Monetary Authority for Bitcoin

This is no doubt probably a very controversial Bitcoin Improvement Proposal and is also a very rough draft of one.

Bitcoin lacks a Central Bank. This is good and bad. A central bank benefits those with political connections. But Bitcoin lacks price stability, this generates menu costs, and incentivizes speculation. I propose the creation of a monetary authority for Bitcoin that sets block reward to a new mathematical formula.

The velocity of the Bitcoins that are in circulation likely approaches 100,000x per year as compared to 1x - 4x for the USD. This in itself is not bad. But given that only 10% to 20% of Bitcoins are circulating, this means that the price of Bitcoin is decided largely through speculation. In fact the price of a Bitcoin is irrelevant to those who use Bitcoins as a currency because it appears the majority of coins being used are immediately being sold and repurchased in the exchanges for the sole purpose of buying goods.

Unless Bitcoins can be used to purchase intermediate goods and have a closed economic ecosystem, Bitcoin will be too vulnerable to speculation and would not be a viable currency. But the development of a closed economic ecosystem is stymied by the uncertainty of Bitcoin prices and speculation.

Fortunately the infrastructure for transacting Bitcoin has long been established, with many major exchanges. Nearly all major exchanges announce recent prices. At the point when a block is generated, the miner will also add the exchange price of bitcoin between various other currencies and crypto-currencies to the blockchain. The exchanges that are kept track of could be hard coded into Bitcoin or the miner could choose, how this works is not something I'm personally focused on.

With every new block, the miner will compare the cumulative percentage change in the exchange price of Bitcoin over the previous 432 blocks. The standard deviation of the percentage change in exchange rates will be calculated. Outliers will be excluded, this is so that in case x-currency suffers from hyperinflation, the x-currency will be ignored. It is extremely unlikely for all the world’s currencies to be suffering from hyperinflation caused by monetary expansion as opposed to a supply shock.

Every 432 blocks the block reward will be reevaluated. For every 5% increase in the geometric mean of Bitcoin exchange rates in relation to the world’s currencies would increase the block reward by 3%. A 5% decrease in the geometric mean of Bitcoin exchange rates will decrease the block reward by 3%. Changes in the exchange rates of less than 5% will not alter the block reward.

The minimum block reward will be one Bitcoin.

Why is this better then the current system? Very simple, we are still dependent on banks. Currently Bitcoin is poised to replace Visa and Paypal, not the Federal Reserve. Bitcoin will be less efficient then Visa and Paypal because it takes times to transfer money out of exchanges to one's bank account and vice versa. In order for Bitcoin to replace the US dollar, it needs to not be a more complex version of a debit card. It needs to have a closed economic ecosystem, where all transactions are done in Bitcoin (Consumer > Merchant > Wholesaler > Factory), and the only people who use the exchanges are merchants who need to and those who wish to gamble on Bitcoin.

In order for Bitcoin to have widespread acceptance, it needs price stability. My proposal won't peg the Bitcoin to any one currency, but it would reduce month to month variability in relation to a basket of currencies and discourage views that it's speculative.

Look at the current system, it's not healthy and it's not a currency.

On Tue, Dec 10, 2013 at 8:01 AM, Ryan Carboni <ryan.jc.pc@gmail•com> wrote:

> The exchanges that are kept track of could be hard coded into Bitcoin or
> the miner could choose, how this works is not something I'm personally
> focused on.
>
>

That is like saying "We need a way to travel around the world quickly. There will be an anti-gravity technology; how this works is not something I'm personally focused on."

Or, in other words, you are ignoring exactly the sticky, difficult problem that would have to be solved for your proposal to have any chance of working.

It is not a violation of the trust of those holding the currency. Many people bought Bitcoin in the hopes that it's value in the relation of other currencies will increase, not because there's a fixed money supply. The majority of people using Bitcoin as a currency in exchange for real goods are using the exchanges.

My proposal will still allow for 4.9% semi-weekly variations in the price of Bitcoin, allowing for it to appreciate 11,800% per year.

On Mon, Dec 9, 2013 at 2:11 PM, Andrew Poelstra <asp11@sfu•ca> wrote:

> On Mon, Dec 09, 2013 at 02:01:07PM -0800, Ryan Carboni wrote:
> > This is no doubt probably a very controversial Bitcoin Improvement
> Proposal
> > and is also a very rough draft of one.
> >
>
> Ryan, you can stop there already because any change to the inflation
> formula (supposing such a thing is even possible, which it's not)
> would be a violation of the trust of those holding the currency, who
> obtained it while believing that its inflation algorithm would not
> change.
>
> --
> Andrew Poelstra
> Email: apoelstra at wpsoftware.net
> Web:   http://www.wpsoftware.net/andrew
>
> "If they had taught a class on how to be the kind of citizen Dick Cheney
>  worries about, I would have finished high school."   --Edward Snowden
>
>

For what it's worth, once upon a time I pushed this agenda on Bitcointalk. I'd say early 2011 or so. The response I got was so strong and unanimous in favor of this point being absolutely non-negotiable that if the money supply were anything other than fixed, Bitcoin may as well be pretend e-dollars. I was not just persuaded against it, I was put in my place.

