Topic: Market Driven Money Supply.. - page 2. (Read 3815 times)

Thx. Finally a third-party diagnosis of my idea..

Yes - I have been thinking something like this, in fact that is why I say in my last post :


By which I mean that if you want to SPEND the coins it has to be done using CASH, you can't spend/send GOLD. This is the reason for switching from one to the other. You want to save you buy gold, you want to spend you sell gold.

Therefore CryptoCash is the Medium of Exchange, and CryptoGold is the Store of wealth. Like 2 sides of the same coin. You can't use CryptoGold as the medium of exchange, since you literally can't sent it to an account. You can only BUY or SELL it on the Chain.


How about if the inflation wasn't done on all the wallets ? you could simply give the new coins to the miners ? I'm not sure how the demurrage would work though in this case.. Maybe only expand.. Seems a technical cheat though.

I am doing all this because I don't like the idea of a deflationary currency..

What I want, is a currency that grows/shrinks in line with economic growth. And i'm trying to find a financial relationship that tells us how much to expand or contract the money supply..  and it must be fully crypto based.

I do think demurrage is a good monetary construct, but my only issue with it is whether the General Public can deal with it Psychologically ? Not even a financial issue.


This is the crux really. As you say 'Each party can gain ONLY by being correct in it's prediction AND in finding a willing counter-party to take the opposite side of the deal.'

This could be done with an on chain exchange, sure. What the 2 sides of the trade are, seems the problem..

I did have another idea. The K Percent Rule. Keep it super simple.

Pick a percent increase, say 5%, and simply use that, forever. Then the CryptoGold would be the 'pressure valve' that you could jump in and out of. When economic growth out performs monetary growth, the price of CryptoGold would go down, and when economic growth under performs monetary growth, the price of CryptoGold would go up. Quite like this one actually.. just means the money doubles every 14 years.. exponential increases are always tricky though..

And in a way that can't be gamed, and requires no trusted third party.

Sorry rex I don't think that 2-coins on the same chain really gets you any useful information because your exchange (as far as I can see) is all PRESENT valuation.  The value of the two coins will simple move in synch with each other compared to real assets their is never any reason for people to flee from one half of the system into the other because both halves are basically identical especially when your giving holders of the 'cash' a PPC like interest rate to cause money expansion, their is no way you can ever be diluted so holding cash is as good as holding 'gold' your just choosing which of two numbers goes up your quantity of coin or it's value in Dollars, your getting rich just as fast either way.

The bigger flaw in your approach is that you seem to be trying to create nominal price stability while KEEPING deflationary economics, aka just holding money is yielding an increase in purchasing power.  I'm not sure if deflationary economics is something you genuinely support, or just think is a prerequisite to adoption or if you just view proportional nominal increase for all coins as the simplest technical solution.  But I can assure you that any solution that involves money expansion ONLY through the inflation of all wallet balances will be economically identical to BTC.

What I am looking for is a system in which a coin networks increasing 'market cap' is in the hands of NEW people, not just the early adopters.  An individual holder of coins shouldn't be enriched or impoverished by changes in market-cap and ideally price information is preserved too.  How money new money is distributed is a separate issue from determining how MUCH to change money supply which is what we need to figure out first.

I'm a believer in Demurrage, which I feel has desirable effects on interest rates (lowers them) and velocity (raise it), while it might seem to contradict the non-impoverishment of holders I just mentioned a holder of money enjoys liquidity and demurrage is the payment for liquidity, so long as the rate is correct (another idea I've wrestled with) the money holder is neither robed nor subsidized.  Demurrage might also be a means of driving a prediction market.

The system might be something like this, everyone needs to pay demurrage but you can receive a kind of secondary 'pre-paid' demurrage coin (a bit like your gold/cash distinction) lets call them 'stamps', this sits in your wallet and can not be sent like normal coins but it is used first to pay all demurrage and it is denominated just like normal coins.   Once it runs out demurrage starts being drawn from your normal coin balance so the prepaid stamp is in a sense equal in value to normal coins in the present.

Now we take two people who have differing views on future coin valuation.  The one who expects an increase in coin value would like to have stamps in the future but would give them away now, the one who expects a decline in value would want stamps now but would be willing to give them later.  They could create an exchange that has them each paying the others demurrge costs in addition to their own during a different period of time.  First the person expecting an increase in value pays for them both in what he feels will be cheap coins and then the second person pays for both of them in the future with what he feels will be cheap coins.  Each party can gain ONLY by being correct in it's prediction AND in finding a willing counter-party to take the opposite side of the deal.  We can mandate that all the contracts be for equal pairings of time 1 week / 1 week, 6 months / 6 months, but the quantity of demurrage paid can float.  This will give us a predicted value of demurrage in the future and hence the predicted value of coins in the future and we adjust money supply accordingly.

