Topic: Multicoin, Namecoin, Goldcoin, Silvercoin, OilCoin, 1971coin, backed by bitcoin! - page 2. (Read 12238 times)

I think I understand what you are suggesting. No counter-party risk is possible because the contract is liquidated before that can happen when bitcoin prices are diving.

While I would love to see something like this implemented, it does not address my primary desire of transferring risk from users who want stability to users who want to speculate.


I have to re-iterate, the result of the contract does not depend on voting at all. The external exchange rates only affect the fee structure when trades take place, encouraging people to trade near the external spot price. The actual trading price is determined by supply and demand within the bitcoin network. There is pretty much nothing to gain from taking over 51% of the bitcoin network hashing power to force a different exchange rate into the block chain. All you would accomplish would be to annoy people by changing the fee structure slightly. Much more lucrative uses of that hashing power can be found.

No matter the denomination, the contracts will be automatically redeemed before some of the parties is insolvent.
The problem with this is that the contracts can expire before the contracted date, but the funds in escrow for the other part are the maximum you should expect to win. If you're losing, you can always add more funds to avoid that the contract gets redeemed.
In fact you don't even have to liquidate the contracts when they are become "insolvent", both parties know the funds that are in escrow from the other party, they shouldn't expect to gain more than that.


I'm just noting that the contracts could be denominated in a stable currency. The currency doesn't have to even exist, it can be defined as a basket of commodities or the dollar plus the increase in CPI from shadowstats. It doesn't have to be a currency. The contract could have rice vs gold or mac vs google.

I still think that the hardest part is to define what information must the miners include in the block and how is it going to be calculated that a block is valid or not.


I like your idea for a distributed option market, but it requires many changes and some of them (the voting for the input of information from markets) are very risky. You need to move coins from an address to other with the only authorization from the original address of the contract, and the result of the contract depends on voting.

I yield on this issue. Bitcoins can't be created out of thin air. I've decided this after contemplating a doomsday scenario thought experiment here: http://forum.bitcoin.org/index.php?topic=31645.msg403514#msg403514


So what happens if bitcoin prices fall 90%? I don't understand how the dollar-denominated contracts would stay valid without an escrow fund.



I agree that something like this might be the way to go, especially if the bitcoin community is lukewarm on the idea of polluting the protocol with my crazy ideas

I know, that's why I'm telling you that you can't.


Well yes, since they're bitcoin denominated, the price in dollars of the commodity doesn't matter at all.
Since you got inputs from markets to the chain, you could also denominate them in dollars Even in dollars from 1971 or any other reference currency. Miners would have to agree on what PCI to look at.


It is very simple how it would work, you create another chain with your rules, if you need it, with its own currency.
After proposing to add demurrage to bitcoin (freicoin) I would say that is not easy to convince people when you have to modify the rules of what blocks are acceptable.
I have a second proposal that may be more acceptable by the bitcoin community. If it can't be added to bitcoin or namecoin, middlecoin will be needed.

My proposal in the sister thread actually mentions that temporarily printing bitcoins might be an emergency measure added to the protocol: http://forum.bitcoin.org/index.php?topic=31645.0


Bitcoin-denominated derivatives are only slightly useful if bitcoin values are bouncing all over the place. I might be right that oil will rise 5% over the next six months, but my gain is dwarfed by a 50% drop in bitcoin values that I used to escrow my bet. I have to have some kind of bitcoin option strategy to hedge against a drop in bitcoin values, which is getting way too complicated for anyone but an options expert.


Everything I have proposed so far requires changes to the existing bitcoin protocol. It might also be possible to engineer something that runs distributed, is backed by bitcoins, but does not need to touch the bitcoin block chain. I would be very interested to hear proposals on how that might work.

I've read this thread and I still think that your system has the risk of default (and the subsequent collapse).
Since you can't print bitcoins (not even for a while), you can default.

I don't know what is wrong with the derivatives with bitcoin escrows. You still get what you want, oil-coins.


If I've understood vector76 properly, you would have an oil-coin versus a derivative short oil and long bitcoin.
The problem I didn't get about fungibility is that any of the parties could redeem the contract at any time.
That problem could be reduced if the system can look for contracts enders on both sides of the bet.
Remember that both sides of the derivative are always solvent (or the contract is automatically redeemed).

I also came to the conclusion that you cannot use bitcoins for the escrow, because maybe you need to transfer bitcoins of it from a user to the other and you don't own the private keys.
You need derivativeCoin.

