Author Topic: Least volatile measure of value. What could it be?  (Read 11132 times)

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Offline merivercap

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Hey Starspirit & Bitsapphire,
Just following up on my comments about unit of account and reference points of value.  I was thinking about Bitcoin the other day and came to realize that Bitcoin does in fact have a discrete unit of account or reference point.  It's actually the computational time required to mine/hash a new block. (Roughly 10 minutes of computational time).  The computational time in the 'proof of work' process is the 'unit of account' that can be a reference point to judge all goods & services against.  Fascinating to think about.
I used to think money required something to back it, but now my view is that money is the unit of account. Its value derives from the integrity of the monetary system, and how much confidence people can have that the ledger system as an effective and fair way to record where goods and services have been provided and are owed in society. Gold did not need anything to back it, apart from durability and scarcity, but that's what provided the integrity in the system. Now I think the block-chain technology can achieve the same function. So I'm not sure we need to identify an underlying unit of account anymore to call something money. Not sure though.

The security provided by PoW might add value to a crypto-money, but the cost of production (as in any industry) has no direct influence on the demand for or valuation of the money, so I don't see this cost as a unit of account to compare the price of goods and services. I still think the value of the money itself does that. Perhaps I'm misunderstanding what you mean though.

I agree commodity money (digital or real) doesn't need anything to back it.  Money has a unit of account based on a piece of itself in anyway you want to slice it (Bitcoin/satoshi or silver/dollar/sterling/shekel/drachma), but I was mainly referring to a real world reference point to compare the 'slice' of money to for the average person to subjectively compare its value.  BTW the grains in my previous posts refer to grains of silver/gold so it didn't refer to the # or barley/wheat grains.  I may have confused the ideas earlier.  So a grain of silver in medieval times would be worth maybe a certain # of grains of barley ....let's say 1,000 grains for example.  1 troy oz of the silver Spanish dollar coin (451 grains) would be let's say would be roughly equal to 451,000 grains of barley.  The silver/gold/grain price would fluctuate of course... A grain of gold would be worth roughly 16x a silver grain (based on the free-market ratio which I've heard was generally around 16:1 a very long time ago)   In the agrarian countryside, the reference point of grains was a good one.  However, in cities and towns with more service-related occupations,  'Nick Szabo' describes how accounting for time & sacrifice, time-wage rates, & clocks improved the economy and working relationships: http://szabo.best.vwh.net/synch.html
BTW read this paragraph gave me a chuckle:
"The most valuable property of the bell tower time was not its accuracy, but its fairness.    Even if it broadcast the wrong time, it broadcast the same wrong time to everybody.   An employer, even if he was colluding with the Church to bias the sometimes subjective ringing of the canonical hours, couldn’t tell his favorite employees that it was time to go home, while making other employees work extra, and pretend that it was the same time.  (In contrast, on our computer networks such “Byzantine” attacks are possible, without advanced safeguards, when “broadcasting” time or other information)."    :P

To your second point about cost, I agree and I mentioned that from an Austrian point of view value is the primary driving factor.  However 'Nick Szabo' addresses this as well in all his other writings on 'Origins of Money', collectibles, sacrifice&time, unforgeable costliness etc.  (You should read all his stuff.)  So craftsmen in antiquity would not really make anything of immediate functional value in creating beads of money.  So why would they sacrifice so much time and effort making beads when every day would have been about survival from an evolutionary standpoint?  'Nick Szabo' would call this unforgeable costliness and another way that a money can originate and he cites many examples.  Even Adam Smith brought up the Cost of Production Theory of Value.  From a logical Austrian perspective you can dismiss that theory,  however from a human standpoint there seems to be a perception of value primarily based on cost & sacrifice.  'Nick Szabo' discusses how people value collectibles oftentimes for it's unforgeable costliness like for example an intricately weaved Native American basket.  It's a human instinct.  So Bitcoin is exactly that experiment.   The use of Bitcoin for it's immediate functional use as money is clearly lacking, but the potential future use as money seems to be growing.  The promise and capability of being a global secure ledger, the unforgeable costliness of mining, the network effect etc seems to be driving Bitcoin to be accepted as such in a fascinating real world experiment. 

The human reference point of computing time for a Bitcoin block or Satoshi would be its relative value to human time.  So 10 minutes of computing time would fluctuate around X hours of human time, just as a grain of silver would fluctuate around X amount of barley grains.  Whether the inventor designed Bitcoin to have computing time as a point of reference or he just needed to have a way to control inflation over time using automatically-adjusting difficulty I'm not sure.  It's probably by design if you read 'Nick Szabo'.  Anyways it's just interesting to ponder.