It is not GOLD as in the Physical Yellow Stuff..

To Recap :

We have a blockchain based crypto coin, just like bitcoin, BUT it has 2 types of coin on it.

Gold is the name I use for the coin with a fixed amount. Let's call it CryptoGold.
Cash is the name for the coin with a variable amount. Let's call it CryptoCash.

There is an exchange between the 2 coins on the chain.

There will only EVER be 1 million CryptoGold.
CryptoCash can grow and Shrink.

The Gold price I refer to is the price of the Fixed Amount Coin (CryptoGold) in the Variable amount coin (CryptoCash).

So to start with you would have miners mining 1 million of each. Let's say you get 50 of each per block, decreasing as usual etc etc.

Then you have users trading the 2 types of coin on chain.

The FAIR price is the total CryptoCash divided by total CryptoGold.

At the very beginning the Fair price will be 1.0, as there will be the same amount of both coin types.

When the Market price of CryptoGold, on chain, is Higher than the Fair price (PEOPLE BUYING A LOT OF CRYPTOGOLD), we contract the amount of CryptoCash, driving the FAIR PRICE DOWN, as there will be less CryptoCash. So Total CryptoCash / Total CryptoGold will go down. (There may actually be less Crypto Cash in the system than CryptoGold, making it more valuable..)

When the Market price of CryptoGold, on chain, is Lower than the Fair price (PEOPLE SELLING A LOT OF CRYPTOGOLD), we expand the amount of CryptoCash, driving the FAIR PRICE UP.

We may find that a stable Market & Fair price is reached at about 1200.. meaning there is 1200 times more Cash than Gold. or 1 million CryptoGold, and 1.2 Billion CryptoCash.

So - Sell your gold and drive the price down, and We'll print CryptoCash,
Buy gold and store it driving the price up, and we'll stop printing it.

Expansion and contraction of CryptoCash, occurs on ALL coins, so proportionally no-one loses out.

I am using this principle :


I would limit the expansion and contraction to maybe +/- 5 or 10% per annum (or however many blocks 1 year is).. so as to prevent monetary shock.

There is a final piece that I am working on.. That being that CryptoCash can be transferred, but that CryptoGold can ONLY be Bought and Sold on chain.. Still thinking about this though..

How do the chains know what is the market price of "gold"? And if the price of the gold chain changes, doesn't that affect the valuation of the cash chain?

Good Post. Read it. You make some salient observations about the shortcomings of FGCs (First Generation Crypto-currencies..) and I would recommend anyone interested in creating an SGC (Second Generation Crypto - not 'StarGate Command') read it. 

The proposal I put forward earlier, which I break-down in an earlier post in this thread, is indeed fully self contained ? It uses an ON-CHAIN exchange.. Not an external one.

Also - I think that the basic idea I put forward is VERY SIMPLE.. Both to implement and understand. I'm a big believer in KISS.

Market based currency will tend towards monopoly-oligopoly... So? There won't be enough transparency... So a market based coin will not get you beyond some kind of business cycle.

Great conversation! Very interesting, if it weren't for my two year old outside with the hose I'd read through the whole thing with a fine tooth comb, twice over. Very original problems and solutions! A crypt future is like crack to us economists.

I played with some ideas like this in a post I made back in April:

https://bitcointalksearch.org/topic/m.1897412

In general, I think any reactive scheme built into a system must be completely self-contained; it must be able to base its decision-making purely on internal information, not on external information that must be supplied by humans (who may be unreliable.) This rules out decision making based on prices or exchange values, which are external parameters. However, there are patterns of system behavior that are characteristic of certain types of conditions (bubbles, busts, stable conditions) which might well, if expertly characterized, form the basis of an algorithm which could begin to implement a flexible monetary policy.

Yes, but it is very complicated. But the gist is rather than everyone competing for one block of coins, everyone competes to create their own money from a big block available with those creating it faster earning slightly more. Then the system compares a the speed of creating a block of coins with prior blocks and uses that to increase the difficulty. I have some other tricks to account for potential reductions in energy requirements.


Well you can never have something that is perfectly stable. What I aim for is something that would be more stable in the long run vs. a basket of commodities than any other individual commodity. If things are going well, demand is going to go through periods where it far exceeds supply, and things may occasionally go bad where supply exceeds demand. The price will always oscillate, the question is how well can you keep it oscillating around a given, stable point.

Hi Etlase2!


That's interesting.. I think a way of doing that would be to have the block reward for mining to be proportional to the Hash Rate of the Network ?

Higher the Hashrate, higher the block reward.. All though - when computers change it might cost less for the same hash rate..

