BitCoin was a trailblazer in the field of digital currency. However, like many 1.0 software releases, issues encountered once the software was released to the public and exposed to a much wider user base exposed unintentional effects and brought into question some of the key design decisions made by its author(s), particularly the emphasis on anonymity of transactions instead of the “security” of transactions. This RFC proposes some high level changes that address a few of the problems that inhibit Bitcoin from being more widely adopted; please respond with comments or additional RFCs. The issues I see are:
1) Endpoint security
2) User/Transaction “Trust”
3) High variance in exchange rate over time
Endpoint Security
The reports of “bitcoin malware” and significant bitcoin thefts raised concerns about the fact that bitcoin “wallets” do not require a private key or PIN to initiate transactions. It is the difference between credit card or cash transactions, which do not require any “password,” and debit card transactions, which require a PIN that would prevent a thief from being able to use a stolen card and often have a person’s picture on them. Credit card companies can operate the way they do because they have sophisticated fraud countermeasures that take into account many factors including the location, type, and amount of each transaction before authorizing it. Cash is often stolen, even at great risk and threat of incarceration to the thief. Since a full anti-fraud heuristic would be impossible to implement, the key question is whether most people want anonymous “digital cash” or something more like a “digital debit card.”
If you go to local merchants, you will notice that fewer and fewer people are paying for their purchases with cash. They appreciate the convenience of credit/debit cards and the security that comes from knowing they are not liable for fraudulent transactions. To offer that security, there are three key changes that would need to be made to Bitcoin:
1) Require a password to be entered before each transaction can be initiated
2) Authenticate each user’s identity with a certificate authority (more details on this later) at the time a transaction is initiated
3) Empower certificate authorities to provide password reset services, so balances are not lost if the password is lost (to do this, merely encrypting the wallet with a password doesn’t work, instead the wallet should be encrypted/decrypted by the product of a successful authentication request to the CA)
User/Transaction “Trust”
Given the irrevocability of transactions, you must have complete trust in your counterparty to transact with them using Bitcoin. In the “physical cash” world, you are both in the same location and know each other’s identity. You can call on a shared set of police/courts to adjudicate in the case of dishonesty. No such recourse exists in a Bitcoin transaction, which could involve people in different countries misrepresenting their identity. Having a set of “trusted” certificate authorities (similar to those that offer SSL certs) that perform identity verification and can provide limited personally identifiable information to counterparties can allow people to make better informed decisions prior to agreeing to participate in a transaction. To some extent, this is already happening in the Bitcoin universe with the Escrow services. But, there is too much friction in using an escrow service for every transaction (in the offline world, it is only used for higher value transactions for this reason). Identity verification is lower friction and could provide the trust needed to encourage more transaction activity.
High Variance In Exchange Rate
In my opinion, the high variance in Bitcoin exchange rates is attributable to three factors: speculation, limited liquidity, and a monetary supply that changes without any regard to the exchange rate.
To discourage speculation, I would recommend that there be a time based “inactivity” fee associated with currency balances that are not being used in transactions (with protections against trading circles, etc.). By discouraging accumulation of coins, you also have the beneficial side effect of the transaction record better reflecting actual currency for goods or services transaction history rather than non-transaction related currency exchanges.
To address the liquidity issue (particularly given that the “inactivity” fee will discourage trading), there should be system in place for the election of special “market-makers” that are exempted from the inactivity fee in return for providing a minimum level of liquidity to the market. Unlike financial markets, where the market makers can exit the market without penalty in times of uncertainty, these market makers will lose their inactivity fee exemption if the velocity of their trading activity declines below a certain level. That should provide a significant incentive to provide continuous liquidity.
The monetary supply problem is more complex. I like the fact that the Bitcoin monetary supply cannot be arbitrarily expanded or reduced by a central authority. However, the current decaying expansion formula seems overly simplistic. Given that the complete transaction record in the Bitcoin system is effectively known, as the prevailing exchange rates would be (based on special transaction records for market-maker activity), and the question is how the system should modulate the monetary supply, it would seem that you can somehow create a formulaic relationship to enforce consistent exchange rates across a basket of global currencies or commodities through modulation of the monetary supply. The system would be its own central bank and since the relationship to those currencies and/or commodities is “hard coded” with a target inflation rate of 0%, there is no uncertainty about how the system would behave. The inactivity fee and currency discovery rate would modulate on a periodic basis with the goal of assuring that the currency as a whole experiences neither long term inflation nor deflation. This would also provide confidence to the market makers.
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I’ve only had a couple hours to think about this, and I’m sure active forum members have thought about these issues far more deeply than I have. I just wanted to start the discussion about how to iterate on Bitcoin to create a more widely adopted digital currency.
Topic: RFC: Creating a More Widely Adopted Digital Currency - page 2. (Read 2003 times)
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