In your example, the loan interest rate is 5% so the lender only needs to get 5% interest on the balance. It may end up "feeling" closer to 8% interest with respect to purchasing power (i.e. 5% interest plus 3% deflation), but the loan interest rate does not include deflation just like a typical 5% loan from a bank in dollars with 3% inflation is still just a loan for 5% even though the inflation makes it feel more like 2% with respect to purchasing power.

I did the calculation with some real numbers and included the output of an excel spreadsheet.

P: original loan amount (i.e. $10000)
d: deflation rate (i.e. 3%)
D = 1-d (i.e. 0.97)
i: loan interest rate (i.e. 5%)
I = 1+i (i.e. 1.05)
n: term length of loan (i.e. 10)
k: current pay period payment is being calculated for

Here is a general formula for the k'th payment amount.

payment[k] = P*I*(1-D/I)/(1-(D/I)^n)*D^(k-1)

Here is the first payment using the numbers:
Payment[1] = 10500*(1-0.97/1.05)/(1-(0.97/1.05)^10) = $1,461.76

Here is what it looks like in excel.
Note: Outstanding is 1.05 times the remaining principle. The Payment is per the formula above, and the Remain is the Outstanding minus the Payment.
   
k     Outstanding   Payment       Remain
1     $10,500.00    $1,461.76     $9,038.24
2     $9,490.15     $1,417.91     $8,072.25
3     $8,475.86     $1,375.37     $7,100.49
4     $7,455.51     $1,334.11     $6,121.40
5     $6,427.47     $1,294.09     $5,133.39
6     $5,390.06     $1,255.26     $4,134.79
7     $4,341.53     $1,217.60     $3,123.93
8     $3,280.13     $1,181.08     $2,099.05
9     $2,204.00     $1,145.64     $1,058.36
10   $1,111.28     $1,111.28     $0.00

As required, each payment is 3% less than the previous payment and the balance is paid in full.

I found the following URL helpful in understanding the formulas:
http://www.mathpages.com/home/kmath297.htm
(Note: In the mathpages' URL they talk about inflation instead of deflation so their "I" is my "D" and my "I" is their "Y". I just picked "I" and "D" to correspond to the "i" and "d" already being used in this thread.)

Someone selling gold for bitcoins at a set price is not a promise but only a temporary promise to exchange gold for bitcoins at that price and that temporary promise can change at any time. If bitcoins were backed by gold there would be a permanent promise to always sell gold for bitcoins at a set price. A temporary promise that can change at any time is very different from a permanent promise. Someone selling bitcoins for gold is very different than someone backing bitcoins with gold.




I agree there would need to be incentive for someone to assume the responsibility of backing goldcoins with gold. The 0.2% per year storage fee and the 3% above spot auction fee discussed in my original post are areas that have potential for profit as it is pretty easy to store gold for less than 0.2% per year and also pretty easy to acquire gold for less than 3% above spot (i.e. the maximum over spot goldmoney charges is 2.49% and the maximum yearly storage fee is 0.18%). However, the largest potential source of profit is the likelihood that many auctions will be for more what would be required to back the goldcoins. For example, if an auction of 1000 goldcoins brought in $2000 and it only cost $1500 to purchase the necessary ounce of gold to back the goldcoins then that would be a $500 profit. There is plenty of incentive for someone to create and back something like Goldcoin.




It is not a pegging scheme because although you would have a guarantee that 1000 goldcoins gets you an ounce of gold,  an ounce of gold is not guaranteed to get you 1000 goldcoins.




The Goldcoin system proposed would be just as vulnerable to attack as Bitcoin will be after all the bitcoins have been issued because Goldcoin would use the same transaction fee system as Bitcoin. I think the Bitcoin transaction fee system is a good model for Goldcoin to follow.

I agree there is a risk that the centralized backing may fail. There is definitely a risk. You may think it is a huge risk. I may think it is a manageable risk. However, I am not trying to argue the size of this risk. What I am trying to convey is that with Goldcoin there is at least a possibility that the goldcoins will be backed by gold. My point is that even a small probability of being backed by gold is better than a zero probability of being backed by gold.

