They have very different exposures to exchange rate risk though. The market rates will be the safest, so demand should cluster at that point. I accept it's not perfect though. This may be an argument for the preferability of a Ripple-esque system without collateral.

Yes, it's an interest rate swap, but implemented as a repo in order to reduce the contractual requirements. You're correct that it's non-trivial that the market clearing mechanism will return the right interest rates, as we have two interest rates to pin down from the intersection of two surfaces. But the given market clearing mechanism ought to work. To see this, suppose there were opportunities for investing bitcoin and repocoin with net (e.g. 0.02) risk free interest rates r_r and r_b. Furthermore, for simplicity, let's forget about the lost interest on the locked coins (it can be shown that everything we say ignoring the locked interest on the locked coins also holds in the limit as the time interval goes to zero). Then the seller (no matter how risk averse) will wish to participate in the swap/repo at least if R_b>=1+r_b and r_r>=R_r-1, likewise the buyer (no matter how risk averse) will wish to participate at least if R_r>=1+r_r and r_b>=R_b-1. Solving these four inequalities gives R_b=1+r_b, and R_r=1+r_r. Thus, in the presence of heterogeneity in risk aversion in the market, we should expect to see highest trade volume when R_b=1+r_b, and R_r=1+r_r i.e. when the "repo" interest rates reveal the true interest rates.

Each individual wallet knows it's own bitcoin private key of course, and it is these individual wallets that are responsible for executing the bitcoin transactions they are required to execute for the protocol. A failure to execute these transactions would be detected and would count as default.

The guarantor risk appears to users of the currency as inflation risk, which all cryptocurrencies already expose them to. No movements in their balances would be observed, only (possibly) movements of prices denominated in the good. And, what is more, since this would be the first cryptocurrency which does not impose an "inflation tax" on cash holdings, the costs imposed by this inflation risk would be miniscule to them. Furthermore, as I said in the original post, by pinning the interest target (on both cash and bonds) at the long run real interest rate, prices would be roughly stable in the long run, so any inflation would be short lived rather than persistent.



No need for the thanks or apologies, your discussion has consistently helped me clarify things to myself. I shouldn't have got exasperated...

Bitcoin has many similarities to gold. But societies have persistently chosen to use fiat currencies over gold. Gold however maintains a use as collateral in some real world repos, just as I'm proposing bitcoins would retain a use as collateral here.

Modify 3 as follows, changes in red. These changes also ensure that the interest rates are 100% risk free, with the risk now being spread equally over all of the users of the currency, not just those participating in bond markets. I have an idea for further simplifying things by combining 3 and 4, but I'm not sure I have the will power to spend further time arguing here...

3)a) You host repocoin-bitcoin repo orders within the repocoin blockchain, so they're public and verifiable. Each repo order consists of three quantities: a number of bitcoins, B (possibly negative), and two gross interest rates, R_r and R_b (e.g. 1.02 representing 2% interest). The order represents an offer to sell (buy if negative) B bitcoins at the end of the current block for a price of P* repocoins per bitcoin and then buy (sell) R_bB bitcoins back at the end of the next block for a total cost of P*R_rB. Note: the seller has borrowed BP* repocoins and will pay back BP*R_r, i.e. R_r is the gross nominal interest rate on their loan. Meanwhile, the buyer has borrowed B bitcoins and will pay back BR_b bitcoins, so R_b is the gross nominal interest rate on their loan.
3)b) Market interest rates R_r* and R_b* are determined by the following verifiable, deterministic algorithm. First, a list of all of the values R_r takes in orders is created, along with a list of all of the values R_b takes. At any particular value of R_r and R_b we can calculate the total volume of trade that would occur. We take the values which maximise this trade volume as the market rate.
3)c) We mark (R_r*-1)BP* repocoins in the wallet of each seller as locked and untrasferable. We also mark (R_b*-1)BP* repocoins in the wallet of each buyer as locked and untransferable. This locking is enforced by consensus.
3)d) At the end of the current block, as before, the repocoins and bitcoins in the orders to be executed are transferred as prescribed, with the bitcoin transactions going through first, and the repocoin one only happening once the bitcoin ones has been verified. If a seller's bitcoin sale transaction fails for some reason then their previously locked repocoins are unlocked.
3)e) At the end of a specified, later, block, the reverse transaction has to take place. This only happens if the seller's wallet has the required R_r*BP* repocoins (including the locked ones).

