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I am thinking of an alternative mining scheme where block reward would grow (or decrease) with popularity of the coin. The rationale behind this idea is to make an exchange rate more stable since greater interest will not result in higher coin price.

The biggest question is probably how to technically solve such variable block reward because there seems to be no easy way of how to collectively decide on reward height.

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  • To echo the sentiment of my answer below: Market prices are exactly measures of popularity and they are very efficiently and effectively decided all the time. If you are speculating on possible future scenarios, I suggest thinking about ways people will try to leverage the celebrated information processing capabilities of prices and markets. – Will Nelson Dec 10 '13 at 11:50
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How would you define popularity? Any measure you make must be decentralised, and whatever you decide on can be arbitrarily faked. It's completely impossible in the terms of a trustless currency like Bitcoin.

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  • Market price is a measure of popularity. Since there is no monopoly on exchanges anyone can run one. Then you probably want to count a VWAP (Volume-weighted average price) across the whole exchange market and you should be all set. – Kozuch Dec 10 '13 at 12:46
  • @Kozuch And how would you reliably measure that? What about lying exchanges? – CodesInChaos Dec 10 '13 at 16:52
  • @CodesInChaos: What exactly are you asking about measuring? I just proposed one way above (VWAP). There seem to be a real paranoia within the Bitcoin community in linking some "real world data" to the protocol - developers say it is a "vulnerability" and they will never do it - this is laughable. In the meantime, the only vulnerable thing here is Bitcoin itself... nobody knows whether it will be here tomorrow. Why an exchange doesnt want to lie? Because if people realized the exchanges would go out of business??? – Kozuch Dec 10 '13 at 22:49
  • @Kozuch You did not say how you measure the VWAP and feed it to the protocol in a secure fashion. What if I open "Honest Achmed's Bitcoin exchange" and report that I exchanged a billion bitcoins for a dollar each? – CodesInChaos Dec 11 '13 at 8:26
  • Ok, I get what you mean now. Well each node would need to filter such exchanges out... If the exchange is new and nodes do not trust it, they simply would not use its prices within VWAP. In the end what we need is block reward height, so nodes have to calculate it somehow... maybe price is only one input for such calculation. Number of transactions (which also gives the economy value) could be another input. Actually the more inputs we have the less risky the final calculation should be... – Kozuch Dec 11 '13 at 9:54
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I've recently thought of pretty much the same thing.

@Anonymous: Popularity is not difficult to define. Call the new currency bitcoin'. A good measure is the price of a bitcoin' in terms of some broad index of consumer goods (like the CPI basket), commodities, or whatever else you want. Perhaps the best available measure of popularity is MtGox's current price in USD, or EUR, etc.

If the bitcoin' price is high, the mining reward rises, essentially quickly generating new bitcoin', thereby lowering their price. A falling bitcoin' price would trigger higher mining rewards to slow the supply expansion.

Practically, at present, I think the extra stabilization provided by such a system would be minimal. But my opinions on the matter are currently not too strong.

Note that the current mining system already works to stabilize the price of a bitcoin to some extent: as the price of a bitcoin rises, more miners enter, increasing the supply and helping to drive down prices. But how's that system working out? So far, not so great as far as stability goes. And of course, when the ~21M bitcoin cap is hit, there will no longer be any stabilization mechanism available that links bitcoin supply with bitcoin price.

UPDATE 1 I forgot to mention the important question of how "popularity" is announced/communicated into the bitcoin' system. Very good question. One could imagine a trusted entity with a well-known public key signing such announcements and system nodes verifying that particular entity's signature.

One nice aspect: the "popularity" measure could be relatively objective, e.g., latest publicly available quoted price from a popular exchange. This would at least allow anyone in the world to determine whether this trusted entity is really trustworthy (are they lying about publicly available quoted prices???). But admittedly, this is a real sticking point in the design, e.g., what if this trusted entity is hacked?

UPDATE 2 Another related idea: if one could reliably enforce bitcoin contracts that involve trades of other real-world commodities/assets, then it'd be easy to construct a decentralized system in which many anonymous entities publicly announce bitcoin's "popularity" (again, use bitcoin's current market price as a proxy) and these announcements would be very reliable. (To be clear: the entire point of these announcements is to tweak the block mining reward to stabilize the bitcoin' price. The basic idea: reliable announcements of current BTC' prices are announced into the BTC' network. The mining block reward is constantly fluctuating depending on the current BTC' price. If BTC' is relatively high, the block reward increases, attracting miners. If low, the reward is lowered.) Just make these announcements into the form of offers to buy and sell bitcoin' for the commodity/basket/asset against which it's stabilized. For example, if the current market price of a bitcoin' is 1 USD, then an announcer might announce "I'll sell 1000 bitcoin' for 1.1 USD each and buy 1000 for 0.9 USD each". If the announcement is binding, then you can bet that announcement is not going to be disadvantageous to the announcer! One can reliably deduce a current price bracket for bitcoin'. Again, though, one needs a reliable way to enforce bitcoin contracts exchanging real-world commodities like USD.

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  • You can determine the price in a decentralised way. Which exchange, how much is it weighted, is this exchange real? Who decides? It can't possibly work the way you think. – Anonymous Dec 10 '13 at 11:05
  • @Anonymous I don't understand your comment. And I don't know how to respond to "It can't possibly work the way you think." Why not? Of course, the systems I proposed are built on assumptions. In Update 1, I assume there is a centralized trusted entity that honestly announces price quotes. And in Update 2, I assume there is a way to enforce bitcoin contracts that trade the real world commodity(s) against which bitcoin' is stabilized. Outside these assumptions (which are, after all, assumptions), what is wrong with the proposals? – Will Nelson Dec 10 '13 at 11:22
  • @Anonymous By the way, I believe that billions of USD worth of contracts are written and traded everyday whose payouts depend intimately on publicly available price quotes. – Will Nelson Dec 10 '13 at 11:25
  • You assume there's a trusted entity, but there can't be one, that's literally the entire concept of Bitcoin. The rest is irrelevant. There's no way of having a decentralised Bitcoin "price", so we don't even need to consider anything outside of that. – Anonymous Dec 10 '13 at 11:37
  • "There's no way of having a decentralized Bitcoin 'price'." I think you are wrong here. Do we have one "monopolistic" exchange for Bitcoin? The answer is "NO" - I know at least several exchanges... So the exchange system is already a decentralized one with each entity having its own (decentralized) price. I guess you can agree with this, right? – Kozuch Dec 10 '13 at 12:00

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