Similar to Bitcoins, the largest number of Goldcoins that could ever exist would be 21,000,000. Since above I defined the exchange ratio to be 1000 goldcoins for an ounce of gold, the most gold that would ever be necessary is 21,000 ounces of gold which is just a small fraction of the amount of gold mined each year.




I agree that creating a good backing system is difficult, and I didn't address this issue because I am trying to convey a different point about the importance of backing. I also agree that the stronger the backing the better. This is precisely the point I am trying to convey, a stronger backing is better than a weaker backing and so even a weak backing is better than not having any backing at all.




The amount of gold the goldcoins could be redeemed for would be set at a fixed value at the launch of goldcoin. In my example implementation above, I picked 1000 goldcoins for an ounce of gold to be this fixed ratio. However, this is not the maximum value of goldcoins as it is only their minimum value. In other words, 1000 goldcoins gets you an ounce of gold, but an ounce of gold may not necessarily get you 1000 goldcoins.




I don't plan to create Goldcoin. I just wanted to use it as a thought experiment to make a compelling case that a Bitcoin clone that is backed by something has the potential to eat Bitcoin's lunch. The reason I mention this isn't to cause fear, but rather to suggest that it may be possible to slightly tweak Bitcoin  so the current Bitcoin system could be backed by something. For example instead of giving the new bitcoins to miners who heat their homes with GPUs, you could sell the new bitcoins in an auction and use the proceeds to back bitcoins. In other words, instead of the proceeds of newly issued bitcoins going to pay electric bills and purchase CPUs which only benefit the Bitcoin users who like subsidized transaction fees, the new bitcoins could be sold and used to benefit Bitcoin users by backing their bitcoins.





I am assuming gold is backed by the many commodity uses for gold (i.e. gold is in cell phones, computers, automobiles, hospitals, and probably even GPUs, etc.)

The transaction system of Goldcoin would be identical to Bitcoin and therefore it would be just as decentralized. However, you are correct that the backing method I suggested would need to be run by a centralized responsible party.




Below are some excerpts from my original post that answer your two questions. The first excerpt addresses the gold storage issue with a 0.2% storage fee per year. The second excerpt addresses the failure scenario and how it is not a liability compared to Bitcoin.

“Lastly, anyone can redeem 1000 goldcoins at any time and receive the current value of an ounce of gold less a storage fee which would be around 0.2% per year starting from the launch of Goldcoin until the date the goldcoins are redeemed (i.e. if you redeemed your goldcoins in five years from the launch of Goldcoin you would have a little less than 1% deducted from what you got for redeeming your goldcoins).”

“However, in the disaster scenario where the Goldcoin system of auctioning goldcoins and redeeming goldcoins completely fails (i.e. government crackdown, gold gets stolen, etc.) then the backup plan could be to have Goldcoin automatically revert to the exact same system Bitcoin uses of awarding new coins to miners. In other words, the failure scenario for Goldcoin could be to revert to the Bitcoin system.”




Goldmoney has both a centralized backing system and a centralized transaction system. The Goldcoin system mentioned above would be different because it would have a decentralized transaction system identical to Bitcoin. Also, I don't think goldmoney has failed yet, and I believe you may be referring to e-gold as the digital gold currency that has failed due to a government crackdown.

You did a very good job putting your video together from an organizational and production standpoint. I wish I could make videos that good However, I really have difficult with the arguments you put forward.

I don't think capcha is an example of use beyond "exchange". I think the reason bitcoin can be used in place of capcha is the low transaction costs of the "exchange" (i.e. it wouldn't work with paypal because paypel has high fees, but if paypal had a $0.01 fee then it probably could work in place of capcha as well). Anyway, regardless, a bitcoin exchange in place of capcha it is still an exchange of something of value between the visitor wanting access and website owner wanting to avoid spam. I agree it is a very small exchange that most visitors consider negligible, but it is still an exchange of high enough value to prevent a spammer from making the exchange.