I believe that if there ever becomes a consensus that Bitcoin's inflation parameters were a show-stopper for the Bitcoin economy, that the power to correct it lies with merchants, who would vote for changing the rules. I believe they would do this not by changing Bitcoin, but by accepting, in parallel, a brand new alt coin that reflects the consensus as to how the inflation should be. I believe such an alt coin would have its genesis at around the time that consensus moved toward accepting inflation, rather than adopting the seignorage of some other alt coin out there today.

Mike/Casascius

From: Ryan Carboni [mailto:ryan.jc.pc@gmail.com] Sent: Monday, December 09, 2013 3:24 PM To: apoelstra@wpsoftware•net Cc: bitcoin-development@lists•sourceforge•net Subject: Re: [Bitcoin-development] Monetary Authority for Bitcoin

It is not a violation of the trust of those holding the currency. Many people bought Bitcoin in the hopes that it's value in the relation of other currencies will increase, not because there's a fixed money supply. The majority of people using Bitcoin as a currency in exchange for real goods are using the exchanges.

My proposal will still allow for 4.9% semi-weekly variations in the price of Bitcoin, allowing for it to appreciate 11,800% per year.

On Mon, Dec 9, 2013 at 2:11 PM, Andrew Poelstra <asp11@sfu•ca<mailto:asp11@sfu.ca>> wrote: On Mon, Dec 09, 2013 at 02:01:07PM -0800, Ryan Carboni wrote:

> This is no doubt probably a very controversial Bitcoin Improvement Proposal
> and is also a very rough draft of one.
>

Ryan, you can stop there already because any change to the inflation formula (supposing such a thing is even possible, which it's not) would be a violation of the trust of those holding the currency, who obtained it while believing that its inflation algorithm would not change.

On Mon, Dec 9, 2013 at 7:23 PM, Ryan Carboni <ryan.jc.pc@gmail•com> wrote:

> It is not a violation of the trust of those holding the currency. Many
> people bought Bitcoin in the hopes that it's value in the relation of other
> currencies will increase, not because there's a fixed money supply. The
> majority of people using Bitcoin as a currency in exchange for real goods
> are using the exchanges.

Your proposal has been met with widespread laughter. Were I not ill with the flu, mockery would ensue as well.

To piggyback on Jeff,

Any proposal that is going to add reliance upon data from third parties outside of the Bitcoin network itself is likely going to be rejected outright. This opens far too many potential vulnerabilities.

"The exchanges that are kept track of could be hard coded into Bitcoin or the miner could choose, how this works is not something I'm personally focused on."

Yeah... you can't just gloss over a little detail like that. There must be consensus between the miners, otherwise a solved block will be rejected by a miner's peers.

I've got a better idea. Ben Bernake needs a new job. Let's just let him set the block reward.

On Mon, Dec 9, 2013 at 5:23 PM, Jameson Lopp <jameson.lopp@gmail•com> wrote:

> To piggyback on Jeff,
>
> Any proposal that is going to add reliance upon data from third parties
> outside of the Bitcoin network itself is likely going to be rejected
> outright. This opens far too many potential vulnerabilities.
>
> "The exchanges that are kept track of could be hard coded into Bitcoin
> or the miner could choose, how this works is not something I'm
> personally focused on."
>
> Yeah... you can't just gloss over a little detail like that. There must
> be consensus between the miners, otherwise a solved block will be
> rejected by a miner's peers.
> --
> Jameson Lopp
> Software Engineer
> Bronto Software, Inc
>
> On 12/09/2013 06:10 PM, Jeff Garzik wrote:
> > On Mon, Dec 9, 2013 at 7:23 PM, Ryan Carboni <ryan.jc.pc@gmail•com>
> wrote:
> >> It is not a violation of the trust of those holding the currency. Many
> >> people bought Bitcoin in the hopes that it's value in the relation of
> other
> >> currencies will increase, not because there's a fixed money supply. The
> >> majority of people using Bitcoin as a currency in exchange for real
> goods
> >> are using the exchanges.
> >
> > Your proposal has been met with widespread laughter.  Were I not ill
> > with the flu, mockery would ensue as well.
> >
>
>
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Bitcoin is made of many parts, yes, but not all parts were developed simultaneously.

