Quote from: johanatan on July 02, 2011, 06:27:37 AM

Okay, so this is back into the realm of 'let the market sort it out'. I thought you were trying to roll such things into the blockchain by use of some system of linear equations (which adjust prices per difficulty dynamically). So you may have gotten rid of some inefficiency [or 'tax' as you put it] in the first order, but second, third and higher orders (or degrees) would still be traditional markets (with all their pricing inefficiencies)?

The important thing to me is creating bonds and allowing them to be traded for contingent claims. Inefficiencies associated with letting exchange markets sort out bond pricing (i.e. interest rates) and contingent claim pricing (essentially guesses on the probability of future difficulty states) are not obvious to me. (please point them out so we can discuss)

My sense is that you would prefer mining markets to sort out pricing. To do this you need one difficulty level for each asset type. You can keep each asset's currency generation rate approximately constant by adjusting each asset's difficulty upwards and downwards independently. This is just an independent linear equation for each asset.

(e.g.)
D_i(t)=D_i(t-1)*A_i(t-1)/H_i(t-1) , where:

A_i(t-1) is the generation rate of asset type i during period t-1
H_i(t-1) is the target generation rate of asset type i during period t-1
D_i(t-1) is the difficulty of generating asset type i during period t-1
D_i(t) is the updated difficulty of generating asset type i during period t

An issue is that difficulty doesn't adjust instantaneously. If there is some big market shock, people will switch assets. If you have a large
number of assets, switching could cause wild swings in difficulty rates across adjustment periods. To avoid this, you would need to put in circuit breakers that prevented each asset's difficulty from going up and down too quickly

(e.g. rules like)

D_i(t)=D_i(t-1)*A_i(t-1)/H_i(t-1) if 2*D_i(t-1) > D_i(t-1)*A_i(t-1)/H_i(t-1) > 0.5*D_i(t-1)
=2*D_i(t-1) if 2*D_i(t-1) <= D_i(t-1)*A_i(t-1)/H_i(t-1)
=0.5*D_i(t-1) if 0.5*D_i(t-1) >= D_i(t-1)*A_i(t-1)/H_i(t-1)

I think a system like this would work. The system could allow for the mining of just bonds (small number of assets), or mining directly for contingent claims (large number of assets). However, I also think that allowing exchange markets to sort out pricing would work. Allowing exchanges to do the pricing work would be much simpler to implement. To me, it makes the most sense to start with a simple system which is easy to implement. If that works stick with it. If it has serious problems, then add complexity later.