Also, I don't view "proof is work" as giving money value. Would you rather have a coin that promised “Someone was given this coin as proof they mowed a yard” or a coin that promised “I'll mow your yard when you give me this coin”. There is a very big difference between proof of past work and a guarantee of future work. The thing people value is the guarantee of future work and proof of work does not necessarily correspond to getting future work. For example, if someone dug a ditch, took a picture of the ditch, and then filled the ditch back up, then the "proof of work" picture they took would not really have any value even if the picture were a certified by a notary as legitimate proof that dug a ditch and filled it. Anyway, I think the concept of "proof of work" giving something value does not make sense when you really take time to think about it.

Goldcoins would also have value based on the unique features, qualities and benefits of bitcoins because the hypothetical Goldcoin was designed to deliberately have those same features. Goldcoins would likely trade at values above their redeemable gold value. Goldcoins would just have an additional feature because goldcoins would be backed by gold.

The main criticism I am hearing about the Goldcoin concept is that the gold backing may fail. To me this is an admission that it would be good if the backing did not fail which means people have an intuitive sense that it is better to have backing than to not have backing. If the backing of goldcoins described above were somehow magically guaranteed, then would you prefer 10 goldcoins over 1 bitcoin?

If Goldcoin should have its backing fail, then it would be possible to have it automatically switch to function exactly like Bitcoin which has no backing. The thought experiment of Goldcoin was designed to be a Bitcoin clone except for the tweak to allow it to be backed. Automatically undoing that tweak in an emergency situation of losing its backing could make it just like Bitcoin.

Yes the dollar could also be a possible way to back a Bitcoin-like currency. It would actually be easier to back with a dollar because instead of having to pay to store the gold backing the "goldcoins" you could earn interest storing the dollars that back your "bitdollars". I didn't want to use the dollar in my example of backing a Bitcoin clone-like currency because people would probably attack the dollar aspect instead of thinking about the concept of a Bitcoin clone being backed by something.

The failure scenario you bring up would render Goldcoin to be like Bitcoin with nothing backing the coins. However, at least with Goldcoin there is a chance for there to be a backing.

The reserve price is set as a fixed ratio between gold and goldcoins. In my example I just picked 1000 goldcoins to 1 ounce of gold to be the fixed ratio for every auction. The auctions could take place on a website. The bids could be done with bitcoins (using the conversion rates between bitcoins, dollars, and gold) and you could also redeem goldcoins for bitcoins (using the conversion rate between bitcoins, dollars, and gold). Of course you could also use a service like goldmoney.com to to directly give people gold when they redeemed their goldcoins. I'm not sure if the details I picked are the best, but I wanted to pick some numbers to illustrate the Goldcoin concept.

I was pondering what would happen if somebody launched a completely separate Bitcoin clone except they tweaked the code slightly so the Bitcoin clone could be backed by gold. Below I discuss Goldcoin, a hypothetical Bitcoin clone except backed by gold, where goldcoins would have all the properties of bitcoins except each goldcoin would be redeemable for a predetermined amount of gold.

Overview of Goldcoin

I assume it wouldn't be too difficult to build a completely independent Bitcoin clone because Bitcoin is open source. Once this identical, yet separate, clone of the Bitcoin system were setup, the only algorithmic tweak necessary to enable the goldcoins to be backed by gold would be make it so instead of miners competing with computational power for the new coins, people would compete for the new goldcoins in auctions. The proceeds of the auctions would be used to purchase gold thus enabling each goldcoin in circulation to be backed by gold. Other than the differences mentioned above, the Bitcoin and Goldcoin systems would be identical.

Example Implementation of Goldcoin

To illustrate how this Goldcoin concept could work, In the paragraph below I make up some numbers and details about how a Goldcoin system could be implemented.

At launch, the number of goldcoins available for purchase would be identical to the current number of bitcoins (i.e. If launched today there would be an initial inventory of 6,770,350 goldcoins available for purchase). Additional new goldcoins would become available for purchase at the same rate new bitcoins became available to miners (i.e. the total bitcoins_in_circulation over time curve is identical to the total goldcoins_in_circulation+available_for_purchase over time curve). Frequent auctions of 1000 goldcoins would be scheduled whenever there were at least 1000 goldcoins available for purchase.  The minimum auction reserve price for 1000 goldcoins would be set at the price necessary to purchase an ounce of gold (i.e. gold's spot price plus around 3%). If the inventory of goldcoins available for purchase goes below 1000 goldcoins, then auctions are placed on hold until the total “goldcoins over time curve” makes it possible for more goldcoins to be available for purchase. Lastly, anyone can redeem 1000 goldcoins at any time and receive the current value of an ounce of gold less a storage fee which would be around 0.2% per year starting from the launch of Goldcoin until the date the goldcoins are redeemed (i.e. if you redeemed your goldcoins in five years from the launch of Goldcoin you would have a little less than 1% deducted from what you got for redeeming your goldcoins).