If the seller doesn't have this number of repocoins, then the previously locked repocoins are unlocked and sent to the buyer along with any other repocoins left in the wallet. Exchange limit orders are then automatically generated to sell the buyer's B bitcoins if they have them, an any price. This generates BP** repocoins (where P** is the new exchange rate) which are then destroyed, along with the (R_b-1)BP* locked repocoins in the buyer's wallet. Simultaneously, R_rBP*repocoins are generated (from nothing) and transferred to the buyer.  This leaves the buyer with at least the number of repocoins they were promised, despite the seller's default. To disentivise the seller from doing this too many times, after a default they would be excluded from the repo market from then on. And, in the long run, a bitcoin cost of wallet opening would be introduced to counter-balance default losses from people repeatedly opening new wallets.

If the seller does have the required number of repocoins, then, the buyer's B bitcoins are transferred back first, and then the buyer's (R_b-1)BP* locked repocoins are destroyed, and exchange limit orders are automatically generated in order to buy (R_b-1)B bitcoins at any price, using repocoins generated from nothing, with the resulting bitcoins transferred to the seller. Finally, the seller's locked repocoin are unlocked and the required repocoin are sent the other way. If the bitcoin transaction fails (e.g. because they do not have enough), then the buyer's (R_b-1)BP* locked repocoins and the seller's R_rBP* are all destroyed, and exchange limit orders are generated in order to buy R_bB bitcoins at any price, using repocoins generated from nothing. This leaves the seller with the number of bitcoins they expected. As before, the buyer is excluded from future participation in repo markets following default.[/color]
3)f) So, given the locking mechanism, it is only following large exchange rate movements that people will have an incentive to default, and when they do default, losses for the repocoin community will still be minor since they'll be proportional to abs(R_r-R_b)abs(P*-P**) (small).

Over-collateralization is standard in repo exchanges. The collateral here is mostly bitcoins, plus the small amount of repocoins required to pay the interest.

Your point about the missing interest on the bitcoins is correct though. Just as the buyer is lending the seller repocoins, the seller is effectively lending the buyer bitcoins, and the buyer might legitimately like interest on this, if they didn't expect compensating increases in the purchasing power of bitcoins. The Hotelling model of resource extraction would predict precisely such increasing bitcoin value, which was what I had in the back of my mind. However, it is an undesirable feature of what I presented previously that some of the medium run departures from Hotelling rule growth of repocoins will potentially be reflected in the value of bitcoins. I'll see if this can be remedied.

This thread is a duplicate, please continue the discussion here: https://bitcointalk.org/index.php?topic=374829

You would. But, 1) you'd only do this in the movement in exchange rates was larger than the interest rates, which it won't be a lot of the time, and 2) by construction, the loss to the other party from doing this is on the order of (R-1)(P**-P*) i.e. the product of two small things, so the risk premium this adds to interest rates should be small.

A repo market is a collateralised bond market. See e.g. https://en.wikipedia.org/wiki/Repurchase_agreement . It combines elements of futures markets and bond markets to produce one which comes close to capturing the risk free rate. The basic idea is that I sell you an asset (perhaps below market price), and we both sign a contract in which we promise to trade back the asset at some specified price in the future. The specified price may be written as a function of market observables to remove some of the risks associated with fluctuations in the value of the asset. As you point out in a later post, an enforcement method is obviously needed for these contracts, however, if the collateral is appropriate, losses from the other party reneging on the contract may be minimal.


Yes. OK. The details of the bitshares decentralized market seem a bit sketchy in the white paper, but they seem to have much of the required structure. eMunie also seems to have solved the problem, though I understand from Raxe that their solution isn't really decentralized. Finally, Ripple certainly provides a structure on which something like this could be built, with decentralized trust.


I do not pretend to know all the precise implementation details. I was hoping to provide useful guidance on the econ side, but having overused the word "easy" I guess I ought to put my money where my mouth is and conjecture as to how this could be implemented. The version I present here is without any explicit trust mechanism, though perhaps using the Ripple trick for trust would further help. For clarity in the below I call the new currency repocoins.

1) The wallet software would sync both the repocoin block chain, and that of a third party currency (Bitcoin would be the obvious one given its dominance, so I'll call the third party currency bitcoin below).

2)a) You host repocoin-bitcoin exchange orders within the repocoin blockchain, so they're public and verifiable. Each exchange order consists of two quantities: a number of bitcoins, B (possibly negative) and a price in units of repocoins P. The order represents an offer to sell (buy if negative) B bitcoins at the end of the current block at a price of P repocoins per bitcoin.
2)b) At the end of the block, the intersection of the supply and demand schedules are calculated, and the market exchange rate is set at this point. We will call this P* in the below. Since this is a deterministic function of the orders, it may be calculated by all nodes and verified en mass. All sell orders below P* will be executed (to be described), as will all buy orders above P*.
2)c) The repocoins and bitcoins in the orders to be executed are transferred as prescribed, with the bitcoin transactions going through first, and the repocoin ones only happening once the bitcoin ones have been verified en mass. Since the network can enforce the removal of repocoins, but not the removal of bitcoins, this order is required.