One non-obvious consequence of the rules described in my last post should be noted.

I stated that with falling bitcoin prices, hyperbitcoins are sold to speculators, diluting the existing hyperbitcoins and reducing their leverage.

However, for someone holding bitcoins, the effective leverage achieved by trading them for hyperbitcoins actually increases as prices fall. The system is effectively offering greater and greater leverage in exchange for your bitcoins, while existing hyperbitcoin holders get less and less value and leverage.

It might be desirable to amplify this effect when bitcoin prices are falling rapidly, perhaps actually destroying a small percentage of the hyperbitcoins held by each user to make the deal better for new hypercoin buyers. This would be an even more conservative approach to managing the escrow fund. I believe it might be possible to mathematically guarantee solvency with some high degree of probability.

My intention is to have the protocol sell more hyperbitcoins to speculators as bitcoin prices fall, decreasing everyone's leverage by diluting the hyperbitcoins which will also drive down hyperbitcoin prices faster than bitcoin prices (the leverage) and adding bitcoins to the escrow fund. When bitcoin prices rise, hyperbitcoins will be purchased from speculators by the protocol, increasing everyone's leverage and driving up hyperbitcoin prices faster than bitcoin prices (the leverage) using excess bitcoins from the escrow fund. I believe that by having the protocol control the hyperbitcoin supply and resulting leverage, the escrow fund can remain solvent in a sustainable way and prevent default as long as bitcoin remains a viable currency.



I agree that the math is easier when bitcoin prices are going up, but I believe the protocol's control of hyperbitcoin prices and effective leverage also prevents default as described above. A more extreme situation, with panic-selling of both bitcoin and bitcoin-backed pegged-value tokens would require a more extreme response, for which I outline a couple possibilities in the first post of the sister thread: http://forum.bitcoin.org/index.php?topic=31645.0

You are correct that all currencies and commodities tracked would need a real-life counter-party (the escrow fund itself cannot be taking positions that have a net long or short position against oil/gold/Euros/etc). That is the intended function of GoldCoins vs AntiGoldCoins, etc.

Dacoinminster, your idea depends on bitcoin (almost) always going up. That's what I don't like about it. In case of default, you can't print more bitcoins outside the bitcoin network, just IOUs.

vector76, what if we have the derivative contracts inside the chain an also an automated broker that liquidates/covers your position if the reserves get too low?
This way, you eliminate the default risk. If you want your position to exist longer, just put more funds in the escrow.
To make them fungible, the "additional funds" (the difference between the needed funds and the actual funds), should be returned to the seller when the oil-coin is sold. The buyer of the oil-coin can add more funds to the contract within the same transaction to avoid the contract to be liquidated because of a small change in price a block after the transaction is made.

I think it could work, but yes, you would need a counter-party in the derivative for each oil-coin issued. All contracts would be btc (or derivativecoin) denominated.

The network would rely on derivativecoin creation and/or in fees for the contracts creation and trades. The fees can be charged in bitcoins, derivativecoins or both.
There's no need to create another currency for this though. This way we could also see if fees are enough on their own.

I see two things mixed together
1. a derivative system to stabilize value while someone else gets leverage, and
2. something akin to a fractional reserve banking system

I'm not sure how one ties into the other or why they must be connected.

Hyperbitcoins are leveraged and it is therefore possible for them to be underwater.  The owner can walk away, presumably losing their initial bitcoin 'collateral' but it is still a default.

If a hyperbitcoin were leveraged 2:1, say if it's effectively one bitcoin plus a derivative that's long bitcoins and short USD, then if bitcoins fall to below half their value, the hyperbitcoin is worth less than zero and the owner can discard it.  I don't see this as particularly unlikely since bitcoins today are less than half their high for the year.

Yes, I agree, holding something with the features of bitcoins but with the value stability of oil would be great.  The problem is that somewhere along the line it requires a contract that's long on oil.  I agree that it is difficult or impossible to hold oil in a digital wallet.  This is precisely the problem.

To tie bitcoins into an oil contract such that it can be redeemed for oil will require an oil contract that can be held and transferred digitally.  Essentially a digital bearer certificate that can be unlocked when the derivative is redeemed... or something like that.  A company or 'bank' could hold reserves and issue digital bearer certificates, and those could be connected to bitcoins through derivatives.

But at that point it would be simpler to just use the digital bearer certificates themselves.