Similarities Between Goldcoin and Bitcoin

Please keep in mind how similar the Goldcoin and Bitcoin systems would be. There could be the same level of anonymity because the systems are virtual clones and you could even buy goldcoins with bitcoins. Transactions have the same degree of decentralization because the two systems are virtual clones with the gold backing being completely independent from the decentralized transaction system. The payment address conventions of Goldcoin and Bitcoin could be identical (perhaps put goldcoin_ in front of the goldcoin addresses to distinguish between the two) which would make it easy to modify existing systems that already accept bitcoins to also accept goldcoins. Also, similar to bitcoins, goldcoins could be bought and sold on independent exchanges as the goldcoin prices would actively fluctuate between auction prices and the redeemable price.

Tradeoffs Between Bitcoin and Goldcoin

The one advantage Bitcoin users would have over Goldcoin users is Goldcoin users would have to directly pay the cost of their transactions because new goldcoins aren't awarded to miners in exchange for performing computations. However, the goldcoin transaction fee system would be identical to the transaction fee system Bitcoin will use after all the bitcoins have been created.

Of course, the one main advantage Goldcoin would have over Bitcoin is that goldcoins would be backed by 0.001 ounces of gold per goldcoin. However, in the disaster scenario where the Goldcoin system of auctioning goldcoins and redeeming goldcoins completely fails (i.e. government crackdown, gold gets stolen, etc.) then the backup plan could be to have Goldcoin automatically revert to the exact same system Bitcoin uses of awarding new coins to miners. In other words, the failure scenario for Goldcoin could be to revert to the Bitcoin system.

Conclusion

If you were convinced that the hypothetical Goldcoin system described above were operated by an open source development team of the same level of skill and integrity as the Bitcoin development team, then would you exchange some of your bitcoins (i.e. currently bitcoins go for around $15 each) to get around a ten-fold number of goldcoins (i.e. currently goldcoins would be around $1.50 each)?

The reason I bring up the hypothetical Goldcoin system is because I believe it would be possible for the current Bitcoin system to be tweaked slightly so bitcoins could be backed by something like gold. For example, instead of giving new bitcoins to miners, bitcoins could be sold at auction and the proceeds could be used to buy gold and then each bitcoin could be redeemed for the amount of gold in storage divided by the number of bitcoins in circulation. This is just a crude example of how it could be done, but this simple approach of starting to back bitcoins with something now could make Bitcoin more competitive with future competing currencies like the hypothetical Goldcoin.

Skeptics don't necessarily miss the fundamental problem that has been solved. Skeptics can also see how Bitcoin's issues can be seen by people as opportunities in disguise  . . .  which includes people inspired to create a better Bitcoin-like system.

I think the majority of Bitcoin skeptics who spend time on this forum are not skeptical about Bitcoin as a concept. Instead, they are skeptical about bitcoins holding their current valuations. However, these same skeptics might think future currencies based on the Bitcoin concept will be wildly successful. There is a big difference between the Bitcoin concept having long term value and bitcoins having long term value and skeptics tend to be aware of this difference. Skeptics may view the Bitcoin concept as revolutionary as search engines or social media but the skeptics are likely to think of Bitcoin as an Altavista or Myspace and imagine there will be lots of competitors that come and go with eventual leaders becoming dominant like Google and Facebook.

The topic below has some good suggestions.
http://forum.bitcoin.org/index.php?topic=6010.0
I especially like "Economics in One Lesson".

Gold isn't just used by “idiots with disposable income” to cover Ferraris. It is found in things regular people's use every day such as cell phones, computers, televisions, cars, etc.



