Topic: Targeted Deflation Rate (Read 2666 times)

Not really though I would if I could think of a good method. There is a tension between controlling deflation and controlling inflation. If the algorithm can destroy coins at a much faster rate than it can create them, the algorithm will offer stronger protection against inflation. I view rapid deflation as the lesser of two evils. Accordingly the system would be designed to issue coins at a much slower rate than it can destroy them. Remember new issuance of currency in the current period would be set to a fraction (say one tenth) of the transaction fee/tax volume in the previous period.

E.g the tax brought in 10 coins last period for miners and destruction. This period the algorithm issues 1 coin. If difficulty is climbing according to Moore's law or faster, tax is distributed to miners. If difficulty is not climbing fast enough, tax destroys about 10 coins. Net money supply falls if difficulty falls and rises if difficulty rises.

Value of coins should be roughly one to one with transaction volume in the long run. Suppose transaction volume doubles from 100 to 200. Tax revenue would rise from 0.1 to 0.2. Iff difficulty is simultaneously increasing, currency issuance rate woul increase from 0.01 to 0.02. As you can see there is nothing in here to protect the system from rapid deflation. If difficulty is falling, currrency destruccreation would move from 0.01 to -0.09. As long as difficulty continued to fall, destruction would continue. In the event of a collapse, transaction volume would likely increase as wealth holders rushed to sell. Potential Destruction rates are proportional to transaction volume, so these would increase dramatically as well. This would provide some protection against a sudden collapse. The higher the tax rate the better the protection, still I couldn't accept tax rates higher than 0.1%.

Obviously i disagree with you regarding the effectiveness of private insurance markets in the management of systematic risk. However, the imposition of a tax is a serious issue as you point out. One option is two issue currency as bonds with fixed maturity. Bond transactions would not be taxed. Bonds would turn into regular coins at maturity. Transactions using regular coins would be taxed. This would allow businesses which need very frequent transactions to operate to use bonds for their operations.

Extreme economic growth is going to lead to extreme deflation. You're going to prevent everyone from benefiting from deflation?

Different from the FED in that the goal would be to achieve deflation of around 2% or more per year. FED aims for inflation of around 2%. Also different in that currency generation is specified by an algorithm rather than an appointed commitee. Similar to the FED in that the system takes currency in and out of circulation to limit price volatility.

I agree that Euros and dollars will have a more stable long run valu than difficulty, but this requires a trusted mechanism for reporting exchange rates to the system. I don't see how this could happen without centralization. If someone has a clever mechanism for incentivizing nodes to make truthful reports to the blockchain, I would be very excited by that. (nerdgasm) It needs to be relatively low cost and incentive compatible (truth must always be more profitable than falsehood). Good luck with this designing these systems is challenging/maybe impossible.

Bitcoin not being enough like Federal Reserve Notes.

Let's go ahead and leave it busted.

Most viable would be imho a theoretical exchange rate against a basket of all major fiat currencies. But if you don't believe in them, that's probably not an option. Historians have a similar problem and afaik they often use a very basic and overall consistent measurement, the price of a cow.

Its called open source.

We simply start different blockchains fixing different imaginary and/or non-imaginary "problems", catering to various whims and so on and so on, and let the market decide.

("Heck if your kind had their way Satoshi would've bought shares of PayPal or something and made ad-hoc "adjustments" to "the system" instead of writing bitcoin..." )

-MarkM-

Perhaps there are different ways of registering these votes?  The reason why I thought miners might do the trick is that the barrier to entry to mine is not too high, so anyone who wants to register their opinion about inflation rates can start mining and join a mining pool.  Right now, deepbit (the dominant mining pool) accounts for ~50% of new blocks.  I should also add that one might also implement speed limits on the rate at which the target inflation rate can be changed, in the same way that difficulty now can't be increased or decreased by a factor of more than 4 every two weeks.

Originally, I had liked Suggester's old suggestion of tying mining rewards to hash rates, so that the money supply would at least roughly track the number of active users weighted by their investment in the system.  But that doesn't really allow for monetary deflation when it's necessary, and it also ties up huge resources in mining, neither of which seems like a good idea.

I'd be happy to hear of other ways in which the target inflation rate might be determined.  Personally, I would favor something democratic and dynamic over an algorithmic solution, as a way to acknowledge that we're all fallible and can't perfectly predict the future, so we need a mechanism for allowing consensus decisions to be changed.

Forcing the costs on those who don't need it will make even more ventures prohibitively expensive,   also for most current ventures we are choosing to self insure, why should we lost that right?   bit-pay already is offering this type of service for merchants from what they say, and if you really need non trival amounts there is always lloyds of london.    You can also cross insure if you want as well.   You are never going to get rid of all the risk in life.    I also see the generation protocol as a potential failure point, but not for the reasons you do.  I see what you want to do as far worse then what we have now.

Whether everyone should be forced to participate in an insurance pool or just those who choose to is open to debate. Insurance can be prohibitively expensive when it is elective. Where can I purchase forward bitcoin contracts in non trivial volumes now? How much does this insurance cost?  How do i know that the insurer won't pull a 2008 banking crisis and fail to pay? I don't think usable insurance for bitcoin will ever materialize without revamping the generation protocol. This in my view is an Achilles heel.

@pat

You are giving miners a huge amount of power in your system. Do they have good incentives to make prudent decisions? 

Miners can be made wealthier in two ways:
Increasing the total social surplus created by bitcoin = the good way

Increasing the share of this surplus distributed as mining rewards = the bad way

If miners were representative of all potential beneficiaries from bitcoin it might not be an issue. I don't think they are. There is a significant danger that the system of one mined block one vote will lead to miners assigning themselves excessively large rewards.

That is a problem best solved with companies that will offer private insurance funds and other classic hedging solutions long in use in mutlicurrency trading.   There is no need to burden the currency itself and hence everyone with those costs.

To clarify: the problem is inflationary risk faced by merchants who receive payment in bitcoin.

The proposal is to set aside some portion of sent money as a flow of insurance funds. In the event of inflation the flow of insurance funds is destroyed to reduce the money supply. In the event of deflation, the insurance monies are redistributed to miners as rewards for processing transactions.

I would allow money supply growth to equal a fraction of the max currency destruction rate. This is the product of send volumes and the tax rate. The fraction might be one tenth.  Since the max destruction rate is well in excess of the currency creation rate, the currency would still be deflationary.  The rules would make deflation more predictable. Spikes in transaction volume which indicate deflationary pressure would be offset by accelerated money growth. Drops in difficulty growth rates which indicate inflationary pressure would be offset by currency destruction. The outcome should be a more stable and predictable rate of annual deflation.

You know what they say, if it ain't broke...

You would probably have to use a proxy, like difficulty with some growth factored in automatically because of Moore's law.  Essentially you would rely on difficulty tracking electricity prices.

I haven't, have no intention of doing, and said "in the context of setting up a new block chain where the money supply is more flexible".  The underlying technical side of Bitcoin is rock solid, and there are many many people in this forum are thinking of ways of building on *that* without having to subscribe to deflationary economics.

Bitcoin by design is a Deflationary economy. 
If you don't like it, don't put your money in it.

/thread

Deflation shouldn't be artificially limited. What you are discussing is a central plan. All central plans fail due to the economic calculation problem.  The greater the value of a bitcoin, the greater the incentive to spend/sell it. This is a natural limit. We have seen this principle at workk for several weeks now and there is no reason to believe it will stop working when bitcoin production slows.

+1

Also, how do you decide which price inflation indicator to use? What we call price inflation is just the price index issued by the government. But Bitcoin has no government and the price index can be calculated in infinite ways.