I wrote this elsewhere originally, but it got very little reaction, so I am editing it a bit and posting this here.
Cryptocurrencies are something sorta new, since bitcoin is now almost ten years old. When envisioned they were meant to be currencies, used to buy and exchange value. However, they have become far more like securities, where people speculate for the value increases and then cash out. Or "hodl," as they say, and then cash out when the price is really really, high. I have wondered for a long time what it would take to make a real digital currency.
How could you change the dynamic such that you have a relatively stable (value wise) currency with low cost trading, high speed transactions and all the incentives for the 'miners' to still stay in the game. Likewise you want something that does not inflate ridiculously either. That breaks the whole rule about price stability.
No cost transactions have been attempted, (re: [Fcoin](https://steemit.com/life/@sogo/the-death-of-fcoin-a-tale-of-bad-token-design)). The problem was the wild inflation that took place. Likewise, it's backend in the ethereum network as a token, was badly broken and, at times, crippled the that network.
Others have tried to tackle took many coins in circulation by using a Proof of Stake, where you are rewarded for holding the coins rather than buying and selling. The problem is the price will still go up and it outright encourages hoarding, which is anathema to stability since it creates whales and those whales at some point will, in fact, cash out. Then, boom and doom.
One potential idea is something like a 'proof of transaction' where the more the coin is traded by someone, they will be rewarded. This would function something like a percent off or something like the Starbucks stars or rewards program. The more you spend, the more you get rewarded in more of the same coins. Now, there are two problems, IMO, with this. The first is then you fall into the bot trap. It'd be really easy for a bot system to be set up to ping-pong the coins around. This would generate the coins and cause inflation. The work around is to cripple the reward amount based on how often the transactions are taking place, but that would be, again, run against the whole idea of getting people to use it like money. The second problem is rewarding people with more coin for using the coin is inflationary still. Even if mildly so, it would cause the coin to lose value over time. From an economist, POV, this encourages the transactions: use it today or it will be worth less tomorrow! But from the POV of the crypto community, this would be really bad. Who wants to have a coin that will lose value. However, if this is meant to be a transactional item, this would not be a terrible solution.
There is another potential solution. Another alternative 'proof of transaction' might be to have a 'timer' in the coin. If the coin sits in a wallet for more than a set time frame, ie is not used or is in 'hodl,' half the value of that coin is deleted. Call it a 'half life' for a coin. When the coin is transacted, the 'timer' is reset for that coin. The deduction or deletion, when it happens, is then sent to the miners. The short fall between coins deducted and the value of the mining, is awarded with newly generated coins. Given the half life algorithm, the miners are then encouraged to sell those coins or use it to buy, say, Starbucks, asap. There would be some inflation still, but so long as the coin is adopted and used in brick and mortar and popular websites, then it ought to be relatively easy to keep the use rate up.
That's the rub though: it has been really hard to get many companies to adopt using cryptocurrencies. Another problem is this could be abused. Some nontrivial thought needs to go into the security of the coin so that no one could trigger a mass 'decay' and swipe all the coins. Likewise, getting the decay algorithm right, or at least the period for the decay algorithm right is equally important. A year might be too long. A day is 1000% too short.
At any rate, I am curious what others think. I know many people - potentially most! - in the crypto community view the coins as investments rather than transactional money. My attempt here was not so much to try to create a new coin as examine a potential method to turn a cryptocurrency into a transactional currency rather than just an investment.
I would appreciate some thought and feedback from the community. I am sure I am going to be mocked here, since everyone is talking about the 'next coin to the moon,' but, here we are.
Exponential decay by a factor of 0.5 seems a bit harsh. The penalty for missing your first 'spend deadline' is huge.
ReplyDeleteConsider first applying a grace period of two to four weeks. If a person were to receive their paycheck in cryptocurrency then we want to allow them one to two pay periods to use it without penalty.
After that point, apply a decay rate equal to the growth rate that week. This means you could gain (or lose) a little value by holding coins for up to a month, but after that you can't possibly gain anything more through speculation.
This provides a lever to control the coin supply. The decay rate can be offset above or below the growth rate to incentivize people to spend more or save more. The decay rate can also take into account core inflation, rendering the coin both stable and inflation-protected relative to real costs.
The reason cryptos will object to this is it requires the same kind of central-bank controls as all other fiat currency. There are no good candidates to be trusted with this responsibility.
Even a vote by coinholders would not be fair since current holders have an incentive to vote for a lower decay rate.
Miners would have an incentive to vote for higher rates since that would increase the pool of coins they can win, plus it would be awkward to weigh their votes accurately.
A negotiated solution is not sustainable as it would have to be done weekly.
The only way I can see this working is if a disinterested authority with the trust of all parties can provide oversight.
Hi Chris.
ReplyDeleteI was thinking on the order of a year on the outside or month on the inside. I was leaning, personally, more towards a year. people need to be able to hold their coins to some extent (save enough to buy something or not have to maniacally spend everything at once), but I am seeking to avoid the hodl.
The half life was picked just because of the relative ease of modeling it. It mimics the radioactive decay of elements.
I have to wonder - speculation here - if you couldn't make the number crunch for the miners be a return hash with all the coin IDs of the coins that need to decay. Its incorporation into the blockchain would then trigger the decay. That way you could avoid a central authority.