I think gold's price does include a meaningful component of its commodity value. It isn't as volatile in the short term as silver because the above ground supply of gold is large compared to its yearly production and consumption. I agree the $300 to $1500 jump isn't a result of increasing commodity demand for gold as it is more a function of the dollar's devaluation and anticipated devaluation of the dollar combined with the historical knowledge that people typically rush to good physical stores of (commodity) value when they notice their money, that is backed by nothing of physical value, being devalued. However, I believe a strong component of both silver and gold is its their value as a commodity. If silver is valued as a commodity and gold isn't then why do the valuations of silver and gold track each other fairly well over the long term. For example, during the decade long $300 to $1500 jump in gold (a five-fold gain), silver went from like $5 to $35  (a seven-fold gain). Silver and gold are both good ways to store commodity value, but silver is just more volatile in the short term.

The main point I want to make on this topic is that if people want to make a case that having commodity value isn't important for a currency, then they should find another example to make their case other than gold.

You would be amazed how many things around you contain gold. The amount of gold in a typical cell phone is around 0.001 ounces (http://www.eoearth.org/article/Cell_phone_recycling?topic=49558). At today's prices this is about $1.50 worth of gold. If it made sense to use copper or silver instead of gold they would. I imagine there is a lot of gold contained in Bitcoin mining rigs. Anyway, gold has an incredible number of uses, and if it were cheaper it would be used in lots more things. However, gold is so expensive that it is only used in the rare occasions when it can bring more value than its current $1500 per ounce price tag. Making gold plated jewelry is one very popular way for a very small amount of gold to go a long way covering the surface of a cheap base metal to give it a shiny gold luster with the amazing tarnish and corrosion resistant properties and of gold. There are around 83 million of ounces of gold mined each year and the population of the world is around 6.8 billion so doing the math you realize that each year only around 0.012 ounces of gold are being mined per person per year. I don't mean to be a commercial for gold, but I do want to convey that gold is extremely rare and has many commodity uses even at these high prices. There are reasons people have valued gold for thousands of years and it isn't because they are stupid and under some kind of magical shiny object spell cast on the world by bankers.

Gold can't be used as an example of money that does not need a commodity use to have value because gold has a tremendous number of commodity uses even at the current high prices.

Thanks for following my hypothetical. I guess I'll go with the definition that fiat currency is "by definition" currency that is declared by government to be legal tender which ultimately goes back to your insistence that force is part of the definition. I guess it takes more for something to be a fiat currency than for it to be issued by government, not be redeemable for any commodity, and to be accepted as payment of taxes. I agree my hypothetical head tax coin currency is unlikely to happen, but I think social pressure has the potential to give something like head tax coins value. Of course, a publicly displayed list of who has paid or who hasn't paid their voluntary tax would be important.

My question about something being fiat currency wasn't directed at the gold example, but instead at whether you thought "head tax coins" in my hypothetical scenerio were fiat currency. The only reason I brought the gold example into this hypothetical scenario was to convince you that my "said organization" was a government that clearly imposes monopolies by force. The government clearly uses force in the gold example, but the same government would not use any force for the head tax coins. Basically, I want to challenge your definition of fiat currency being a currency imposed by force by bringing up a counter example, the government issued and completely voluntary "head tax coins" that have no commodity value, no representative value, and the only value would be derived from them being able to be used to pay a voluntary tax to the government. Nobody would be forced to pay the head tax, use the head tax coins, or accept the head tax coins. Is the hypothetical scenario of head tax coins an example of a fiat currency that is an exception to your requirement of fiat currencies needing to be imposed by force or are these head tax coins viewed as something else by definition like merely government issued tokens that people happened to use as currency? I'm just trying to understand what makes something a fiat currency, and I am not convinced force is theoretically required 100% of the time by definition.

I see the point you are making in this topic and agree that if you analyzed all fiat money around today you will ultimately find that force is ultimately the defining feature that gives today's fiat currencies value. However, pursuing my hypothetical scenario further, what if this same said organization also forced people to pay a different tax that was mandatory and that could only be paid in gold and the tax revenue paid in gold was used to fund the enforcement of various government imposed monopolies. This said organization which is clearly a government that imposed monopolies by force could also still issue the head tax coins that nobody was forced to pay, use, or accept. Would these head tax coins still not be considered fiat money?