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Offline oldman

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Create a dac with one delegate for each country. Each delegate pays hundreds if not hundreds of thousands of folks to submit data points via app interface. How much gas cost, beef, electricity, a hair cut, their tax bill, babysitter, dentist whatever. Each data point gets paid for with a micro payment in a bitAsset, say bitGold for the sake of argument.

The data points are plugged into a clever database that analyzes/averages/whatever and spits out two things: a value for the store of value/currency token (same principles as BTS, transaction fees pay delegates) and data feeds/metrics which can be purchased (other source of income).

This dac would serve humanity incredibly well by providing unbiased raw data on economic activity as well as a store of value that would continuously adjust to maintain constant purchasing power.

Offline starspirit

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Hey Starspirit & Bitsapphire,
Just following up on my comments about unit of account and reference points of value.  I was thinking about Bitcoin the other day and came to realize that Bitcoin does in fact have a discrete unit of account or reference point.  It's actually the computational time required to mine/hash a new block. (Roughly 10 minutes of computational time).  The computational time in the 'proof of work' process is the 'unit of account' that can be a reference point to judge all goods & services against.  Fascinating to think about.
I used to think money required something to back it, but now my view is that money is the unit of account. Its value derives from the integrity of the monetary system, and how much confidence people can have that the ledger system as an effective and fair way to record where goods and services have been provided and are owed in society. Gold did not need anything to back it, apart from durability and scarcity, but that's what provided the integrity in the system. Now I think the block-chain technology can achieve the same function. So I'm not sure we need to identify an underlying unit of account anymore to call something money. Not sure though.

The security provided by PoW might add value to a crypto-money, but the cost of production (as in any industry) has no direct influence on the demand for or valuation of the money, so I don't see this cost as a unit of account to compare the price of goods and services. I still think the value of the money itself does that. Perhaps I'm misunderstanding what you mean though.

Offline merivercap

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BTW the idea that the unforgeable costliness of the Bitcoin POW can be used as a unit of account does not necessarily make it have value.  Bitcoin, from a typical Austrian economist point of view, must show value first as a global ledger/payment system/digital commodity before the computational time unit of account can be used. 

Over time if the demand and value of Bitcoin is there, the computational time 'unit of account' can be the reference point when the actual value of an Bitcoin is used more for it's exchange value, rather than it's subjective use value (as a payment system/ledger/collectible etc.)

For example gold is first used as jewelry or for industrial use, but over time because of its other qualities (divisibility, durability, relative portability, fungibility) it became the primary commodity for exchange and its monetary value became dominant over it's subjective use-value.
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Offline merivercap

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Hey Starspirit & Bitsapphire,
Just following up on my comments about unit of account and reference points of value.  I was thinking about Bitcoin the other day and came to realize that Bitcoin does in fact have a discrete unit of account or reference point.  It's actually the computational time required to mine/hash a new block. (Roughly 10 minutes of computational time).  The computational time in the 'proof of work' process is the 'unit of account' that can be a reference point to judge all goods & services against.  Fascinating to think about.

'Satoshi Nakamato' aka 'Wei Dai' aka 'Nick Szabo'...aka the inventor with a beautiful mind really carefully thought this one out.  It was many years in the making.   If you read 'Wei Dai's' b-money txt: http://www.weidai.com/bmoney.txt, you can see the inventor originally was trying to link the cost of a standard basket of commodities with the computing cost of a proof of work system. That would be a reference point or unit of account, but you would need an external input with a standard basket of commodities.  I think one of the key decision points was when the inventor found a way to algorithmically change the difficulty so that the avg computing time would not change and that's when he pretty much decided to unleash the Kraken. 

If you read 'Nick Szabo', his explanation of what took Bitcoin so long to happen:
http://unenumerated.blogspot.com/2011/05/bitcoin-what-took-ye-so-long.html

And 'Nick' also describes unforgeable costliness & bit gold:
http://diyhpl.us/~bryan/papers2/bitcoin/unforgeablecostliness.html

He describes time-wage rates vs piece-wage rates here in: Measure of Sacrifice (time): http://szabo.best.vwh.net/synch.html

And he mentions 'time' again here in: Antiques, time, gold, and bit gold: http://unenumerated.blogspot.com/2005/10/antiques-time-gold-and-bit-gold.html