This doesn't mean that the derivative market is infeasible, it only means that the derivatives are subject to default risk.  If the bearer certificates could be used, then they could provide 100% guaranteed "backing" but without them there must be some counterparty who is holding the other side of the contract, and that counterparty could default.

If I trade derivatives through a broker, the broker is on the hook if my liabilities exceed my assets, so the broker will liquidate/cover my position if my reserves get too low.  This sort of system might be required for derivatives to be trustworthy enough to be fungible.  It would be a step in the right direction, and exchanges could provide this sort of service today if they wanted, without any changes to the block chain.

To go fully decentralized and guaranteed only by encryption, default risk is going to be a problem.  And it has two facets, one is the actual default risk, and the other is that it makes the derivatives non-fungible.

In my mind, overcoming the default risk is one of the core challenges of setting up such a system.  Perhaps the derivatives could be restricted to those with limited downside, where you can't lose more than 100% of the investment.  Instead of being short, you essentially own a put (or something like that).  Then these contracts can exist without risk of default and without having to figure out how to somehow connect the underlying asset itself.

Yes. I want derivatives which are an order of magnitude easier to use. So much easier that they are invisible and seemless to the average user.


I think I agree with those statements, if I understand them correctly, except that I think there is a HUGE advantage to holding oil-denominated bitcoins, whereas you say there is not much advantage.

Try creating a trading account to buy some oil futures. Go ahead, I'll wait . . . .

I bet your experience will be several orders of magnitude more complicated than clicking "value stored as" and choosing "oil" in your bitcoin client.


Well, resolving the conceptual issues is what this thread is for. I want to know if this idea has a fatal flaw.

The entire problem with backing bitcoins with gold, silver, etc is that someone has to come up with the 200 tons of gold in the first place to back it...  and treat bitcoins as the paper.

It's not going to happen.  

I am not saying it's impossible,  but you need some serious gold / silver / whatever behind it to make bitcoins backed by anything.

Here I'll back it..  1 ounce of silver for each bitcoin...  so people start sending me their bitcoins, and I in turn have to start sending them ounces of silver...  i'll go bankrupt in a week as I will hold thousands of bitcoins,  but out thousands of ounces of silver at 40 bucks a pop.

Now if you scale it down...  3 bitcoins for each ounce of silver...   that's fine...  until silver skyrockets or bitcoins do.. then someone's going to be either sending me more coins to exchange... or sending more silver to exchange...   leading to another bankruptcy...    

bitcoins have to stand on their own.

At a fundamental level, this is all about derivatives. 

Nominally holding commodity A, while it is stored as commodity B, means you hold B and you also hold a derivative that is short B and long A.  And your unit of B that you are holding should be in escrow in case the derivative goes sour.

If the derivative short B and long A is inextricably tied to a unit of commodity B, then it is safe from default, but there is not much advantage compared to just trading commodity A.  If they are severed, then there is risk of default, and the risk is tied to whoever is the counterparty to the derivative, which means they are not fungible.

It is premature to speak of how a block chain or somesuch could implement deriatives trading, before the inherent issues are resolved conceptually.

What is wrong with contracts, PGP keys, and webs of trust? The problem with them is they are hard to explain to Grandma. It's much easier to tell Grandma, "See, you bought some bitcoins, but you can store them as USD, Euros, gold, oil, . . . "


I hope you are right that bitcoin will eventually stabilize. However, price volatility favors speculators at the expense of people who just want to use bitcoin to engage in commerce or store value. The assertion that bitcoin will stabilize may be true, but it can't be proven. I'd rather have the protocol provide stability for the people that want it, and transfer the volatility to the speculators who want it.


Please don't be insulted if I offer to pay you for your post

The payments are kind of a gimmick to spur conversation on a topic that I am really really interested in.

I agree that oil, gold, whatever markets will be valuable for the bitcoin economy. But as they introduce a single point of failure, they should be kept outside of the bitcoin protocol. What is wrong with creating trade contracts, signing them with your PGP key and establishing a web of trust between traders? This approach can be extended upon in a bottom-up manner, it can use bitcoin as a currency, but it will still not be able to damage bitcoin security.

I disagree with the recent populism targeting at artificially stabilizing the bitcoin currency. Bitcoin will stabilize itself like any other currency when we establish a prosperous bitcoin-backed economy. For this to work, the most important next step will be merchants growing up and providing services or goods for real BTC prices instead of constantly adapting their prices to the exchange rates. After that, the market will stabilize the price by itself (and probably lead to an even more stable currency than what certain national currencies currently are due to the governments becoming more and more indebted).

