6 ms·

Actually, I studied economics in the past and technically you can have a currency which is deflationary in nature, it just does not make it ideal. The Dollar ha

Actually, I studied economics in the past and technically you can have a currency which is deflationary in nature, it just does not make it ideal. The Dollar has a similar disadvantage in many respects due to inflation. It would actually be better to have some sort of currency which expands based on the number of transactions... There's a pretty large theory behind it and I out line some of it on my blog, where I also explain how a crypto currency can "potentially" work[1] or you could read one of Friedman[2] or Knights[3] books. [1] http://austingwalters.com/the-currencies-of-tomorrow/ http://austingwalters.com/the-currencies-of-tomorrow/ [2] http://en.wikipedia.org/wiki/Milton_Friedman http://en.wikipedia.org/wiki/Milton_Friedman [3] http://en.wikipedia.org/wiki/Frank_Knight http://en.wikipedia.org/wiki/Frank_Knight Further, economic system and in turn the manipulation of the Dollar in the U.S. is based largely off Kaynes work, which for the most part (we now know) is an inaccurate portrial of economics.

philwelch 13y ago
I think some variety of Friedman coin would be ideal. You even have the information necessary to implement it because Bitcoin mining is already based on blockchain data, right?
zanny 13y ago
This. Bitcoin is digital gold. Once it proves itself, we will probably transition into something like peercoin, or more appropriately an unimplemented proof-of-work payment scheme that calculates the payments not only on difficulty but also on the transaction rate across the last several blocks. You would want a median 1% inflation, but if exchange slows significantly (indicating money hoarding) you want the inflation rate to increase. If too many transactions are happening, you would turn down the inflation rate to compensate. The only real "hard" part is preventing spoofing the system by moving money back and forth between accounts to fake economic activity, so you would have to put weights on idle money so that money that has been stationary longer has more impact than money changing hands, to avoid tampering.
- fragsworth 13y ago
  I strongly suspect that the Bitcoin developers and mining community will eventually choose to inflate the currency. Not for any economic reasons, but rather to provide the funding for a large and secure mining network, because future transaction fees might prove to be insufficient. That 21 million number is not set in stone, and will change if there is a need for it.
  - zanny 13y ago
    That still doesn't account for the fact that having a mathematical model for inflation is hugely advantageous for a currency. Current btc should be inflating at upwards of 10% considering how little money movement there is in the network due to the investment hoarding.
    - maratd 13y ago
      > That still doesn't account for the fact that having a mathematical model for inflation is hugely advantageous for a currency. This is hugely important and obvious to anybody who has taken Econ 101. Everybody knows this. So why would you invent a currency that was deflationary in nature due to an artificial cap? Well, once you realize that the guy(s) who invented it are holding 10% of it, you'll have your answer. Bitcoin is in a huge bubble at the moment. My only hope is that this bubble bursts before the inventors can cash out. Oh, sweet justice. After the collapse, there is every reason to believe that Bitcoin will become something genuinely useful or at the very least, inspire something that will be useful.
      - fragsworth 13y ago
        Deflation is only a threat because of fractional-reserve lending. The world ends up owing itself more than it actually has in currency, and it collapses in on itself in a massive disaster if and when the currency deflates. Fractional reserve lending of bitcoins seems highly unlikely to happen any time soon, if ever. And if it does start happening, it is likely to be made quickly illegal, because the system simply won't work.
ryanjshaw 13y ago
Are we even able to analyse Bitcoin as we would fiat currencies or precious metals? Why is this assumption left unstated and unanalysed? Cryptocurrencies have several interesting properties that these traditional mediums of exchange do not, for example: - the supply is fixed and precisely known at any point in time, with very little chance of that ever changing by unilateral decision (e.g. politics, war); surely this will factor into future decisions to price goods and services, in the same way businesses already factor inflation into their business models - low transaction costs for high value cross-border payments could see a niche use that no fiat currency can compete with (unless you somehow believe there will be a unified global real-time gross settlement system or the like any time soon) - settlement times could also see a niche use that no fiat currency can compete with (if it works, and your transaction is confirmed in seconds/minutes/hours rather than days as with ETFs, then I foresee people using it for certain value transactions) - accessibility (just look at M-PESA in Kenya -- everybody has cellphones, but moving physical cash around is expensive and dangerous) - up until all the coins are mined, and probably for some time thereafter, the value will be quite volatile; after that, however, value will pretty much reflect real economic activity and volatility will be less predictable -- why is there this obsession over the present volatility? All the coins will be mined within a fixed time frame provided 1 person continues mining, which is almost a certainty, and eventually the price will have to stabilise. I fear the article is comparing apples and oranges. Maybe the author just wants to sow FUD while he buys some cheap BTC :) Don't get me wrong - I have my doubts that Bitcoin has what it takes (among other things, I think the initial unequal distribution of wealth is a serious problem), but cryptocurrencies in general are likely to be a successful and inevitable medium of exchange at some point in the future.
- maxerickson 13y ago
  It's merely very unlikely that the supply changes. Current accepted wisdom is that rewriting the client to produce more coins would fracture the currency. Future accepted wisdom may change. It's also hard to beat cash for settlement times.
  - ryanjshaw 13y ago
    Rewriting the client is not sufficient. You need to convince everybody to run the new client. I don't see that happening as easily as you presume. It is highly likely that cryptobanks will come into place in the future (cryptocurrencies are not very layperson friendly right now), with traditional contractual law ensuring the cryptobanks do not suddenly change the rules under client's noses. I disagree regarding cash. You're making a blanket statement and I'm saying there are niches where cash sucks. Aside from the M-PESA example I've given, another is overseas travel. Cash can be a big waste of time - depending on your local laws, obtaining forex prior to departure can be a pain (e.g. in South Africa), the withdrawal fees are exorbitant and often unclear, the risk of theft significant, you have to be aware of local exchange rates and if you want to save money you have to be aware of the exchange rate of the cash you have on hand vs. your debit and/or credit card processor etc., then when you get back (again in South Africa at least) you have to resell your forex within 30 days, and you also have limitations on how much you can purchase in a year. Another is cash payments over a certain value -- again in South Africa, walking around with more than a certain amount of cash in your pocket is asking for trouble.
clin_ 13y ago
Why are people replying to this post like OP is some kind of authority? It doesn't sound like he "studied economics" so much as he took a course. Of course you can have a deflationary currency. The problem is that people won't spend it. The dollar is not naturally inflationary. Instead, the fed allows for a controlled amount of inflation every year to encourage spending. Automatically managed currencies like you discuss still suffer from inflexibility—as our understanding of monetary economics adjusts, or qualities of the economy change (as with the change in velocity of money during the 80's-90's), it would be difficult to adjust the algorithm to better stabilize the money supply. More importantly, cryptocurrencies are region agnostic. I take it you learned about optimal currency area in your studies? Any arbitrary threshold would risk having inconsistent effects in different places. Expansion may be just the thing to encourage additional transactions in a recessionary region, but may encourage rapid inflation elsewhere. The result is always high volatility, making it unfit as a store of value.

