Quote from: JohnDoe on September 27, 2011, 09:07:11 PM

I may be wrong, but I believe this sytem is flawed in the same way Encoin is. It assumes an equation will remain constant over time but it is more likely that it will vary. I'm referring to the assumption that an increase of X in difficulty will equate to an increase of Y dollars in the cost of mining. In the future that equation may change to X*1000 difficulty = $Y in cost, so because difficulty can only adjust linearly then at some point it will start playing catch-up with technological progress and so hyperinflation will ensue because it will always be profitable to mine.

Sorry for the delay in responding.

I understand what you are saying. A point that I didn't make clear is that, like with bitcoin, the difficulty levels are non-linear. In bitcoin, each difficulty level increase means a doubling of effort. Here effort means hashes/second which is a mathematically predictable. This of course has nothing to do with the cost of that effort as measured in dollars.

You are correct in that it is algorithmically impossible to externally calculate the cost of someone else's algorithm. I'm pretty sure that is a part of Church's Thesis. But if it's not, it should be!

The only way (I can see) that you can bind this problem to the cost of electricity, over time, given *hidden* technology changes, is through human to human competition. Human's decide how much *hidden* electrical cost they are willing to risk. Weighing the risk against their current projections for possible arbitrage gains. If there is no potential reward, nobody should risk anything by mining against their own self-interest.

It's this non-linearity of, and competition for, Dollar rewards (not ENC rewards) that makes the system converge. I'll make up an example and see if I can convince myself.

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Say Alex and team run the only implementation of EnCoin, on the most efficient know hardware. So does Bill's team, and everyone else. Every time teams see an arbitrage opportunity they mine. One and only one team WINS new coins. All the competing teams LOSE their electrical investment.

The winning team immediately sells their coins to recoup their electrical investment. That coin sale must cover expenses for both this round and previous rounds in which they competed and lost. That leaves them either a profit in dollars, or a hemorrhaging of dollars. The latter, as in Vegas, causes unprofitable gamblers to stop by choice or by inevitability.

Each time any arbitrager sells new coins it does two things: 1) It lowers demand for competing seller's coins, lowering ENC's exchange price. 2) It doubles the *hidden* dollar investment required for every arbitrager who tries to compete in the next round. This reduces the overall potential for arbitrage profit. When the potential for profit reaches zero, the system has converged on an ENC price in dollars constrained by *still hidden* individual electrical costs of the participants.

I assert, this competition should keep the ENC/dollar exchange value relatively stable in the face of a growing or shrinking economy. Extreme economy growth can raise exchange prices, but arbitragers will work quickly to bring them back down. If prices fall, the transaction tax will both, take ENC out of circulation, and reduce the demand for dollars by penalizing panicking sellers in ENC.

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The technology case is really what you are contesting. I claim that in the face of *hidden* technical change, the system *always* re-converges. Meaning, given zero human intervention, ENC value can never tend toward zero or even infinity. The only question I can't answer is, "How far can it wander from the current price?"

Let me expand on the original example by adding hidden changes in technology.

Say, Alex has a reputation for being the finest arbitrager. He's the best at knowing when to risk electricity and when to avoid doing so. Bill was being much less successful, so he adopts a strategy I call tit-for-tat. If Alex is mining, then Bill will mine. If Alex stops, Bill stops. This annoys Alex, but there is nothing he can do about it. As a result, both teams do equally well as measured in dollar profits.

Now Charlie creates another network. One equivalent in every way to Alex and Bill's. EXCEPT, *unknown to anyone* Charlie has a better implementation of the proof-of-work algorithm, or a secret processor, it doesn't matter. Charlie's can make 1024 times the number of proof-of-work guesses as the others. All for the same quantity of electricity.

There are a number of ways Charlie can play this hidden card.

1) He can start mining when no one else can and win every round. If he adopts this strategy, he can win at most 10 times in a row. Since he has to doubling his personal difficulty each time, eventually he will stop. If ENC prices hold during this period, they will continue to hold. If they move some, they will hold at the final price once Charlie runs out of arbitrage room.

The other mining teams can't help but notice Charlie has a technological advantage. In fact, no other teams will be able to compete with Charlie until they update their technology.

This has no effect on monetary policy. Charlie gains no additional power to affect prices even though he is the only miner. Self-interest prevents him from further mining. He can let the price rise a bit, then mine again. But again that is the goal of the process. The process doesn't care who gets rewarded in dollars. Its goal is keeping the value of ENC stable and it succeeds in this scenario.

This scenario, however, is NOT OPTIMAL for Charlie. We have what is commonly called an "Iterated Prisoner's Dilemma" situation. Charlie can maximize his technology advantage over the long term by cooperating with his opponents. Interestingly enough, it is in the opponent's self-interest to cooperate with Charlie as well.

2) Charlie decides, instead of winning every time, he will adopt Bill's tit-for-tat strategy and do exactly what Alex does. Sure, he is going to solve every proof-of-work in 1/1024th the time and electricity as Bill and Alex. BUT, he decides to only submit enough winning solutions to deliberately match what Alex and Bill are winning. Alex, Bill, and Charlie's wins affect the ENC's monetary dynamics in exactly the same way. ENC's value stays exactly as stable as it would have if Charlie had not been present.

Instead of the sudden inflation spike above, network "client's" see ZERO changes in ENC values or in the behavior of the network as a whole. Alex, Bill, and Charlie are indistinguishable to network "client's" and all equally trustworthy.

Instead of being bankrupted as above, Alex & Bill continue making money the way they always have, but predictably less because there is more competition (securing the network!). They don't see any issues, nor do they have any reason to distrust Charlie. Charlie and Bill's behavior is indistinguishable to Alex.

EXCEPT, Charlie is driving a paid-off Jag, while Bill is using his minor mining profits to pay down the loan on his Hyundai.

Why?

Because for every 1,025 dollars Bill receives for selling his ENC to the exchange, Bill sends $1,024 to the electric company and keeps $1. Charlie sends $1 to the electric company and keeps $1,024.

Which is as it should be.

Because, Charlie thinks Alex and Bill are deluded for leaving a hundred 100 watt light bulbs burning day and night, thinking they are helping to secure the world's future!

The process doesn't care who gets rewarded in dollars. Its goal is keeping the value of ENC stable and it succeeds in this scenario. I'm pretty confident it will succeed in every other scenario as well. Changes in market conditions or technology, might move the price a little bit. But it will never go into bubble or crash scenarios the way you postulated.