Topic: Securing contingent claims - page 3. (Read 7309 times)

I don't understand what motivation the existing businesses would have to take the other side of the bet.
Could you please explain?

You need to define what sort of transactions contribute to velocity. For instance, if I take money out of my safe and put it on the table and then put it back in the safe, even if I do this millions of times a second I'm not decreasing its value. I think you'll find that currency conversions also don't contribute.

Could you also please explain what you're trying to achieve with contingent blocks? It looks like an option based on difficulty. What does it enable?

ByteCoin

I wanted to pointed out that the contingent claims market would allow large businesses adopting bitcoins to capture some of the benefits from entry into the economy.
These business would know that announcement of their try would lead to an increase in the future difficulty level. Therefore they would want to place bets on future difficulty increases before announcing their entry.
Existing business would take the other side of these bet to insure themselves against loss.

I'm not a programmer, but I think a few things are relevant. I am thinking of the p2p escrow system rather than the mining system, but the comments are relevant to both.

1) Informational content can be greatly reduced by offering a limited number of standardized contracts. The set could be expanded once information technology improves.
2) If the contracts are tradeable, limited contract variety is not a big deal. (e.g. difficulty drops to a low level on August 1st, the price of a contingent claim paying off on low difficulty Jan 1st will go way up.) So you don't need a large number of maturity dates. Even one contract maturity per year even will accomplish much of the job.
2) Insurance will cost money in this system just like regular insurance. People willing to pay money for insurance will be limited to those dealing in large values of BTC.
Everyone else will prefer to self-insure. This means that the number of transactions will be orders of magnitude smaller than those occurring in the regular bitcoin user base.
3) Because of the different use of these contracts, charging much larger fees for higher data requirements shouldn't be a problem for users.
4) Once contingent claims are transformed into bitcoin the data contained is no longer useful.  I think only outstanding claims would need to be recorded in a block chain. Once these claims were realized (becoming either bitcoin or nothing), data associated with them could be deleted. The ledger would need to contain consistent information on all outstanding claims, but not on claims that had been transformed into bitcoin.

Side note: In the current system, perhaps the txn fee should be indexed so it is inversely proportional to current difficulty rather than adjusted ad hoc.

I don't think bitcoin itself will ever intrinsically allow the financial instruments you are talking about.  I also don't think that it is possible to build a sustainable currency system with the properties of bitcoin (pseudo-anonymity of parties engaged in transactions, and distributed authority) that also includes the financial instruments you are talking about, because the cost of incorporating those instruments into the system would mean a greater cost to be paid by the 'miners' in that system that validate transactions.  It is possible that such a system could become self-sustaining but if it did, the cost of every transaction would include the cost of the instruments that you mentioned (because the miners would expect a return that gave them a profit even after paying the cost of verifying those complex instruments, which would require either inflation (always fabricating bitcoins to pay miners) or higher transaction fees.

I guess what I'm saying is, you're talking about a system that has higher transaction fees because it includes these instruments.  Actually now that I've thought through this line of reasoning I realize that maybe your system would work - *if* it were possible for miners to attribute the extra cost of the instruments to the transactions that cause them to incur that cost, and *if* the cost wasn't also passed on to future miners who had to do more work to verify those past transactions without getting any benefit of the original transaction fees.

Ex. I mine a Contingent Block today. The Coins in the Contingent Block become a bitcoin Block on August 1st 0:00 UTC or Block xxxx if difficulty is less than X, and disappear otherwise. In the meantime, I can trade the contingent coins on an electronic exchange similar to bitparking. 

Now note that (barring changes to mining tech) difficulty on August 1st [or block xxxx] proxies for the USD/BTC exchange rate on August 1st. The difficulty price relationship will only become stronger over time, once the mining business is more mature. Thus if I trade some bitcoin for some contingent coins, I could remove a considerable fraction (probably the majority) of the variance in the USD value of my BTC holdings as of August 1st. The insurance relies on a p2p system with block chain integrity as the only counterparty. It would be much, much cheaper to use this system for insurance rather than a traditional market which exposes users to counterparty risk.

Difficulty of regular and contingent Blocks can be pegged so that the total number of coins and contingent coins generated at block time t is fixed in all future states of the world. Fixing the generation rate would make contingent claims a scarce resource, i.e. contingent claims would not affect long-term money supply trends. Relative difficulty for each coin type would be adjusted according to a system of linear equations that related past difficulty levels to current difficulty and which incorporated the constraint that expected total supply generation remained constant (i.e. solution of a system of linear equations)

Alternatively, a p2p contracting system could be implemented which allows bitcoins to be held in escrow by a blockchain and then distributes bitcoins at expiration according to difficulty information in the bitcoin block chain. The block chain would need to be secured using a proof of work system that rewarded individuals performing the work with contract fees. Contracts would need to be standardized (for example you can only contract on ln difficulty >= 0, 0.1, 0.2, .... and only on realization on the first day of each month or week). It is important that each side of the contract could be freely traded to other peers, so that holdings in these contracts would remain liquid.

I am not a programmer, so I don't know which type of system would be easier to implement. Combining everything in one blockchain seems more secure.

Either of these systems would make it much easier for merchants to adopt bitcoin without subjecting themselves to large risks or the considerable expense of exchanging BTC for USD after every transaction. The value of bitcoin is inversely proportional to its velocity. If merchants are constantly exchanging BTC for USD after every transaction, the velocity will be high and BTC value will be low. Instead Merchants could hold BTC and a bundle of BTC contingent claims aka BTC derivatives. If unwilling to bear the residual risks, they could purchase supplementary USD-denominated insurance on futures markets. The value of BTC would still be higher because much of the insurance market could be denominated in BTC.

"Bitcoin is technically sophisticated. As a monetary system, it looks primitive." - The Economist
I think this is a correct assessment. If bitcoin doesn't eventually introduce more sophisticated p2p monetary instruments, some other digital currency will. This currency will be much easier for merchants to adopt. If bitcoin hasn't achieved world domination before this happens, bitcoin will disappear and the new currency will take over.

For a simpler proposal for more basic monetary instruments (bonds), see my post here:
http://forum.bitcoin.org/index.php?topic=18288.0