Hmm.. so do you have a way of determining a 'Consistent Cost to Produce' ?

I know that Decrits uses a voting system.. Maybe a block vote could take place to determine the price of a unit of energy.

BUT - I am really after a system that has 'Price Stability'.. Which I don't think this system would have, since as you say the variable price would determine whether miners mine it or not (Unless I'm missing something..) ?

spartacus, I know I've directed you before to my Decrits proposal. While I don't have a perfect solution, I do have one that is very decentralized and crypto-only.

First of all, a requirement for a crypto where the money creation is variable and based on demand or whatever needs to have its security separate from mining. This I've already solved.
Secondly, to provide a stable value base, the only real way is to provide a consistent cost to produce the currency. This is really difficult, but I think I've got something that comes really close. If the cost to create the currency is consistent, then people create more of it when its price is high and none of it when the price is low. Rather than finding a way to remove currency from circulation when the price is low, I changed my opinion to the one where you leave things be, because a currency that is below its cost to produce will look undervalued and will incentivize people to accept it as payment, so it is self-correcting.

A consistent cost to produce doesn't guarantee any value, but it will have a very real impact on how people will think about such a currency. I think it will lead to far more stability than just about any other metric could.

Yep..

LOL .. yep.. me too..

I think I have an idea. How about this..

I have been looking for a relationship between some financial instrument and the Money Supply. Think I have found one. I have mentioned it in other posts but the idea is now very clear to me..

The Gold Standard
https://bitcointalksearch.org/topic/the-gold-standard-222653
https://bitcointalksearch.org/topic/freidman-k-percent-rule-268336

This is a nice article with good stats
http://www.macro-investing-strategy.com/gold-and-money-supply/

What that basically says, is something that when you think about it, makes sense.

What is the connection between the Gold Price and The Money Supply ?
  
"The price of gold is the link between real growth and monetary growth: When real growth under-performs monetary growth, the price of gold rises. When real growth out-performs monetary growth, the price of gold falls. And when real growth matches monetary growth, the price of gold is flat."

Now we have a connection between a 'fixed amount commodity', like Gold, or BITCOINS, and the money supply.

OK - so here it is..

You have a normal blockchain based crypto coin, but with 2 coins on the chain, rather than 1.
There is an exchange on chain from one coin to the other.

1 Coin has a fixed amount.. say 1 million in all. Ever. Call it Gold.
1 Coin is not fixed. It grows and shrinks based on the Price of the Other Fixed Coin (Gold).. Call it Cash.


Yep.. And how would the amount of expansion/contraction be calculated ? Simple..

The FAIR price is the total amount of Cash divided by the total amount of Gold.

If the Market price of Gold is higher than the Fair price, we contract the amount of cash..
If the Market price of Gold is lower than the Fair price, we expand the amount of cash..

No need for a futures/bond market.. the Price of Gold does that.. And it ALL happens ON CHAIN.. no external inputs.

What do you think Impaler ? Can it work...

ps Best of all.. I am working on coding a version myself.. It kinda' works..  

This sounds more like a service than an alt-coin to me.  Design some method to determine the general price level and then create a website which keeps an up-to-date value of the result expressed in terms of bitcoins.  Equipped with a simple API, wallets and shops can (as per your claims) use this to allow their users/customers to make "better-informed decisions on consumption and investment".

Let's be aware of the meaning of Bitcoin or any currency. A currency serves as a trusted "medium of exchange." IOW it supports the spread of "economic value" over its population. The amount of 21 million coins has already introduced this "new economic paradigm." Yet, it appears that Bitcoin additionally does not trespass the borders of the playground occupied by miners, speculators, early adapters, opportunists and other geeks with more than average thrill seeking genes, cq hormones.
Let's face it. At this moment 12 million BTC's remain in the hands of only less than 3 million people. That's more than 50% of a possible future Bitcoin economy. Are these 3 million persons in the same position as bankers, governments and CEO's of multinationals right now? Houston, we've got a problem !

Thx, I've thought about this problem a metric Fuckton but it is still not solved to my satisfaction so if you interested in exploring the concept further I am game.

I completely agree that non-crypto inputs are neither desired nor useful, first off all real currencies currently target some level of inflation so even perfectly matching one of them would introduce an inflation rate into said coin that we really do not want.  So I'd forget about any scheme focusing on coins relative to anything external, just worry about the prediction markets relative valuation between 'now coin' and 'future coin'.

To get that kind of prediction you need to allow people to do effective trading of coins between the present and the future, but the 'push' nature of all transactions in BTC makes this nigh impossible, the person who is to receive in the future has no means to compel delivery of what's been promised which is a great part of why BTC is nearly impossible to short.  So we need some kind of NEW instrument that is recorded in the Block-chain along side coins and denominated IN coins but distinct, a kind of coin-futures-contract or coin-bond.

