is right about bitcoin however this has been done in other altcoins. There was an ICO which I really eyed hard however decided not to go with it. They were suggesting basically funding their business with the coins they were given to them. They would get a factory, get machines, get resources and produce some products that was worth really well. That way their business would make a lot of money and the coins would be considered shares so however much you owned of that coin that much of the company you would own.

The way it worked was get horrible at first (the capital costs) and slowly increase over time (profits). The price was basically speculation just like other coins but it was also backed by the profits of the company, so if you owned 1% of the companies coins (stocks) than you get 1% of the profit shared with people, paying more for it or less for it is still speculation.

I think you misunderstood the proposal. It tries to solve (or at least, mitigate) a problem that hasn't be solved by anyone: stabilize the price of Bitcoin or any other cryptocurrency, using products to "back" it.

"Stable" cryptocurrencies (e.g. Dai, BitUSD, Tether), while some of them are interesting, all of them have one of two fundamental flaws:

1) if they're (fairly) decentralized and based on a "pegging" mechanism, their peg could be attacked by manipulators, profiting from shorting it after the peg broke (there is no way to completely prevent that, but for BitUSD and Dai you'll need to be a big whale or a cartel)
2) if they're centralized, their operators could run away with your money.

And if you're using them as "hedges" against Bitcoin's volatility: You can never really know if the market really has turned, or if the bears continue to roar Short term volatility aside.

The goal of this proposal is not to provide a peg, but to reduce volatility of traditional cryptocurrencies like Bitcoin providing a "backing" that gives people the chance to preserve value even if there is a crash. The cool thing about it: If the "backing" is done with digital products (e.g. music, video games ...) then even in the event of a 90% crash the merchant continues to make profit like I explained in the second post with the metal band.

It's understandable since this topic is bit old, but now you don't have buy products when Bitcoin is higher to manage Bitcoin's volatility. You can convert Bitcoin to stable crypto currencies and then buy back btc. It's safer option and you don't have to force yourself to buy some product.

Update:

It seems to be difficult to explain why a merchant would participate in that "backing" system. So I give a very simple example.

Let's say we have a community of heavy metal music lovers that are invested in Bitcoin.

There are two musicians that sell heavy metal music for Bitcoin, Band A is using the "backing mechanism" and Band B is not. Both are selling their music for 9,99 USD per album (as a high-quality digital good, e.g. in FLAC format). So as they have only fixed production costs, every cent they sell above these costs is profit.

In normal times, they both sell about 100 copies per month. Now a crash happens. Bitcoin loses 20% one single day.

People run for possibilities to escape from the crash. The heavy metal lovers that are invested in BTC discover the band that participates in the "backing" program. Their album is now available for ~8 USD. 100 of them buy that album.

But not only that: An other heavy metal loving group of 100 people that is not invested in BTC, discovers the discount price, buys Bitcoin and then buys the album for the cheaper price.

At the end of the month, we have the following figures:

- The not-participating band sells, as usual, 100 copies of their music for $9.99 = makes 999$
- The participating band sells 100 copies for 9.99 = $999 and 200 copies for 8$ each the day of the crash (1600$) = 2599$.
 

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Bitcoin is rallying again. But with every step the currency achieves in its way to the moon, volatility risks grow and so the risk for Bitcoin users to lose value due to a crash grows, too.

What if we had a mechanism to at least lower the individual risk for Bitcoin users, investors and holders to run into a crash?

If they could, in the case of a crash, simply buy a good or service to the old (higher) Bitcoin price - at least for a day or so - then their risk would be significantly lower.  

Well, that's my idea: a decentralized backing mechanism for Bitcoin by goods and services.

I would design it to be very simple and let it stay totally outside of the protocol and the Bitcoin software, so I'm not posting it in the "D&TD" section. I have already presented it in the OpenBazaar thread, but there it got little attention as the thread is not very much a readers' favourite.

The mechanism could be implemented by Bitcoin merchants that trade Bitcoin for goods and services and base their prices for their goods on fiat/BTC prices , NOT for fiat/BTC or altcoins/BTC traders and exchanges. The major impact would be on ebay-style merchant platforms and Bitpay-style payment processors.

It could work the following way:

- The merchant can choose to be a "Bitcoin backer". (It's important that it's a voluntary decision.)
- While the Bitcoin price moves to the upside or is stable, the price of the good moves in the opposite direction (like in Bitpay), so its price measured in fiat currency (e.g. USD) is stable.
- In the case of a downward price movement, the prices of the goods change from this "dynamic price" to a "fixed price in BTC". He would guarantee this price for a time period, e.g. for 24 hours.
   (Important: This fixed price must not necessarily be the "top price" (e.g. the top of a bubble) but can be, for example, the daily average price.)
- While this "fixed price" stays valid, the merchant gets highlighted as a "Bitcoin backer" on the platform.

That's all - the coding work for web-based platforms/processors should be trivial. It's a bit more complicated on OpenBazaar-like platforms because an "oracle" is needed for the price feed, but it should be doable.

Example:

- An app developer sells an app for the equivalent of 10 USD.
- Bitcoin's price is $1000, so the app's price is 0.01 BTC.
- Now Bitcoin's price crashes to $900.
- Instead of the price of the app going up 10% the price stays at 0.01 BTC for 24 hours. In this 24 hours, the app developer is "backing" the price.

Why should a merchant do this? Isn't it a loss for him?

A merchant can benefit from this, because in the case of a crash many people that were late to sell their BTC on an exchange could instead buy goods and services from "Bitcoin backers." This would boost the sells of the backers.

The most beneficial it would be for developers/producers of goods with a low or zero marginal cost. Examples are: software apps, computer games, music, e-books, videos/movies, p**n.

But as a price crash of more than 20% in 24 hours is rather unlikely, also producers of "rival" and "scarce" goods could benefit. To limit risk, the merchant could limit the quantity of items that she's wanting to sell for the fixed BTC price.

Advantages for Bitcoin users and Bitcoin as a whole

The bitcoin price would be more stable, because "late panic sellers" would not have to need to realize losses if they don't want to hodl. They could instead buy goods/services from Bitcoin backers.

From the point of view of the individual Bitcoin user, it's less risky to invest in Bitcoin.

For the Bitcoin ecosystem, it's beneficial because merchants would have a stronger presence and so the "real-world" ecosystem can grow.

What are your thoughts?