Topic: Proposal of a "stable" coin mechanism with no oracle or peg (Read 610 times)

Fist of all sorry for the delay.

An increase in transaction to fees, in principle, can reduce the transaction rate. In practice the effect might not be so strong for a few reasons:
1. The blocks can have an unlimited size, there will be much more transactions and therefore the increases in transaction fee can be much lower;
2. It's very conceivable that drastic drops in price *might* increase the transaction rate due to speculator entering the market;

In the implementation I had in mind (this is not in the paper), the changes in fee and block reward would be gradual and small. If the network notices that the  changes are having an undesired effect (in this case dropping the hash-rate even more) it can stop interfering or revert it's actions. The network objective would be to keep the hash-rate variations within a certain band from, say, a linear function.

Again, the goal is to smooth price variations. There might be cases in which there simply is not much to be done and the price will go down or up by a lot.

This is controlling supply. You offer a product people desire more (more lucrative bonds) and expect them to demand more. But in the end of the day they could think you are not trustworthy and not buy the bonds anyways. I bet Venezuela's public bonds have very high interest rates and yet no one is buying them, because as I said you can only control supply and hope demand follows.

This is correct, I don't know why I wrote that. Sorry. My opinion on base remains the same though. It has good ideas and could work but I think my approach is better.
Elaborating on the reliable oracle problem I commented on: the problem with using schelling coins *to regulate price* is that the coin owners won't have an incentive to submit the real price, instead they will submit prices as low as possible so that the network will reduce supply and their coins will appreciate in value. I do think schelling coins can useful for other things.
My approach also allows for unlimited block size, which basis doesn't support.

I think the collateralization approach (which is very similar to my arbitrage approach) should be able to maintain a peg given that:
1. Enough people use the coin;
2. The price of the underlying asset, BitShare, don't move very drastically.
Unfortunately the volume has being in a downward spiral from +2M USD/Day to ~1000 USD/Day.
In the case of a global settlement the supply of BitUSD would decrease drastically and the price would go up and not down. What I think happened is that the price of BitShares dropped, people created more BitUSD to "short sell" BitShares, which increased the supply of BitUSD and this drove the price down. You can see that when the price of BitShares went up again BitUSD followed, this were people converting their BitUSD back to BitShares to "close a short position".
Of course BitUSD has the problem of requiring a trusted data feed.

I mentioned FreeCoin only as an example for what was discussed at that time. The problem of the transaction fee destruction is not that it reduces mining incentive but that it reduces the incentive to use the currency. Did I understand right that with less hashrate, the destroyed fee will be higher? (If not, please correct.) In this case, the currency will become less attractive for use for payments just when the hashrate/price is low - and people would even transact less, so there would be less coins destroyed.

Yep, I agree here actually - however, it has some theoretical sustain: the Quantity Theory of Value. However, the problem is that the number is easy to manipulate and as you write there always will be spikes and valleys not related to price. They could be "flattened" out using a moving average but I think it's still not enough to become really an indicator that would make sense.

I mentioned the 2013 discussion of the oxidation/demurrage fee as a comment to your discussion with mixoftix, so its outcome actually supports your point.

You cannot "control" demand in the sense to "force" people to buy something, but you can create incentives, as monsterer wrote (e.g. by offering interest). That's why I mentioned Basis: there, you can get interest if you buy "bonds" which later are transformed in to real currency.

While I agree with point 1 and (somewhat) with point 3, it's incorrect that there is no way to destroy coins. Coins can be transformed in bonds (to reduce supply), and in certain market situations these bonds are burnt, without any compensation for the holder. So buying bonds is risky, but it can be attractive if you time it well.

This list has only documentation purposes, I don't want to "shill" for any of the coins I listed there, but document success and failure of different concepts, so no problem . I also consider e.g. NuBits to have a pretty "dumb" peg mechanism as supply always grew (and thus it was a matter of time until the peg failed). BitUSD has also lost the peg recently, although it's still close enough (70 cent) to be able to recover. I've read in their forums that this was caused by a "global settlement", i.e. coins were transformed into the collateral currency (BitShares in this case).

IMO you've got that backwards, but it doesn't matter. Terminology aside, this mechanism is how the real world pegs currencies to the USD.

https://www.thebalance.com/what-is-a-peg-to-the-dollar-3305925

This is control of supply. You supply something(high interest rates) you think people will demand more and hope they do so. The demand is how much people want something,

That isn't the case. You can make holding a long position less/more attractive by paying/reeving interest on said position. That directly controls demand.

@mixoftix
I don't like the idea of oxidation for reasons that I already explained. I also think it's getting kinda off-topic and might call for another thread.