It seems using computational time as a unit-of-account was one of the economic foundations of Bitcoin.  I do wonder if rather than time some other unit of account that takes into consideration the quantity/quality of output might be preferable because as an Austrian I do like emphasizing an end-result rather than time.  For example you can measure the # of puzzles and difficulty level of puzzles solved per unit time. (This system would be much harder to implement, but it's just an analogy) 

If you see the comments of 'Nick Szabo'  on his 2011 'Bitcoin: What Took Ye So Long' post a few years after Bitcoin launched he suggests some other methods to determine unit of account and actually questions the decision to automatically adjust the difficulty level (which effectively makes the unit of account computational time).   I'm wondering if it's just the inventor providing clues of ways to improve his own invention and experiment after a few years of observation?  It seems 'Nick' promoted some ideas on the comments sections for suggestions to improve Bitcoin as well as for future projects including smart contract implementation & proof-of-stake. 

Anyways computational time as a proxy for unit of account might work out for Bitcoin, but I think if someone is going to try out another POW system they would try out something that would consider quantity&quality.

BTW pretty much everything 'Nick Szabo' writes are the underpinnings of Bitcoin's design as well as the block chain revolution.  Note: The blog starts to get weird from about 2012 on.  The reading becomes very un-'Nick Szabo'-like.  Even weirder 'Nick Szabo' starts a twitter account in 2014 and starts consistently tweeting?  Very strange for an intellectual.  Hope he's ok.
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Offline mike623317

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The USD, Euro, and every other government(aka. banker) issued currency out there can be seen as having relative degrees of volatility as well. Heck, the whole idea of a rock solid store of value is only something human beings could dream up, since everywhere you look the universe is basically engaged in violently tearing itself apart. I do not believe that fiat currencies (ledger entries, including all blockchains) can be made into an arbitrary "store of value" as well as remove volitility without the violent cohersion, fraud, and subversion that the bankers' enforcement branch (government) are known for. Strip away the subterfuge, and fiat is nothing but a commodity backed by a "promise".

This is why bit assets are so ingenious. I3 has created a bridge between the existent world of commodities (including all national currencies) and the miracle of transparent ledger interaction. As long as something "stable" exists in the outside world, bitshares is useful. Arhag seems to have arrived at the same conclusion that I have: once we approach the endgame or "saturation stage", the logic begins to break down and its altogether unclear how things will proceed from there.....My guess is some sort of radical social transformation  :D

EDIT: Not at all trying to throw water on the brainstorm, NPI, just pontificating on the (im)possibility of fiat holding any sort of value outside of being a tool for arbitration.

i like your thinking.
i think jim rickards may have a good point though, the next fiat bailout will be the IMF bailing out the US, EU etc with their SDRs. Ultimately gold should prevail, governments may just be able to kick the can a few more inches though. this is why i like bitgold personally.

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Offline starspirit

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Thanks for comments merivercap. I agree that debt and credit needs to be integrated into future money systems, and needs more consideration.

The IOU represents the debt of the issuer in terms of an external unit of account (which in our model is the Perpetual Coin). It does not represent any good, service, hour, or anything of that sort that currently is in use with LETS.

Ripple has an in-build commodity money (XRP) which cannot function as a stable unit of account. It is the same as Bitcoin in this regard, or any commodity money. Our proposal creates a stable unit of account similar to bitAssets, but which track an internal ratio rather than some arbitrary commodity or basket of commodities. Rather, it tracks all goods and services on the market.

Following the discussion between bit sapphire and merivercap, I'm interested how such a system might theoretically work.
First, I'm not sure how this is different to the modern fiat system, where a dollar also represents a value of goods or services owed you by the community, and a dollar owed is the converse obligation. bitsapphire, could you clarify the key difference? I'd like to understand your proposed mechanisms better.

Why I raise this is that there are clear flaws with the current fiat system (merivercap raised some of these):

- Newly created money is fungible with existing money and so immediately affects the quality and value of all existing money.
- New borrowers have temporary purchasing power advantage in being able to buy before economic prices adjust.
- Banks monopolise the money creation process, requiring centralised authority to administer.
- Credit risk becomes centralised and therefore systemic, requiring back-stops and guarantees (e.g. TBTFs).
- The existence of back-stops means issuers (the banking sector) are incentivised to maximise issuance irrespective of the productive quality underlying the debts.
- This leads to an ever more fragile cycle of crisis and greater back-stops.

Why wouldn't a more robust system, that fulfils the same split-barter functionality, be to have self-liquidating borrowing and lending markets, as well as potentially bill of exchange markets (exchangeable issuer-based IOUs), using a fixed supply token for settlement? In this way I think the value of the fixed supply token cannot be compromised directly by new debt issuance.



