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I've been interested in Bitcoin for a while. I've been thinking I'd like to give it a go and see if I can make my own cryptocurrency, just to see if I can.

I run my own small web hosting company, the main reason why I don't want to accept Bitcoin is its price volatility. I mean, at one point it was worth $1000 and now its worth $315.

I was wondering, from purely an economics standpoint, would a currency in which all payments, transactions etc ... where decentralised work if one key part was centralised.

I'd like to make all clients download a text file once a week. In the text file would a number, and that number would tell all of the transaction verifiers how many new currency units can be created in any 24 hour period.

I would like to use this file to control the rate at which new currency units are created, there would be no overall limit like Bitcoins 21M. The value would be controlled by controlling the number of currency units that can be created in any 24 hour period.

So since I know nothing about economics I was wondering, would this work?

  • Do you mean a currency based on the technology Bitcoin uses? Or based on any technology? – David Schwartz Nov 5 '14 at 12:11
  • @DavidSchwartz I mean a currency that I create myself, completely from scratch. I'd use some of the ideas from Bitcoin though. – Francis Nov 5 '14 at 16:27
  • I don't think that “almost decentralized” makes sense as a concept. It either is centralized or decentralized. (if it has a single point of failure, it is centralized, no matter what you do) – Arturo Torres Sánchez Nov 6 '14 at 6:28
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Technically, what you describe would work if you throw in a few extra bits such as authentication of your text file data to ensure that clients agree.

The bigger problem could be to convince people to trust you with setting monetary policy. I think that may be an even worse deal to most users than allowing a central bank to do so. Hence my guess is that the sort of Bitcoin alternative that you describe might appeal to far fewer potential users than you might have expected simply from the idea that you promise to ensure a less volatile exchange rate.

How about making monetary policy automatic, aiming for stability in either exchange rate or value? This is a route I would find more convincing, because it would reduce the role of the central authority you introduce to the potentially verifiable job of accurately reporting either the current exchange rate or inflation.

A yet better way would be to decentralize even that. Unfortunately, I have not yet succeeded (and I've been trying!) to design a system where e.g. a vote can determine monetary policy (or inputs to an algorithm for it, such as the current exchange rate) because I cannot get the incentives quite right to avoid having rational actors potentially lie on a scale that might rig the vote.

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This is the proverbial veggie burger with bacon. There are plenty of people who like veggie burgers. And there are plenty of people who like bacon. But there are very few people who like both.

You have a cryptocurrency that's not run by a government. But it also has a central authority that can inflate it and regulate it at their whim. There are people who like these revolutionary cryptocurrency systems that are not run by governments. And there are people who fear deflation and like currencies that can inflated as deemed suitable by a responsible steward. There are just very, very few people who like both of these things.

You will have to answer this very hard question -- "Why would I want to use a store of value that lets you tax my stored value as you wish?" And "Why should I use a currency that's not backed by a government and not subject to political controls when I can use currencies that are?"

  • Would it be more appealing if, for example, there was a limit built into the software itself? How about the software only accepting the value within the text file if the value in the text file is <= 0.5% of the total number of currency units in existence? – Francis Nov 5 '14 at 16:31
  • @Francis It's very hard to predict what would happen. I guess it would probably depend on what the perceived advantages were. Let me just point out that your approach is, IMO, totally backwards unless this is just a small piece of what you're thinking about. First you create value, then you figure out how to distribute it. You seem to be working on just the second part. It's like figuring out how you'll help the world with the billion dollars you'll get somehow. A fun mental exercise, but without a plan for how to get the value, fairly pointless. – David Schwartz Nov 5 '14 at 18:52

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