[Bitcoin-development] Monetary Authority for Bitcoin

[Ryan Carboni <ryan.jc.pc@gmail.com>]

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This is no doubt probably a very controversial Bitcoin Improvement Proposal
and is also a very rough draft of one.

Bitcoin lacks a Central Bank. This is good and bad. A central bank benefits
those with political connections. But Bitcoin lacks price stability, this
generates menu costs, and incentivizes speculation. I propose the creation
of a monetary authority for Bitcoin that sets block reward to a new
mathematical formula.

The velocity of the Bitcoins that are in circulation likely approaches
100,000x per year as compared to 1x - 4x for the USD. This in itself is not
bad. But given that only 10% to 20% of Bitcoins are circulating, this means
that the price of Bitcoin is decided largely through speculation. In fact
the price of a Bitcoin is irrelevant to those who use Bitcoins as a
currency because it appears the majority of coins being used are
immediately being sold and repurchased in the exchanges for the sole
purpose of buying goods.

Unless Bitcoins can be used to purchase intermediate goods and have a
closed economic ecosystem, Bitcoin will be too vulnerable to speculation
and would not be a viable currency. But the development of a closed
economic ecosystem is stymied by the uncertainty of Bitcoin prices and
speculation.

Fortunately the infrastructure for transacting Bitcoin has long been
established, with many major exchanges. Nearly all major exchanges announce
recent prices. At the point when a block is generated, the miner will also
add the exchange price of bitcoin between various other currencies and
crypto-currencies to the blockchain. The exchanges that are kept track of
could be hard coded into Bitcoin or the miner could choose, how this works
is not something I'm personally focused on.

With every new block, the miner will compare the cumulative percentage
change in the exchange price of Bitcoin over the previous 432 blocks. The
standard deviation of the percentage change in exchange rates will be
calculated. Outliers will be excluded, this is so that in case x-currency
suffers from hyperinflation, the x-currency will be ignored. It is
extremely unlikely for all the world’s currencies to be suffering from
hyperinflation caused by monetary expansion as opposed to a supply shock.

Every 432 blocks the block reward will be reevaluated. For every 5%
increase in the geometric mean of Bitcoin exchange rates in relation to the
world’s currencies would increase the block reward by 3%. A 5% decrease in
the geometric mean of Bitcoin exchange rates will decrease the block reward
by 3%. Changes in the exchange rates of less than 5% will not alter the
block reward.

The minimum block reward will be one Bitcoin.



Why is this better then the current system? Very simple, we are still
dependent on banks. Currently Bitcoin is poised to replace Visa and Paypal,
not the Federal Reserve. Bitcoin will be less efficient then Visa and
Paypal because it takes times to transfer money out of exchanges to one's
bank account and vice versa. In order for Bitcoin to replace the US dollar,
it needs to not be a more complex version of a debit card. It needs to have
a closed economic ecosystem, where all transactions are done in Bitcoin
(Consumer > Merchant > Wholesaler > Factory), and the only people who use
the exchanges are merchants who need to and those who wish to gamble on
Bitcoin.

In order for Bitcoin to have widespread acceptance, it needs price
stability. My proposal won't peg the Bitcoin to any one currency, but it
would reduce month to month variability in relation to a basket of
currencies and discourage views that it's speculative.

Look at the current system, it's not healthy and it's not a currency.

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