Offline merivercap

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To merivercap's points, I've thought about this a bit, and don't have any answers, but here are some of my current views.

I'm coming to think the utility of an incorruptible and widely accessible ledger (the block-chain) is a new commodity on which money can wholly be based. Though it can be argued that block-chains can be forked and reproduced ad-infinitum, the limiting factor in their production is the energy, time and labour required to secure a network, which are limited resources. This is true whether the security is more energy-based (e.g. PoW) or time and labour-based (e.g. DPoS). As a result the network effect means that these resources will tend to centralise around a subset of the most useful block-chains, significantly enhancing their utility and security, and underpinning the value of the tokens attached to those block-chain ledgers. Such ledger robustness was not possible in Mises' day, but if it is indeed a useful commodity, might it still be consistent with his money regression theory?
I agree with your sentiments.  The blockchain/global ledger is a digital commodity.  You can also consider it a DAC or a payment system.  The network effect is important.  Mises would probably agree and after competing in a free market of all commodities & digital commodities the dominant blockchain may eventually be used as the primary form of money in time. 

If the above is valid, the current challenge for crypto-money at this point is merely building enough critical mass for this value to become manifest. I did originally think that backing crypto-money with a commonplace commodity (even a digital one) might help initial adoption, eventually allowing such a crypto-money to gain early dominance, and eventually be able to release its backing and float freely on its value as a pure transaction ledger. This is much what fiat money did when it left the gold standard, as most of the value of gold (the underlying money) by that point was already merely its support of a transactional system rather than its physical applications. This allowed fiat to leave the gold standard without breaking down, although the lack of sufficient monetary discipline since then has seen ongoing long term decline in the value of these units.
Yes.  I think it could still be important to build critical mass.  I'm excited about bitUSD & bitGold because it is a natural bridge from our current system.

BTW Mises was addressing the point about fiat and credit money with his regression theory.  He stated bank credit money (or fiat money) could not come into existence as a money because it did not first originate with exchange value with other commodities. However because  most often fiat money first begins with gold backing, it retains its monetary use value.

I still think its possible for a crypto backed by a tangible well-accepted commodity to gain faster acceptance and surpass bitcoin. But I no longer think that is a necessary condition for crypto-money to eventually be accepted. I am now leaning to the view that the longer bitcoin survives (and other cryptos) without compromise of the block-chain, regardless of everything else, the more such crypto-ledgers will gain wider acceptance of their intrinsic value in society. Wider acceptance will improve stability over time, because the good which is most widely accepted and exchangeable for all other goods in the economy (i.e.money) becomes the least volatile. This is more intuition than proof.

In the end I think the least volatile measure of value is money itself, when it reaches the point of economic dominance. Attempting to anchor the value of this to any other unit would merely cause liquidity to vanish at certain points when its demand relative to those goods changes. There are times when the demand to hold money, like everything else, can change according to people's needs, and only floating money can accommodate this. So there may be some short term adoption gain from anchoring, but I don't think its viable in the long term.

Our concepts of money seem to evolve more quickly nowadays, so my view is also open to change over time.

I agree with your intuition that the most widely accepted good used as money will become the least volatile, but credit money is the dominant money of today compared to commodity money and I'm interested to know how credit money plays out in the cryptoworld because I think it will be important.  I'm intrigued with bitSapphire's theories because  a lot of it aligns with my thinking, but I don't quite understand the mechanisms yet.

And yeah my views on how money works has definitely evolved over a long period of time and probably will continue to....
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Offline starspirit

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To merivercap's points, I've thought about this a bit, and don't have any answers, but here are some of my current views.

I'm coming to think the utility of an incorruptible and widely accessible ledger (the block-chain) is a new commodity on which money can wholly be based. Though it can be argued that block-chains can be forked and reproduced ad-infinitum, the limiting factor in their production is the energy, time and labour required to secure a network, which are limited resources. This is true whether the security is more energy-based (e.g. PoW) or time and labour-based (e.g. DPoS). As a result the network effect means that these resources will tend to centralise around a subset of the most useful block-chains, significantly enhancing their utility and security, and underpinning the value of the tokens attached to those block-chain ledgers. Such ledger robustness was not possible in Mises' day, but if it is indeed a useful commodity, might it still be consistent with his money regression theory?