The FreeCoin solution differs from mine and it has problems that were rightly criticized at the time but it was on the right track. Those problems are:
1. The difficulty is fixed;
2. There are no reliable means for destroying coins, the author simply says that lost wallets are enough for this.

The transaction fee destruction was suggested but people on that thread missed what I saw. They thought it would reduce mining incentive but in fact it won't because there will always be coins to be mined. They thought transaction fees might not be enough for deflating the currency because the transactions per block are fixed, if it were not so miners and other users would not be able to negotiate a fee price. But if you adjust the fee based on hash-rate this is no longer a problem and you can have much larger transaction throughput.

The transaction rate approach makes no sense and I didn't see any real argument in favor of it.  Why would more transactions mean greater or lower price? It might just be Christmas. How would you know in which direction the price is moving?

I briefly explained in my last post why I don't think oxidation would work.

There is no reliable way of controlling demand. It makes no sense to try to control demand. No one outside a dictatorship has ever controlled demand and even they can't force people to buy things at a price for very long. You can only control supply and wait for demand to adjust.

The main problems with Basecoin were that the base shares were distributed to early adopters so there was no fair way of obtaining them(mining), there was no way of destroying coins and it required an oracle to feed market price which still doesn't exist.

If basecoin solved the oracle problem, implemented a way of destroying coins (such as requiring an investment deposit in base shares that could be lost) and implemented a way of mining base shares then it would be great.

Offering interest to holders of a certain coin is not controlling demand, it's controlling supply and hoping demand follows.
I agree with this.

Some of those are good but require an oracle, others are not very good and some are just dumb.
(I don't mean to offend you, it's just other people's ideas that are dumb. Your thread is useful. Sometimes this can't be made very clear through the internet.)

@mixoftix,
I think your 'oxidation fee' idea is worth discussing a bit more, but I didn't find enough relevance to the topic. I strongly recommend you to open a separate  thread for this.

As of now, I suppose it would be easy for people to move their funds regularly for the sole purpose of avoiding your fibonacci based taxation model. In bitcoin fee system is not designed to be that prohibitive for dummy cash transfers.

Lets elaborate the control of price and oxidation fee.. in fact oxidation fee in not a mechanism for control the prices, this is addressing one major flaw in cryptocurrency ecosystem that some economists and financial managers say that "business model in these coins are like ponzi /pyramid schemes". but I need to go even further more..

in cryptocurrencies, we have Alice that initiates a transaction to Bob by assistance of entities that we call them miners. in fact miners here act like a bank / payment provider company but we never proceed to model the role of central bank and the economy that it drives. however we simply use rewarding system instead of central bank's monetary policy, but there also need to be a taxing system to manage the incentives. this is important to build a healthy economy around cryptos ( https://www.abc.net.au/news/2017-03-07/what-happens-to-the-economy-when-we-stop-spending-money/8297724 ):

"if everyone put money into a bank, the economy would grind to a halt."

"Deposits act as a nice bit of insulation for the economy. While they do facilitate lending, economists view savings as a 'leakage' of money out of the economy."

"Starting early, and saving a consistent amount over a long period, can produce big returns. On the other hand … if everyone tries to increase their saving all at once, the result will be bad for almost everyone."

and oxidation fee (in my white) exactly targets this flaw in business model of the cryptocurrencies, which means when your coins are all in circulation, you automatically have a good economy around it and this defines the worth of the coins. a taxing system may need a centralized organization that dosen't fit in crypto environment, but a decentralized fee mechanism that wipes out the coins in the protocol level, could simply establish. BTW, the oxidation fee defines by Fibonacci Sequence (1,1,2,3,5,8,13,..). for example after 5 years destroys 1+1+2+3+5 = 12% of the frozen savings in an address.

P.S.:

and refer to this thread ( https://bitcointalksearch.org/topic/m.1857705 ) the idea of panic tax doesn't make sense, because you need to robust your business model to PREVENT any future panic from the beginning. when panic begin, you only could innovate and pray.. any intervention in users savings during panic just doubles the problem..

UPDATE:

for more information and background of oxidation fee please read about:

https://en.wikipedia.org/wiki/Invisible_hand
https://courses.byui.edu/econ_150/econ_150_old_site/lesson_11.htm

OP, your proposed solution 2 was already proposed some years ago. But I welcome a new discussion about these topics.  

I don't know if you already read it, but the old StableCoin thread of the Altcoin forum had lots of ideas - the first was to peg supply to transaction rate, but also the difficulty/hashrate peg was discussed (an early example is Freecoin). Also demurrage (the "oxidation fee" proposed by @mixoftix) was discussed (but here a participant explains why that would most likely not work). Demurrage (oxidation) is however possible without additional centralization, see Freicoin for an example.