3)a) You host repocoin-bitcoin repo orders within the repocoin blockchain, so they're public and verifiable. Each repo order consists of two quantities: a number of bitcoins, B (possibly negative), and a gross interest rate R (e.g. 1.02 representing 2% interest). The order represents an offer to sell (buy if negative) B bitcoins at the end of the current block for a price of P* repocoins per bitcoin and buy (sell) them back at the end of the next block for a price of P*R repocoins per bitcoin. Note: the seller has borrowed BP* repocoins and will pay back BP*R, i.e. R is the gross nominal interest rate on their loan.
3)b) As before, we calculate the market interest rate R* from the intersection of the supply and demand schedules.
3)c) We mark (R*-1)BP* repocoins in the wallet of each seller as locked and untrasferable. This is enforced by consensus.
3)d) At the end of the current block, as before, the repocoins and bitcoins in the orders to be executed are transferred as prescribed, with the bitcoin transactions going through first, and the repocoin one only happening once the bitcoin ones has been verified. If a seller's bitcoin sale transaction fails for some reason then their previously locked repocoins are unlocked.
3)e) At the end of the subsequent block, the reverse transaction has to take place. This only happens if the seller's wallet has the required BP*R* repocoins (including the locked ones). If the seller doesn't have this number of repocoins, then the previously locked repocoins are unlocked and sent to the buyer. This leaves the buyer a total of B bitcoins and (R*-1)BP* repocoins, which are worth BP** + (R*-1)BP* repocoins, where P** is the new exchange rate. Providing the exchange rate fluctuations have not been excessive, this should still represent a moderate gain for the buyer. If the seller does have the required number of repocoins, then, as before, the bitcoins are transferred back first, and then the seller's locked repocoin are unlocked and the required repocoin are sent the other way. If the bitcoin transaction fails (e.g. because they do not have enough), then the seller keeps their repocoins, and the previously locked ones are unlocked. This leaves the seller with BP*R* repocoins, which (given small exchange rate fluctuations) they ought to prefer to B repocoins.
3)f) So, given the locking mechanism, it is only following large exchange rate movements that people will have an incentive to default. At worst then, R* will be the market gross nominal interest rate plus a bit of a risk premium. But fluctuations in the risk premium should be small compared to the fluctuations in the value of e.g. bitcoin, so targeting R* will still result in a stable currency.

4) Once the market rate in the repo market is observable, it's then just a matter of applying sufficient PoS interest on the next block when the repo market rate is below target, and demurrage if its above target. For example, suppose the target is 4%. Then, if the market rate were to be 3%, sellers in the repo market would gain interest on the repocoins they borrowed during the block in which they'd borrowed them, and hence they'd be more inclined to borrow in the first place, pushing up the market interest rate.

Perhaps I was a bit hasty in my discussion of Freicoin previously. If you could get an interest rate of -1% to 1% then without demurrage that would be an unambiguous improvement, since it represents a lessening of the inflation tax on holding money. However, doing it via demurrage is just replacing the inflation tax on holding money with an explicit demurrage tax. The fact it's explicit makes it marginally preferable, but the economic distortion is still there. People have to hold money to perform transactions, but they're penalised in doing so by the presence of inflation/demurrage.

I started working on a paragraph describing a potential mechanism, but I see there have been several subsequent posts, so I will defer it till my next post.

Well, my point was that we don't need any of these statistics. We don't need to know velocity, or NGDP. All we need to observe is the interest rate in a repo market denominated in the cryptocurrency, and you'll get big gains in stability. This doesn't seem too hard to me.

On the other hand, it's really not clear what the results of targeting the total value of all transactions would be. It's not even clear to me that it's possible. For example, you might think that you could just increase the interest rate on the currency when you were above the desired trend, since with higher interest rates on the currency, people have an incentive to hold it rather than making transactions. But if some people in the crypto-economy are more patient than others, then an increase in interest rates will lead to the patient people buying the crypto-coins off the impatient ones, generating additional transactions. Without sitting down and doing the maths I'd find it very hard to say what would happen here, and if I find it hard to predict, the chances are other participants in the market would also find it hard to predict, and you'd get more instability not less.

No, it's not. It's the total dollar value of final (not intermediate) sales, equivalently, total dollar value added.

You may possibly be right that targeting the total nominal value of all transactions might be an improvement on existing crypto currencies. I really wouldn't like to say, since it depends on the relative variances of various unobserved factors. My hunch is that targeting something sub-optimal like this would not be worth the risk.