If the above is valid, the current challenge for crypto-money at this point is merely building enough critical mass for this value to become manifest. I did originally think that backing crypto-money with a commonplace commodity (even a digital one) might help initial adoption, eventually allowing such a crypto-money to gain early dominance, and eventually be able to release its backing and float freely on its value as a pure transaction ledger. This is much what fiat money did when it left the gold standard, as most of the value of gold (the underlying money) by that point was already merely its support of a transactional system rather than its physical applications. This allowed fiat to leave the gold standard without breaking down, although the lack of sufficient monetary discipline since then has seen ongoing long term decline in the value of these units.

I still think its possible for a crypto backed by a tangible well-accepted commodity to gain faster acceptance and surpass bitcoin. But I no longer think that is a necessary condition for crypto-money to eventually be accepted. I am now leaning to the view that the longer bitcoin survives (and other cryptos) without compromise of the block-chain, regardless of everything else, the more such crypto-ledgers will gain wider acceptance of their intrinsic value in society. Wider acceptance will improve stability over time, because the good which is most widely accepted and exchangeable for all other goods in the economy (i.e.money) becomes the least volatile. This is more intuition than proof.

In the end I think the least volatile measure of value is money itself, when it reaches the point of economic dominance. Attempting to anchor the value of this to any other unit would merely cause liquidity to vanish at certain points when its demand relative to those goods changes. There are times when the demand to hold money, like everything else, can change according to people's needs, and only floating money can accommodate this. So there may be some short term adoption gain from anchoring, but I don't think its viable in the long term.

Our concepts of money seem to evolve more quickly nowadays, so my view is also open to change over time.

Offline merivercap

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Thanks for your kind words! This post is actually a bit outdated as I (and the Bitsapphire team) have simplified and extended the system considerably.

The IOUs would be based on a specific delivery of XYZ good or service correct?   This is the same model for the DigitalCoin &  Ripple system.  Your personal trust network or supply chain can better evaluate your 'credit rating'.  The supply and demand of the specific IOUs as well as the risk is decentralized/distributed.  The major failure in modern banking is that bad debt is centralized and effectively collectivized by government bailouts, guarantees, and money printing.  Hence collective public debt grows to unmanageable levels beyond the level that would represent productive credits, and eventually can lead to currency collapse.

The IOU represents the debt of the issuer in terms of an external unit of account (which in our model is the Perpetual Coin). It does not represent any good, service, hour, or anything of that sort that currently is in use with LETS.

Ripple has an in-build commodity money (XRP) which cannot function as a stable unit of account. It is the same as Bitcoin in this regard, or any commodity money. Our proposal creates a stable unit of account similar to bitAssets, but which track an internal ratio rather than some arbitrary commodity or basket of commodities. Rather, it tracks all goods and services on the market.

One of the major modifications to the system we've made so far is that the bitAsset (i.e. the perpetual coin) is not created as a CFD, but rather through simple contracted collateralization. In our current model any percentage of collateralization can happen. We calculated that at about 300% collateralization (all based on IOUs, nothing else) is the maximum statictically significant security that can be had.

We have also been able to form a very new and I think elegant definition of money and credit:
"Credit is a time-delayed split barter contract. Money is credit without counterparty risk." It's that simple really.

Interesting.  Look forward to seeing how it works. 
Yeah from what I recall XRP is the intermediary asset without counterparty risk between user-issued IOUs that have counterparty risk so it seems to have a somewhat similar function, but your perpetual coin idea doesn't involve IOUs of anything specific like dollars/gold/time...  Interesting.  Just like Bitcoin & Bitshares and other blockchains can be seen as a global ledger or DACs that can satisfy subjective value theory/Mises regression theorem because it is a piece of something tangible (ie. ledger or company) I can see how  a perpetual coin DAC can be similar, but wouldn't the value depend on how useful it is and wouldn't adoption increase value just like Bitcoin/Bitshares and wouldn't that make value unstable? What makes Bitshares much easier to value is because it can be seen a stream of dividend payments from transaction fees.

I like your elegant definition of money.  I like simple and it does make sense when using 'credit' & 'exchange' as the main reference point.  The 'store of value/commodity/asset' aspect that is typically associated with 'money' can be put in a different category because that is not necessary for exchange whereas the narrow definition you have confines the definition to the 'exchange' aspect of money.  A broader definition may include the 'wealth/asset/store of a value' aspect of money.   If you build a boat and I build a house and we exchange the net 'wealth' in the world is increased by a boat + house and so wealth is not a zero-sum game (in case you include Mother Earth than it is zero-sum..lol).... Exchange & credit and a narrow definition of money is a zero-sum game.  Anyways...fun to think about.  Look forward to your progress.