So are prediction market participants would be taking opposing sides in these special instruments, one side predicting a decrease in value for future coins, they are willing to give away future coins to receive coins in the present, and a side predicting an increase in value, they will give-up present coins to receive them in the future.  The instruments will be for some specified period of time so the market will produce a prediction that can be expressed in a ratio for multiple time segments.  For example the prediction for 6 months could be a 3:1 ratio, predicting a coin will fall to 1/3rd it's current value in that time.

How to turn the ratio into a change in money supply, it might be as simple as pushing the mint rate up and down in rather crude fashion until the ratio comes closer to 1:1, supply expansion and contraction could be stake based such that no ones proportional share is changed.  This would be the simplest solution from a technical standpoint (well maybe changing mining rewards is even simpler) but I don't think it would allow any kind of viable futures instrument because your effectively erasing the possibility of being diluted which is motivating people to enter truthful predictions in the market.

? Err.. I have to disagree. Agreed that 'relative' prices stay the same, but what about Price Stability ?

1)Price stability makes it easier for people to recognise changes in relative prices since such changes are not obscured by fluctuations in the overall price level. This enables firms and consumers to make better-informed decisions on consumption and investment. This in turn allows the market to allocate resources more efficiently. By helping the market to guide resources to where they can be used most productively, price stability raises the productive potential of the economy.

2)If investors can be sure that prices will remain stable in the future, they will not demand an "inflation risk premium" to compensate them for the risks associated with holding nominal assets over the longer term. By reducing such risk premia in the real interest rate, monetary policy can contribute to the allocative efficiency of the capital market and thus increases the incentives to invest. This in turn fosters economic welfare.

3)The credible maintenance of price stability also makes it less likely that individuals and firms will divert resources from productive uses to hedge against inflation. For example, in a high inflation environment there is an incentive to stockpile real goods since they retain their value better than money or some financial assets in such circumstances. However, stockpiling goods is not an efficient investment decision, and therefore hinders economic growth.

4)Tax and welfare systems can create perverse incentives that distort economic behaviour. In most cases, these distortions are exacerbated by inflation or deflation. Price stability eliminates the real economic costs entailed when inflation exacerbates the distortionary impact of tax and social security systems.

5)An environment of stable prices helps to maintain social cohesion and stability, since price stability prevents the considerable and arbitrary redistribution of wealth and income that arises in both inflationary and deflationary environments. Several scenarios in the twentieth century have shown that high rates of inflation or deflation tend to create social and political instability.

6)Price stability also contributes to financial stability, because it eliminates market distortions and uncertainties arising from unstable prices. For example, price stability reduces risk premia vis-à-vis interest rates because there is less uncertainty about future inflation.

Or so they say.. 

Problem is of course that if someone has the power to PRINT money, they'll PRINT IT! (Regardless of WHY they should be printing it..)

What we need is an equation.. A maths way of calculating how to affect the Money Supply.

And it seems some kind of Free Market, might be a way of ensuring 'Honest' discovery.

This proposal would not change relative price levels and would thus have no effect on purchasing power, and no effect whatsoever, good or bad.

It's equivalent to if everybody suddenly appends a "0" to the end of each unit of their local currency. If gas cost $3.50 beforehand, it would cost $35.0 after the switch. When you assume that people's desire to hold the same proportion of their worth as cash balances, prices have to multiply by the factor that their purchasing power just rose due to the change.

Now we're getting somewhere..

But - we need a system that doesn't require external/non-crypto inputs..

Could you determine the amount to inflate or deflate the Money Supply of a currency given the price of Bitcoins in the given currency ?  

Or - what I mean is, could the monetary supply of the US Dollar have been regulated given the value of Gold in US Dollars ?

Mathematically speaking..

(I say 'have been' as the current Gold price is SOOO manipulated it bares no relationship, to anything..)

For the proposed system to work, they would have to have behind them a state with its power to coerce the new system on everyone. It seems a bit paradoxical to me, that is, people, if given such choice, willingly cling to a monetary system that would ultimately ruin their lives in the end, and at the same time have to be coerced to a system which would profit them in the long run (corruption and all that shit aside)...

You would need to have a functioning prediction market entirely in the block-chain that requires coin state to participate in and which allows people to hold some kind of 'bond' token which rewards them for correctly betting on future inflation or deflation of the purchasing power of a unit of money.  This ensures honest predictions, meanwhile coin volume grows or shrinks counter to the market prediction, predicted inflation shrinks money supply and predicted deflation grows it.