I'm not sure where any of this is coming from. Certainly not from anything I've written. Suffice to say it's ridiculous to describe what I'm putting forward as Keynesian (I cited Friedman in the first post for god sake) and it's even more ridiculous to ascribe any of the views mentioned in the above quotes to modern Keynesians, who I may not agree with, but who nonetheless manage far more sophistication than is on display from some of the commenters in this thread.

Not entirely convinced by this. Think of all of the transactions generated by a pool. Given even a tiny bit of concern about the continued existence of the pool, people are prepared to incur the transaction fee in order to remove the risk of the pool disappearing with all of their earnings. And in any case, it's not clear that the distortions generated by transaction fees aren't so high as to remove any benefits from e.g. NGDP targetting.

And in any case, even if we knew all transactions corresponded to an exchange of goods, we still wouldn't know which of these were intermediate transactions and which were final. Only the latter is relevant to the calculation of NGDP and/or velocity. We need to know the value added by each transaction, not the final sale price.

There seem to be two proposals, neither of which seem like particularly good ideas:

1) Proposal for hybrid POS/PON: Non-linear proof of stake rewards. Rewards are effectively per account up to a threshold. Seems ripe for exploitation by botnets.
2) Proposal for POI: Seems to be the Google Page Rank algorithm (i.e. Principal Components) with transactions replacing links between webpages, and the sum of coin ages replacing the content quality measure (i.e. the prior distribution over nodes). Seems equally vulnerable to exploitation by botnets. (Suppose there are N legitimate nodes, all trading, N botnet nodes, not trading, and 1 master node for the botnet. The botnet nodes have arbitrarily old coins so receive substantial weight, despite their lack of any trading except with the master. All of this weight then flows to the 1 master node for the botnet, who must then get the highest "PageRank" in the network.) In any case, rewarding old coins is the opposite of what you want to do. The existence of old coins implies that the currency isn't actually being used! By rewarding old coins you're effectively taxing transactions, which imposes a large efficiency cost.

That's another question... With physical currencies positive target inflation rates may be justified by the zero lower bound on nominal interest rates. But as I said in my original post, that need not be a problem for cryptocurrencies, so 0% inflation would be desirable were it possible.

No. I'm not saying what you thought I was saying... Removing predictable components of prices has no effects on welfare. Removing unpredictable components has a beneficial effect. But the unpredictable components can be removed via a very simple, entirely deterministic algorithm. In fact the simpler, more transparent, and less random the algorithm is, the better it is for welfare. For example, in "traditional" economies, central banks can use the Taylor rule https://en.wikipedia.org/wiki/Taylor_rule to stabilise prices.

I might have heard it mentioned, but I hadn't seen the details. The problem is the fixed 5% demurrage rate. Having a fixed rate fixes no economic distortions whatsoever, since if (say) the value of a bitcoin grew by a constant 5% a year price setters could costlessly index to this known growth rate. The aim ought to be to use demurrage/interest to remove unpredictable fluctuations, not predictable trends.

The 80% distribution to a foundation also seems troubling.

Use of currency to pay taxes = use in transactions. It is because I expect that in future someone will give me real goods in exchange for the currency that it has value to me now. (In the case you refer to, the real goods are avoiding whatever consequences non payment of tax has. So, yes, "coercion" if you want.)

But the government is not the only body who might be prepared to exchange real goods for currency for you in future. In fact, it's readily easy to write down a model in which a fiat currency such as bitcoin has a value because everyone believes that everyone else will accept it for payment in future. The problem with these models is that they always have at least two equilibria. One in which people coordinate on believing that everyone else will accept the currency for real goods, and so they too are happy to accept the currency for real goods, and another in which no one believes this. Both are fully rational. (They are sub-game perfect Nash equilibria of the dynamic game.)

Macroeconomists have been interested in the role of nominal tax payments not because they're necessarily the fundamental source of a currency's value, but because they provide a way of ruling out the bad equilibrium of the model, in much the same way that gold's use as jewellery ruled out the bad equilibrium in societies in which gold was used as currency. It is interesting to note that there's nothing ruling out the bad equilibrium for bitcoin. However, this is not the case for e.g. namecoin, for which the (apparently) fixed price of a domain name provides a lower bound on value. The bad equilibrium should also be ruled out for coins such as primecoin for which the mining process is productive, since if I value prime chains sufficiently highly I should be prepared to accept primecoins for real goods in order to incentivise others to mine primecoins.

The price of a currency is a function of supply and demand. The value is measured in different units ("utils" if you like). You're perhaps thinking of demand stemming from a currency's role as a "store of value", but this is an off-shoot demand from its use in transactions. If you did not expect to be able to use the currency in transactions in future, then it would not function as a store of value.