Store of Value happens through Money, not credit (by our definition). Because money has no single counterparty, meaning it is backed by everybody (or everybody participating in the credit creation process), you can "store" value in it. However, by definition the default rate of all credit creation participants is the debasement rate of Money (=counterparty-less credit). This results in either inflation or as in our proposal demurrage. We believe that this is mathematically the basis of the inflation tendency in all moneys (excluding market order books and first degree positive feedback loops of inflation itself).

Credit always happens before Money, as otherwise that money would not have existed in the first place.

The Perpetual Coin could not have a changing value because it only represents the median exchange value (i.e. ratio) between all Credit Coins on the system. This ratio is generated within the blockchain and therefore requires no external data feed such as USD or EUR, etc. It is a Unit of Account composed of the exchange value of all goods and services being traded on the system. This means you don't need to create an external data feed for an arbitrary basket of goods and services anymore, it is generated anyways by the Blockchain as a natural byproduct.

Interesting connection with inflation and default rates.  That theory could fit in well with modern banking since we are on a credit money system and inflation may be a result of default rates more so than increases in base money supply.   The Fed has increased base money supply to the tune of $4 trillion, but it seems to have limited effect on both inflation (at least so far) and credit money supply.  We are in a credit bubble (consumer/mortgage/corporate), but the largest amount of bad debt is government/sovereign debt. Most countries are like Greece.  In any case the current credit money system seems like it's coming to an end. 

I've been thinking about gold standard stability in the US between 1880 - 1913.  The inflation rate was 1.6% per year which is extremely low.  It could be that the default rates were much lower because eventually something real like gold backed the elastic credit money system so the entire credit expansion system was limited with higher quality debt.  Back then no one could create money the way you were able to this decade based on no verified income and no down payment.  Credit money during the gold standard could not fund massive government programs with the idea that governments would always so easily be able to confiscate people's wealth via taxation.

Here are some thoughts: 

Is the value of the the gold standard really just that it was a reference point for each person to easily compare the subjective value of other goods/services they could exchange for?  The IOUs of all goods/services within the entire set of credit/debit exchange needed a common asset to reference.  Hence the reference asset can be anything, whether a grain of rice, gold, BTC, BTS.  Every other asset would just fluctuate around that reference asset.  It would be preferable if the reference asset was chosen that was common to the people.  It may not be that people compared the metal value of gold or silver to other goods & services, but it was that a certain weight & fineness represented some amount of grain seeds.  It would be easy for the average person to compare their labor or other assets against grain seeds because it could represent X number of meals.    Hence a pound sterling was legally defined as 5,400 grains of 92.5% fine silver, and a grain was legally defined "as the weight of a grain seed from the middle of an ear of barley"
http://jpkoning.blogspot.com/2012/12/a-history-of-pound-sterlings-medium-of.html

So the value attached to gold/silver was more about the amount of grains it represented.  Although the # of grains attached to a certain weight/fineness of gold/silver was set by government decree, the free market value of gold/silver vs grains may not have fluctuated that far off from the official decree.   Let's say the metal value of pound sterling could have fluctuated between 4000 - 7000 grains depending on the supply/demand of silver & grains, but for the sake of price stability the monarchy may have decided on 5,400.

The US dollar was derived from the Spanish dollar that was based on the 16th century Joachimsthalers that weighed 451 Troy grains ( 29.2g) of silver.  "Troy grains were nominally based on the mass of a single seed of  a cereal."
http://en.wikipedia.org/wiki/Spanish_dollar

So today's seemingly stable US dollar is based on credit money, but the credit money has a past with a link to silver & further back grains.  Does that reference & history help keep the stability of the current dollar?  If I got a haircut for a dollar backed by gold in 1880, it would be hard for me to think it was worth that much more in 1885.  Overtime because of inflation (or default rates of credit money) a haircut costs much more now.  However the reference point has always been past experience more so than a comprehensive study of comparing the money value of all goods & services.  (Mises ponders this when he discusses credit money and his regression theory in his Theory of Money and Credit.)

The entire set of credit/debit exchange includes a time component as well since some credit is short-term and others are much longer (30yrs for a mortgage).  Of course a mortgage loan is ultimately an exchange of the labor/material to build a house in return for an equivalent 'value' of goods and services the borrower can provide in return over a presumably long time period.  The entire volume of credit/debit exchange is elastic and ever-changing continuously just as the average maturity of credit in the entire system.  All credit is created and then destroyed precisely when an exchange is complete.  (Money & credit is unnecessary if you live in autarky of course.)  The reference point of credit could be anything, but it was grains/gold/silver for a very long time. 