I agree somewhat with monsterer2 that you also have to take into account the demand side, not only supply. That's why I think Basis (ex Basecoin) is very interesting. In this concept, you can exchange coins for "bonds" which get interest and so promise a profit, but these bonds may get burnt if there isn't enough demand for them. This is, in the end, a more sophisticated form of demurrage, where only "speculators" may lose money, but not the regular users. It's a pity that the project seems dormant (no more Twitter messages or blog posts since September), maybe it could be "revived" or the ideas implemented in another coin or even a Bitcoin-based token. What about you?

(Edit: It is even worse: Basis shut down completely, as they write on basis.io. But there could be space for a similar idea.)

I don't know if Basis would really work, maybe it can also be shorted/crashed intentionally to break the peg. And it needs an oracle. But IMO it's currently the most advanced concept.

For me, a stabilizing mechanism can only be one component of a truly working decentralized stablecoin. The other one is a working market of goods and services. That would add additional stability. An on-chain storage market (see Sia for an example) could be a crucial component, as storage space is one of the few massively used services which are somewhat "controllable" on a blockchain.

(I have collected some interesting concepts and existing "decentralized" stablecoins in this more recent thread.)

Why not? There might be a scenario with a price movement so broad that destroying transaction fees is not enough to completely stop it but for most cases it seems like a good solution. Again, there can't be a completely stable price, what we can do is try to smooth variations as much as possible.

You could have an oxidation fee as the other guy suggested but then you would also need to increase people's balance when increasing supply, otherwise there would be guaranteed deflation and a tendency for miners to concentrate money. This might be an interesting approach instead of manipulating fees and block rewards but how to implement this in the block-chain is not very clear. In fact, I think it might not be possible.

Just like bitcoin. Also just like bitcoin you could argue that the intrinsic value of the coin is how much it costs to mine it.

Yes, I was not expecting the coin to have a price before it existed. People can also buy it because they want to protect their capital and know that the price variations will be smoother.

The price can go up and it can go down. This mechanism only tries to smooth price variations, nothing has 100% stable value. Not even the USD or gold.

If all those coins have value why can't another one have too? Neither of them had value in the beginning and tether only had value because people believed the company would pay them back.

He is basically saying that you cannot burn circulating supply. Unless it is a full centralized coin, and you can delete coins from other people's wallet.

By what you are saying, if the price goes from 1.00 to .90, you would need to "delete" circulating supply to control the supply. Burning from fees may not be enough.


The problem is that your coin have no value. Why would people buy? Only to sell in a higher price. It has no real value.
It is not backed by a company with USD reserves, like tether. It is also not a share of a company, which pays dividends.

It is pure speculative, and it value is zero, as there is zero demand for it. Maybe at launch with market you may get some people to pay money for it (just trying to sell at a higher price).

If selling for a higher price ia not a possibility (if you can increase supply when price goes up), them only selling at a lower price is possible (if the demand goes down you can't do anything). So there is no reason at all to buy it, because you will , in best scenario, keep your investment with zero interest rates and a higher risk than tether/usdc etc.


I may be totally wrong, as I am not an economist, just using my basic economics/finance knowledge


Edit:
Why is Ether valuable? Because it is the fuel of the Ethereum network, which is the plataform where many Dapps (will possibly) run in the future, based on smartcontracts etc... Used by big companies like shell, bp, Microsoft....
Why is bitcoin valuable? Because it is a widespread internet money, accepted in most countries of the world.
Why is teher valuable? Because one tether is (supposed) to be backed by one USD dollar, and tether co will pay you for each tether you can get to them.

Yes, you can. What makes you think reducing the reward per block and transaction fees are not enough? Blocks can have very large and variable sizes so transaction throughput will be much bigger.

As it is now blocks need to have a fixed size so that the supply of transactions is fixed. Miners and other users can then set the transaction fee price on the market. If the transaction fee is determined by different means you can make blocks as large as needed to accommodate all or almost all transactions.

There are two different approaches and only one uses convertible coins. You can implement the hash-rate solution in a block-chain with a single coin.

Yes, the price will be determined by supply and demand. If the price goes up more people will want to mine it and the hash-rate will go up. If the price goes down less people will want to mine it and the hash-rate will go down. Hash-rate is an indicator of price. That's what I meant by "estimate". Through the hash-rate you can estimate price variations without an oracle.

'Adjust' is a two sided coin (pun unintended). You cannot reduce supply under this model, only increase it. Burning transaction fees is not enough control.