philwelch 13y ago

I think some variety of Friedman coin would be ideal. You even have the information necessary to implement it because Bitcoin mining is already based on blockchain data, right?

zanny 13y ago

This. Bitcoin is digital gold. Once it proves itself, we will probably transition into something like peercoin, or more appropriately an unimplemented proof-of-work payment scheme that calculates the payments not only on difficulty but also on the transaction rate across the last several blocks. You would want a median 1% inflation, but if exchange slows significantly (indicating money hoarding) you want the inflation rate to increase. If too many transactions are happening, you would turn down the inflation rate to compensate. The only real "hard" part is preventing spoofing the system by moving money back and forth between accounts to fake economic activity, so you would have to put weights on idle money so that money that has been stationary longer has more impact than money changing hands, to avoid tampering.

fragsworth 13y ago
I strongly suspect that the Bitcoin developers and mining community will eventually choose to inflate the currency. Not for any economic reasons, but rather to provide the funding for a large and secure mining network, because future transaction fees might prove to be insufficient. That 21 million number is not set in stone, and will change if there is a need for it.
- zanny 13y ago
  That still doesn't account for the fact that having a mathematical model for inflation is hugely advantageous for a currency. Current btc should be inflating at upwards of 10% considering how little money movement there is in the network due to the investment hoarding.
  - maratd 13y ago
    > That still doesn't account for the fact that having a mathematical model for inflation is hugely advantageous for a currency. This is hugely important and obvious to anybody who has taken Econ 101. Everybody knows this. So why would you invent a currency that was deflationary in nature due to an artificial cap? Well, once you realize that the guy(s) who invented it are holding 10% of it, you'll have your answer. Bitcoin is in a huge bubble at the moment. My only hope is that this bubble bursts before the inventors can cash out. Oh, sweet justice. After the collapse, there is every reason to believe that Bitcoin will become something genuinely useful or at the very least, inspire something that will be useful.
    - fragsworth 13y ago
      Deflation is only a threat because of fractional-reserve lending. The world ends up owing itself more than it actually has in currency, and it collapses in on itself in a massive disaster if and when the currency deflates. Fractional reserve lending of bitcoins seems highly unlikely to happen any time soon, if ever. And if it does start happening, it is likely to be made quickly illegal, because the system simply won't work.