You can use any other reference point such as BTC, but even a global ledger should have a common real world object as a unit of account should it not?  Sea shells, clams & beads with early native americans were not just ledger systems without a referenced asset, but each shell or bead must have represented 'something'... whether labor time,an ounce of meat or flint etc.  People just trusted the ledger or accounting system, but that did not represent the unit of account in itself.  Talley sticks were also used as a ledger at various times in history.  In medieval England the tally cuts represented pounds of grain:

"The manner of cutting is as follows. At the top of the tally a cut is made, the thickness of the palm of the hand, to represent a thousand pounds; then a hundred pounds by a cut the breadth of a thumb; twenty pounds, the breadth of the little finger; a single pound, the width of a swollen barleycorn; a shilling rather narrower; then a penny is marked by a single cut without removing any wood."
http://en.wikipedia.org/wiki/Tally_stick

Does credit money just need a reference asset as a peg so people can easily compare and subjectively assign relative value?

A redemption mechanism allows people who are skeptical to leave the entire credit/debit exchange system (rightly so when it's modern banks giving credit to unworthy borrowers and governments), but it's not really necessary to have a real amount of gold or grain.  It's just a reference point.  The credit is always based on value people create so that would not be limited by constraints of supply in any commodity.  We create wealth.  Gold & grains are real world reference points and nothing more. 

Hence if you create a system like your Perpetual Coin or Grignon's version (or even BTC), does it not face difficulty in having a real world reference, if anything just to help adoption?  Grains may seem a bit awkward in this modern age, but it's probably an easier one for me to use as a reference.  After watching that Grignon video again with credit coin/perpetual coin, it still seems to me everyone will still be confused about what subjective value to place on any credit coin or perpetual coin compared to any other good/service they can provide.  Otherwise it would be like comparing 100ABCs vs 10,000XYZs vs 1,000,000 Credit Coins to 1000 Perpetual Coins to an apple and pair of shoes.  I can easily compare the apple to the shoes, but the others I would immediately have difficulty with.  If anything a real world reference just makes adoption easier.

The second point is any system, who creates the credits?  Right now we have centralized banking institutions who monopolize credit creation and do an extremely poor job of it.   A lot of loans go to unqualified borrowers.  A lot of loans go to wasteful and unnecessary governments.  On the other hand qualified borrowers and good projects have a harder time receiving credit.  Our current system also creates systemic risks because credit creation is highly centralized and when bad credit bubbles go bust, everyone goes down.  A purely decentralized system would have a 1:1 relationship where if a borrower is unable to pay, the one creditor loses out.  The lone creditor must calculate the risk.   You can have any M:N relationship with credit (M debtors/N creditors), but the N creditors would collectively have to evaluate and manage credit risk.  Hence at least default risk would be isolated.    A decentralized system such as bitShares UIA's or other altcoin LETs systems could work well.  However I still think decentralized credit should be backed by assets such as gold/grain/land/company shares or anything more easily recognizable to the average person.  It would be up to each issuer.  We wouldn't see Annie, Bob, or XYZ company credits floating around, rather there would be Annie's apple credits and Bob's orange credits and XYZ smartphone credits or just Annie/Bob/XYZ gold credits.

Anyways just curious to know your thoughts.




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Offline bitsapphire

Thanks for your kind words! This post is actually a bit outdated as I (and the Bitsapphire team) have simplified and extended the system considerably.

The IOUs would be based on a specific delivery of XYZ good or service correct?   This is the same model for the DigitalCoin &  Ripple system.  Your personal trust network or supply chain can better evaluate your 'credit rating'.  The supply and demand of the specific IOUs as well as the risk is decentralized/distributed.  The major failure in modern banking is that bad debt is centralized and effectively collectivized by government bailouts, guarantees, and money printing.  Hence collective public debt grows to unmanageable levels beyond the level that would represent productive credits, and eventually can lead to currency collapse.

The IOU represents the debt of the issuer in terms of an external unit of account (which in our model is the Perpetual Coin). It does not represent any good, service, hour, or anything of that sort that currently is in use with LETS.

Ripple has an in-build commodity money (XRP) which cannot function as a stable unit of account. It is the same as Bitcoin in this regard, or any commodity money. Our proposal creates a stable unit of account similar to bitAssets, but which track an internal ratio rather than some arbitrary commodity or basket of commodities. Rather, it tracks all goods and services on the market.