On Mon, Dec 9, 2013 at 2:06 PM, Gavin Andresen <gavinandresen@gmail•com>wrote:

> On Tue, Dec 10, 2013 at 8:01 AM, Ryan Carboni <ryan.jc.pc@gmail•com>wrote:
>
>> The exchanges that are kept track of could be hard coded into Bitcoin or
>> the miner could choose, how this works is not something I'm personally
>> focused on.
>>
>>
> That is like saying "We need a way to travel around the world quickly.
> There will be an anti-gravity technology; how this works is not something
> I'm personally focused on."
>
> Or, in other words, you are ignoring exactly the sticky, difficult problem
> that would have to be solved for your proposal to have any chance of
> working.
>
> --
> --
> Gavin Andresen
>

You're just closed minded.

On Mon, Dec 9, 2013 at 3:10 PM, Jeff Garzik <jgarzik@bitpay•com> wrote:

> On Mon, Dec 9, 2013 at 7:23 PM, Ryan Carboni <ryan.jc.pc@gmail•com> wrote:
> > It is not a violation of the trust of those holding the currency. Many
> > people bought Bitcoin in the hopes that it's value in the relation of
> other
> > currencies will increase, not because there's a fixed money supply. The
> > majority of people using Bitcoin as a currency in exchange for real goods
> > are using the exchanges.
>
> Your proposal has been met with widespread laughter.  Were I not ill
> with the flu, mockery would ensue as well.
>
> --
> Jeff Garzik
> Bitcoin core developer and open source evangelist
> BitPay, Inc.      https://bitpay.com/
>

Ryan Carboni wrote:

>
> Bitcoin lacks a Central Bank.
>

This is a feature, not a bug.

Also, this is offtopic. Political debate is thataway ->.

bitcoin-development is for development and technical discussion.

+1

On Mon, Dec 9, 2013 at 2:06 PM, Gavin Andresen <gavinandresen@gmail•com>wrote:

> On Tue, Dec 10, 2013 at 8:01 AM, Ryan Carboni <ryan.jc.pc@gmail•com>wrote:
>
>> The exchanges that are kept track of could be hard coded into Bitcoin or
>> the miner could choose, how this works is not something I'm personally
>> focused on.
>>
>>
> That is like saying "We need a way to travel around the world quickly.
> There will be an anti-gravity technology; how this works is not something
> I'm personally focused on."
>
> Or, in other words, you are ignoring exactly the sticky, difficult problem
> that would have to be solved for your proposal to have any chance of
> working.
>
> --
> --
> Gavin Andresen
>
>
> ------------------------------------------------------------------------------
> Sponsored by Intel(R) XDK
> Develop, test and display web and hybrid apps with a single code base.
> Download it for free now!
>
> http://pubads.g.doubleclick.net/gampad/clk?id=111408631&iu=/4140/ostg.clktrk
> _______________________________________________
> Bitcoin-development mailing list
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> https://lists.sourceforge.net/lists/listinfo/bitcoin-development
>
>

On Mon, Dec 9, 2013 at 11:57 PM, Mike Caldwell <mcaldwell@swipeclock•com>wrote:

>
> I believe that if there ever becomes a consensus that Bitcoin’s inflation
> parameters were a show-stopper for the Bitcoin economy, that the power to
> correct it lies with merchants, who would vote for changing the rules.  I
> believe they would do this not by changing Bitcoin, but by accepting, in
> parallel, a brand new alt coin that reflects the consensus as to how the
> inflation should be.  I believe such an alt coin would have its genesis at
> around the time that consensus moved toward accepting inflation, rather
> than adopting the seignorage of some other alt coin out there today.
>

Agreed Mike.

The economic parameters of Bitcoin are fixed in stone forever. Adding a monetary authority to Bitcoin is impossible and undesirable because the implicit contract of Bitcoin is that there would finally be a currency in which no one could mess around with. It would betray all prior holders.

But these are ideas everyone is free to experiment with in new altcoins. If the lack of inflation in Bitcoin ever becomes a problem in day-to-day usage, such a parallel chain could become the de-facto cryptocurrency for spending. Or just maybe fiat already works well enough there...

Wladimir

On 12/10/13, Ryan Carboni <ryan.jc.pc@gmail•com> wrote:

> You're just closed minded.

No, at least to persons have explained you why your proposal is not feasible. If you wanted to learn, you would have made questions on why those parts of your proposal are unfeasible. There have been many proposals about "stablecoins" in bitcointalk and other forums (for example, the "initial proposals" freicoin subforum). I have participated in several of them trying to find a solution and I'm now convinced that this is impossible to implement in a secure AND P2P system.

This is off-topic for this forum, specially if (as you've shown to us) you are not interested in learning why this proposal is unfeasible.