I don't think you will attain a 'smooth' price because the value of either coin on your chain will be determined not by hash rate estimate, but though supply/demand when it gets listed on real exchanges.

You can control price through supply only. For each point in the demand curve that the market assumes you adjust the supply to smooth price variation.  But yes, if the demand drops to zero so does the price.

Note that:
1. it's impossible to have a 100% value stable currency, you can only smooth price variations;
2. "stable" is within quotes on the thread title because it's not really a stable price, it's a smooth price.

bitmover is correct here. You are only proposing a control over one side of the supply/demand equation. Without a control over both you will not be able to stabiise the value of your coin. If demand drops to zero so will the price of your coins.

If you really want to control demand, you need to incentivise it. See interest rates. Look at bitmex.com.

Mining two coins is not a way of controlling supply. The paper presents two different and unrelated ideas and only the later manipulates supply through block rewards and destroyed fees. You don't need to control supply and demand, by changing supply for a certain demand you can variate the price. I do not try to fix a certain exchange ratio for the coin only to smooth price variations, that's why stable in the title is quoted. Gold also does not have a fixed exchange ratio and it's price is fairly stable.


This is correct, if no one wants the coin it's worth nothing. There is nothing that can be done about that. If the entire world decides that gold or the USD is worth nothing then their prices also go to zero.

Nothing can have a completely stable price. The USD is not stable, it's price constantly changes in relation to other currencies and goods such as gold. If tether has a stable price it's only because people believe those companies can pay them back.

The idea is that the amount people receive back doesn't change too much. It's not a security debt. It's like buying gold or diamonds.

I took a look in your GitHub, and I was thinking about it.

As you said in the paper, the price is controlled by supply and demand. You proposed methods to control the supply, by mining  rewards and using two coins... But, what about the demand? You cannot control it.wjy should this coin be worth 0.000001 USD? Or one less or more zero?

If there is no demand for those coins, it doesn't matter any control over the supply.
Maybe I am missing something?

Stable coins should not be speculative, as far as I understand
Pegged coins, which are being successful such as usdt have a demand because they are like a security debt. When you buy tether you can sell it for USD in bitfinex/tether which promises to pay you back , a multimillionaire company...

I don't see , so far, how someone would buy a coin for X USD and expect to receive yhe same value back without amy multimillionaire company or government promising to pay you back (that's how security debt works anywhere in the world).

Buying a stable coin is like lending money.

well, when you decide to model all kinds of metals by crypto-coins, you may find the need for different policies. for example, who uses steel as a medium for storing value? defiantly no one. but at the same time, let focus on modeling gold - as all crypto-coins do and imagine you buy a piece of golden jewelry today with 30 Grams (1.06 Ounces). for the security reason, you may also buy a home safe box and regularly spend time to check the content of the box and be worried during each travel out of city (oxidation fee). with golds around 1 kilograms (35.274 Ounces) and above, now you start thinking about renting a safe deposit box and pay for it every year (oxidation fee).

each entity that involves in the process of block making has to somehow benefit form protecting the whole network. why people should work all the time to persevere something precious for me, for free?

P.S.:

there is another report here about loss of 36% of all bitcoins in circulation. this report may be wrong, but people could either simply forget their private keys or send their coins to an invalid address, and the whole network will suffer from the loss too. this is another problem that I try to address by oxidation fee:

https://news.bitcoin.com/btc-36-in-circulation-lost-23-held-by-speculators-us-tax-authority-monitoring/

If you take into consideration interest in external coins your are analyzing shifts in the demand curve and changes within the supply curve at the same time. It would be better to do one at a time.
The network doesn't change coin supply solely by reducing block reward, there are also the destroyed transaction fees. The later allows for actually reducing the amount of circulating coins and not just slowing down it's increase.

This could be a real detriment to the coin as a medium for storing value.

sorry, sorry. I have lost the mean of word infinite. you are right.

now, what you suggest in your paper is same as what I do. my coin supply is "infinite" too. I have a transfer fee that divides into:
1- transaction fee
2- network fee (this wipes out in the system)

destroying all/part of transfer fee prevents the unnecessary transactions in the system and I really like this. I also have the 3rd fee:
3- oxidation fee (this wipes out in the system too)

and this one is for the unspent coins with more than 1 year old (more older, more oxidation fee). you know, bitcoin and other similar coins have finite coin supply to create something like GOLD in virtual world - but with adding this wiping/destroying policy now we are at the age of modeling COPPER (or other metals) in virtual world.

Gold wasn't the only metal that brought us civilization, others were important too.