One of the major modifications to the system we've made so far is that the bitAsset (i.e. the perpetual coin) is not created as a CFD, but rather through simple contracted collateralization. In our current model any percentage of collateralization can happen. We calculated that at about 300% collateralization (all based on IOUs, nothing else) is the maximum statictically significant security that can be had.

We have also been able to form a very new and I think elegant definition of money and credit:
"Credit is a time-delayed split barter contract. Money is credit without counterparty risk." It's that simple really.

Interesting.  Look forward to seeing how it works. 
Yeah from what I recall XRP is the intermediary asset without counterparty risk between user-issued IOUs that have counterparty risk so it seems to have a somewhat similar function, but your perpetual coin idea doesn't involve IOUs of anything specific like dollars/gold/time...  Interesting.  Just like Bitcoin & Bitshares and other blockchains can be seen as a global ledger or DACs that can satisfy subjective value theory/Mises regression theorem because it is a piece of something tangible (ie. ledger or company) I can see how  a perpetual coin DAC can be similar, but wouldn't the value depend on how useful it is and wouldn't adoption increase value just like Bitcoin/Bitshares and wouldn't that make value unstable? What makes Bitshares much easier to value is because it can be seen a stream of dividend payments from transaction fees.

I like your elegant definition of money.  I like simple and it does make sense when using 'credit' & 'exchange' as the main reference point.  The 'store of value/commodity/asset' aspect that is typically associated with 'money' can be put in a different category because that is not necessary for exchange whereas the narrow definition you have confines the definition to the 'exchange' aspect of money.  A broader definition may include the 'wealth/asset/store of a value' aspect of money.   If you build a boat and I build a house and we exchange the net 'wealth' in the world is increased by a boat + house and so wealth is not a zero-sum game (in case you include Mother Earth than it is zero-sum..lol).... Exchange & credit and a narrow definition of money is a zero-sum game.  Anyways...fun to think about.  Look forward to your progress.

Store of Value happens through Money, not credit (by our definition). Because money has no single counterparty, meaning it is backed by everybody (or everybody participating in the credit creation process), you can "store" value in it. However, by definition the default rate of all credit creation participants is the debasement rate of Money (=counterparty-less credit). This results in either inflation or as in our proposal demurrage. We believe that this is mathematically the basis of the inflation tendency in all moneys (excluding market order books and first degree positive feedback loops of inflation itself).

Credit always happens before Money, as otherwise that money would not have existed in the first place.

The Perpetual Coin could not have a changing value because it only represents the median exchange value (i.e. ratio) between all Credit Coins on the system. This ratio is generated within the blockchain and therefore requires no external data feed such as USD or EUR, etc. It is a Unit of Account composed of the exchange value of all goods and services being traded on the system. This means you don't need to create an external data feed for an arbitrary basket of goods and services anymore, it is generated anyways by the Blockchain as a natural byproduct.
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Offline jsidhu

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So, then the delegates need to provide and vote for a new basket price once a month.

How about creating a metaAsset from the bitAssets that we already have? For example, create a basket from bitUSD, bitEUR, bitCNY, bitGLD and bitOIL (once all of these have sufficient price feeds of course). The DAC can track the basket value by looking at the internal markets and create an artificial price feed for the basket.

You could do that if you think a basket consisting of only USD, EUR, CNY, GLD, and OIL is good enough. I think we would want a more sophisticated basket than just that however.

We should focus on the ISO currencies first then think about baskets... for example the USD index is probably the most common basket and it is usually used for risk management in a portfolio.. not to trade in and out usually. Stick to ISO and a standard and that will bring more people in.

Sorry for the old bump.
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Offline merivercap

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The human population. This could be represented as a coin which has a value of the total amount of humans on record. It should go up or down in predictable ways.

Or perhaps the formula for the total amount of storage space of the Internet itself. The value will increase each year at a predictable rate.

Or electricity usage. Make an asset around electricity demand and you'll get something extremely stable but which always increases.

I would say since we don't have electricoin we'll have to invent some energy assets. The other stuff would be too experimental.

I always liked the idea of using human population for any free coin distribution or inflation rate,  but I wonder how accurate the numbers are.. I guess estimates are probably good enough...
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Offline Markus

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Or electricity usage. Make an asset around electricity demand and you'll get something extremely stable but which always increases.

Electricity is probably the commodity with the most volatile price. It can jump to 100 times its average price within minutes and can also become negative at times. It is also highly location dependent. The reasons for this are that long distance transport is expensive and inflexible and that it can not be stored economically.