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By baking into the algorithm dynamically adjusting the 'difficultly' so that if it is more expensive than the fiat currency then more coins can be created, and visa-versa- causing the currency to dynamically adjust itself to 1:1 exchange rate.

By having an alt-coin tracking (for example) the US dollar then it would be possible to keep all your money in the 'alt-coin' domain and not have to transfer money (incurring fees) to Fiat currencies.

marked as duplicate by dchapes, Tony, Greg Hewgill, Salvador Dali, John T Apr 25 '14 at 20:44

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I see at least one problem with this. Adjusting the difficulty (or miner rewards, or something similar) works much better one way than the other.

I'll assume a mining system similar to Bitcoin. If the value of your coin gets too high, sure you can devalue it by making it easier to mine and dumping more coins on the market. (Already there is an issue that you'll have to get everyone to agree that the mining adjustments are being made based on a "true" market price that isn't subject to manipulation.)

But what do you do if the value is too low? Making it harder to mine will slow down its inflation, but does nothing about the coins already out there. Unless you are going to take away people's coins or buy them back somehow, this will be a very slow way to revalue your currency. It may not be able to keep up with the market.

To put it another way, if you control the supply, you can drive the price down as far as you like. But to drive it up, there has to be demand.

Furthermore, as you make mining less rewarding, miners will leave. This hurts the security of your coin and makes a 51% or similar attack easier, and will tend to reduce demand further.

The usual approach for making one currency track another is with a peg: a market participant with extremely deep pockets (such as a government) announces that they will buy or sell unlimited amounts of the coin at the desired rate. If they do so, the price cannot fall above or below this fixed rate. But if the market starts to doubt their willingness or ability to maintain the peg, you may see a run on the bank.

  • When the value is too low - perhaps you could have a 'proof of destruction' protocol . Take the block reward, split in half. Half to miners and half transferred them to a null address permanently and publicly making them unusable. The total number of coins that will eventually be usable will reduce thereby increasing the value of the currency. – AndyM Apr 20 '14 at 7:46
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    @AndyM: Isn't that just equivalent to reducing the reward? It does nothing about coins already in circulation. – Nate Eldredge Apr 20 '14 at 11:28
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The problem is the "visa-versa" you describe. A coin cannot be made more valuable in terms of $ per coin by difficulty-related magic.

Difficulty only affects the number of new coins minted in a certain timeframe. Given that this amount is always positive, a coin can only ever become less valuable at different rates.

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