Please do also note that I cannot be bribed with 0.1 BTC or whatever in order to write something that pleases someone else. I have my own plans on doing bitcoin business, and I have found that there are people in the community who agree with what I do because I received BTC donations both anonymously and by prior agreement. I am always open to new collaborations with people from the bitcoin community, but I will not engage in business which is easily recognizable as being bound to fail.

Thank you for the answers, it's an interesting project.


Cool. But I still don't understand how it can be done.
I guess what I don't get is the "low trust / voting pool" solution part (questions at the end)
Example.
I offer 1 BTC for 10 NMC.
You accept the trade.
Then what happens? I have to send you the BTC and you have to send me the NMCs.
Is there an escrow with my BTC and your NMCs?
If it's all decentralized, where the private keys of those escrows are stored?


I mean options and things like intrade. Example:

Will 1 NMC worth more than 0.80 BTC by the end of the year?
I put 10 BTCs in escrow and sell it for 5 BTC to you (then you can resell it at any price you want and can).
Whoever was right by the end of the year gets the money in the escrow.


Can you explain how this work?
Is a new currency backed by bitcoin or you can trade directly with btc within OP ?

I think this would work, yes.

First, you'd actually issue two bitcoin-like currencies onto an OT server. For example, Bitcoin and Namecoin.

Second, since you don't want to have to trust an issuer, we'd use the "low trust / voting pool" solution I've proposed, which eliminates the need for an issuer, for any Bitcoin-like currencies. (There is no avoiding issuers for gold-based currencies, but for bitcoin-like currencies it is possible to eliminate issuers.)

Third, since OT has markets (like MtGox) the users are now able to make offers on those markets, trading Bitcoins for Namecoins.

Finally, the OT server(s) processes the trades according the rules defined in the various market offers. Whenever a successful trade occurs, receipts are dropped into the parties' inboxes.

(And yes, the trades are atomic, meaning BOTH parties get a receipt, or not at all.)


Not sure what you mean by this...

When you make an offer onto an OT market, you can attach specific terms to your offer. That is, minimum price ($50 per bushel minimum) or minimum amount traded (500 bushel minimum per trade). You can also create stop-orders (do not activate this offer until the price reaches $50 per bushel.) Basically the same sorts of things you would do on a real market: stop orders, limit orders, stop limits, fill-or-kill orders, day orders (date ranges), etc.


(FYI, OT does support basket currencies, so if you actually wanted to define a single currency as a basket of others, you can do that.)

As I said before, the magic of Open-Transactions is that you do not have to trust the transaction servers. IOW, you still do have to trust the issuer.
For example, if the issuer is holding 100 oz of your gold, he could still disappear with your gold. (This is why OT has traditionally focused on securing the transaction server, so that the server itself doesn't become ANOTHER party that you have to trust, since you normally have no choice about trusting the issuer.)

However for Bitcoin-like currencies (crypto-currencies) as I said before, this "issuer risk" can be eliminated on OT using low-trust servers with voting pools. (By eliminating the issuer entirely.) But obviously such solutions are not possible with gold, silver, or other physical commodities, and so the markets will have to decide on their own which gold issuers they will trust. (One thing OT will never be able to do is PHYSICALLY AUDIT your gold warehouse.)  Therefore I don't know how "anonymous issuers" will work, although I've heard that the eCache group is experimenting with a solution for that, based on bonding.


Keeping things simple, let's assume there is only one OT server, and that 2 oil issuers are using it. (They have both issued their own oil currencies onto the OT server.)

Even though we logically know that both contracts are valued in the real world in terms of "oil", the OT server has no way of knowing that. OT just sees two different contracts -- that's all.

An easy way to convert between the two oil-based currencies, in that example, would be to trade on OT markets.  You just trade one for the other, on the market, the same way that people trade dollars for BTC now on MtGox. The trades would be processed automatically by the OT server, based on the terms in the respective offers, with receipts being dropped into the inboxes of the respective parties once the trade is complete.

There are other solutions for this. For example, if each of the 2 issuers honestly believe that the other oil-based currency is comparable to their own, then there is no reason why the issuers themselves couldn't perform such exchanges on behalf of the users. The issuers could also leave standing orders on the oil markets, and thus use the markets themselves to perform this functionality.  That way no one has to worry about being paid the second half of any trade, since the OT markets handle all of this.