Bitcoin's volatility is not a symptom of its architecture, but a reflection of the collective knowledge of its future acceptance. Currently that knowledge is based on very volatile sources: how some senator feels about it this morning, which direction departments in the Chinese government are leaning. The issue is that proof-of-work is missing from society's end. As time goes on, laws, regulations and policies will start to form, people will challenge them, they will be reviewed and updated, they will be challenged again on different grounds, re-reviewed, and so on. Each of those confirmations will make it that much harder to change earlier confirmations. It won't matter anymore what some senator thinks this morning because she will have months of hard-work ahead of her before she can affect any change. It also doesn't matter if the rulings are positive or negative, just having them will add stability to Bitcoin at some value between $0.0001 to $100,000 per coin.

On Tue, Dec 10, 2013 at 4:38 AM, Jorge Timón <jtimon@monetize•io> wrote:

> On 12/10/13, Ryan Carboni <ryan.jc.pc@gmail•com> wrote:
> > You're just closed minded.
>
> No, at least to persons have explained you why your proposal is not
> feasible.
> If you wanted to learn, you would have made questions on why those
> parts of your proposal are unfeasible.
> There have been many proposals about "stablecoins" in bitcointalk and
> other forums (for example, the "initial proposals" freicoin subforum).
> I have participated in several of them trying to find a solution and
> I'm now convinced that this is impossible to implement in a secure AND
> P2P system.
>
> This is off-topic for this forum, specially if (as you've shown to us)
> you are not interested in learning why this proposal is unfeasible.
>
> --
> Jorge Timón
>
> http://freico.in/
>
>
> ------------------------------------------------------------------------------
> Sponsored by Intel(R) XDK
> Develop, test and display web and hybrid apps with a single code base.
> Download it for free now!
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>

It is simpler than that; simple numbers. Bitcoin is volatile right now, not for fundamental architecture reasons, but for reasons why many other small issues are volatile. Low liquidity and a small issue implies that a single big player can easily the move the market. Further, it is volatile because common financial tools available elsewhere -- shorting, futures/options, etc. -- are not widely and easily available.

None of these factors are special or specific to bitcoin. See http://garzikrants.blogspot.com/2013/11/solution-to-bitcoin-volatility.html

However, this is getting WAY off-topic for a development mailing list.

Ryan successfully trolled the list. Let's not further feed the trolls.

On Tue, Dec 10, 2013 at 7:07 PM, Baz <bk@thinkloop•com> wrote:

> Bitcoin's volatility is not a symptom of its architecture, but a reflection
> of the collective knowledge of its future acceptance. Currently that
> knowledge is based on very volatile sources: how some senator feels about it
> this morning, which direction departments in the Chinese government are
> leaning. The issue is that proof-of-work is missing from society's end. As
> time goes on, laws, regulations and policies will start to form, people will
> challenge them, they will be reviewed and updated, they will be challenged
> again on different grounds, re-reviewed, and so on. Each of those
> confirmations will make it that much harder to change earlier confirmations.
> It won't matter anymore what some senator thinks this morning because she
> will have months of hard-work ahead of her before she can affect any change.
> It also doesn't matter if the rulings are positive or negative, just having
> them will add stability to Bitcoin at some value between $0.0001 to $100,000
> per coin.
>
>
>
>
> On Tue, Dec 10, 2013 at 4:38 AM, Jorge Timón <jtimon@monetize•io> wrote:
>>
>> On 12/10/13, Ryan Carboni <ryan.jc.pc@gmail•com> wrote:
>> > You're just closed minded.
>>
>> No, at least to persons have explained you why your proposal is not
>> feasible.
>> If you wanted to learn, you would have made questions on why those
>> parts of your proposal are unfeasible.
>> There have been many proposals about "stablecoins" in bitcointalk and
>> other forums (for example, the "initial proposals" freicoin subforum).
>> I have participated in several of them trying to find a solution and
>> I'm now convinced that this is impossible to implement in a secure AND
>> P2P system.
>>
>> This is off-topic for this forum, specially if (as you've shown to us)
>> you are not interested in learning why this proposal is unfeasible.
>>
>> --
>> Jorge Timón
>>
>> http://freico.in/
>>
>>
>> ------------------------------------------------------------------------------
>> Sponsored by Intel(R) XDK
>> Develop, test and display web and hybrid apps with a single code base.
>> Download it for free now!
>>
>> http://pubads.g.doubleclick.net/gampad/clk?id=111408631&iu=/4140/ostg.clktrk
>> _______________________________________________
>> Bitcoin-development mailing list
>> Bitcoin-development@lists•sourceforge•net
>> https://lists.sourceforge.net/lists/listinfo/bitcoin-development
>
>