ryanjshaw 13y ago

Are we even able to analyse Bitcoin as we would fiat currencies or precious metals? Why is this assumption left unstated and unanalysed? Cryptocurrencies have several interesting properties that these traditional mediums of exchange do not, for example: - the supply is fixed and precisely known at any point in time, with very little chance of that ever changing by unilateral decision (e.g. politics, war); surely this will factor into future decisions to price goods and services, in the same way businesses already factor inflation into their business models - low transaction costs for high value cross-border payments could see a niche use that no fiat currency can compete with (unless you somehow believe there will be a unified global real-time gross settlement system or the like any time soon) - settlement times could also see a niche use that no fiat currency can compete with (if it works, and your transaction is confirmed in seconds/minutes/hours rather than days as with ETFs, then I foresee people using it for certain value transactions) - accessibility (just look at M-PESA in Kenya -- everybody has cellphones, but moving physical cash around is expensive and dangerous) - up until all the coins are mined, and probably for some time thereafter, the value will be quite volatile; after that, however, value will pretty much reflect real economic activity and volatility will be less predictable -- why is there this obsession over the present volatility? All the coins will be mined within a fixed time frame provided 1 person continues mining, which is almost a certainty, and eventually the price will have to stabilise. I fear the article is comparing apples and oranges. Maybe the author just wants to sow FUD while he buys some cheap BTC :) Don't get me wrong - I have my doubts that Bitcoin has what it takes (among other things, I think the initial unequal distribution of wealth is a serious problem), but cryptocurrencies in general are likely to be a successful and inevitable medium of exchange at some point in the future.

maxerickson 13y ago
It's merely very unlikely that the supply changes. Current accepted wisdom is that rewriting the client to produce more coins would fracture the currency. Future accepted wisdom may change. It's also hard to beat cash for settlement times.
- ryanjshaw 13y ago
  Rewriting the client is not sufficient. You need to convince everybody to run the new client. I don't see that happening as easily as you presume. It is highly likely that cryptobanks will come into place in the future (cryptocurrencies are not very layperson friendly right now), with traditional contractual law ensuring the cryptobanks do not suddenly change the rules under client's noses. I disagree regarding cash. You're making a blanket statement and I'm saying there are niches where cash sucks. Aside from the M-PESA example I've given, another is overseas travel. Cash can be a big waste of time - depending on your local laws, obtaining forex prior to departure can be a pain (e.g. in South Africa), the withdrawal fees are exorbitant and often unclear, the risk of theft significant, you have to be aware of local exchange rates and if you want to save money you have to be aware of the exchange rate of the cash you have on hand vs. your debit and/or credit card processor etc., then when you get back (again in South Africa at least) you have to resell your forex within 30 days, and you also have limitations on how much you can purchase in a year. Another is cash payments over a certain value -- again in South Africa, walking around with more than a certain amount of cash in your pocket is asking for trouble.

clin_ 13y ago

Why are people replying to this post like OP is some kind of authority? It doesn't sound like he "studied economics" so much as he took a course. Of course you can have a deflationary currency. The problem is that people won't spend it. The dollar is not naturally inflationary. Instead, the fed allows for a controlled amount of inflation every year to encourage spending. Automatically managed currencies like you discuss still suffer from inflexibility—as our understanding of monetary economics adjusts, or qualities of the economy change (as with the change in velocity of money during the 80's-90's), it would be difficult to adjust the algorithm to better stabilize the money supply. More importantly, cryptocurrencies are region agnostic. I take it you learned about optimal currency area in your studies? Any arbitrary threshold would risk having inconsistent effects in different places. Expansion may be just the thing to encourage additional transactions in a recessionary region, but may encourage rapid inflation elsewhere. The result is always high volatility, making it unfit as a store of value.