
How do you Design a cryptocurrency like ethereum/BTC to have stable value? - noloblo
how would you Design a cryptocurrency to have stable value, not speculative-asset value?<p>are crypto currency doomed to have crazy swings up and down in value like ethereum and bitcoin ?
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blakdawg
The value swings represent changing ideas in the minds of human beings about
the value of the underlying currency.

If you want the value of a currency to be stable, you need to be in a position
to economically support the stable price - if lots of people want to sell, the
stabilizer must be prepared to buy a lot of the currency at the stable price.
If a lot of people want to buy, the stabilizer must be prepared to sell a lot
of the currency at the stable price. This is potentially a very, very
expensive - and perhaps impossible - undertaking.

See
[https://en.wikipedia.org/wiki/Monetary_policy](https://en.wikipedia.org/wiki/Monetary_policy)
for more.

Ultimately, value isn't something that's designed, it's the overall effect of
a lot of individuals' preferences and guesses about the future.

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rthomas6
The first step is to not make it deflationary, which causes people to hoard it
instead of spend it. Unfortunately BTC gained such popularity in part because
of this property.

One cool way to do this that I've been thinking about is to tie the mining
reward rate to the exchange rate somehow. This has the effect of more coins
being created when prices are low, and less created when prices are high. In
theory this should stabilize the price. The problem with this method is you
need a way to measure the "price" in a decentralized way separate from any
other currency.

One way to do THAT is to aim for a certain velocity of money
([https://en.wikipedia.org/wiki/Velocity_of_money](https://en.wikipedia.org/wiki/Velocity_of_money)).
Theoretically it should correlate to inflation: if people are hoarding, the
*coin will gradually start to decrease in value until more people are
spending. If people are spending like crazy, the value will gradually
increase. Not sure if that is a good solution, just one that I thought up.

~~~
zoloateff
isn't a dollar or euro merely a deflationary currency that follows the
velocity of money principle albeit controlled by the government and when the
velocity is slow they print more?

~~~
rthomas6
Not exactly. First of all the currencies aren't deflationary, they're slightly
inflationary, meaning they lose value over time. Deflationary currencies are
considered very bad if a government holds much debt at all. Inflationary
currencies incentivize spending over holding.

Second of all they don't just look at velocity of money, they also look at the
economy's strength, demand for money and lending, consumer prices indicies,
and other things that are tied to external metrics and thus need a centralized
authority to use. For a cryptocurrency, we can't do this, we have to rely on
some algorithm. Tying creation rate to velocity of money seems like a decent
approximation to me, but I could be dead wrong.

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WheelsAtLarge
It's not possible to have a 100% stable currency. At their core currencies are
human opinions of how much to exchange for a product or service. But human
opinion changes on a whim.

I think a currency could be stabilized by automatically adding coins to the
total when people feel they want to hoard them, such as economic panics and
reducing them when they feel they want to use it without care such as when the
economy is booming.

It has to be automatic but finding a way to do that is the big question. But
what and how? Use an index, maybe but it has to be impartial and give a true
view of how people feel about the economy at the time.

For the US dollar the Federal Reserve is responsible for increasing and
decreasing the money supply but they have truckloads of people telling them
how the economy is doing.

A cryptocurrency has potential since in theory you can figure out exactly how
people are using them.

Additionally, the supply has to increase as more people use it to create
economic goods and services. If you don't, there won't be enough currency to
go around and it will limit the potential products/services that people can
create and consume.

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Finnucane
As others have said, basically it's a problem of control. Normal currencies,
in relatively normal times, are semi-managed by central banks. They use tools
like reserve requirements and interest rates to influence the rate at which
new currency flows into the general economy. It's possible for one bank to
trade in the market in a way to peg one currency against another, as China did
for some years. And it was costly, because they were doing it while trying to
maintain a large trade surplus, so large numbers of dollars were coming in
that needed to be neutralized somewhere. It's why they hold so much US debt.
Real currencies get in trouble--severe deflation or inflation--when
circumstances (the gold standard, external debts financed in another country's
currency) make it hard to respond to economic conditions.

This becomes the question: can the system be designed to respond dynamically
to demand in a way that mimics the actions of a central bank, without there
actually being a central bank? If the goal was to make it so that it was
reasonably constant in terms of purchasing power, there's probably a number of
metrics one could choose to measure that, but how to achieve it, that's above
my pay grade.

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wmf
[https://blog.ethereum.org/2014/11/11/search-stable-
cryptocur...](https://blog.ethereum.org/2014/11/11/search-stable-
cryptocurrency/)

[https://bitshares.org/technology/price-stable-
cryptocurrenci...](https://bitshares.org/technology/price-stable-
cryptocurrencies/)

[http://docs.hero.global/en/master/](http://docs.hero.global/en/master/)

[https://thecontrol.co/stablecoins-a-holy-grail-in-digital-
cu...](https://thecontrol.co/stablecoins-a-holy-grail-in-digital-
currency-b64f3371e111)

------
BjoernKW
I'd say it all comes down to volume. If there's enough money in a currency or
in fact any kind of asset it's much less volatile because it's much harder for
single players with big pockets to move the needle in either direction.

This isn't really a design issue though (or one specific to cryptocurrencies)
but one of making the asset attractive enough in the long term.

Even then larger up and down movements are still possible, for example as seen
when George Soros decided to 'break' the Bank of England in 1992.

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therm000
You can design a token implemente on an Smart Contract to do rebasement like a
Central Bank but in an automated fashion, no humans involved...

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notahacker
option (i) have a _credible_ centralised monetary authority that promises to
redeem it for its reserves of dollars or gold or whatever you want it to be
stable against. Though arguably for the crypto-currency to actually be
credible it needs that monetary authority to hold (or have the facility to
borrow at short notice) the asset it's backing it with

option (ii) replicate the fiat system: i.e. the spendable currency is mostly
credit with a future repayment obligation and thus actual future demand to
hold the currency, and imbalances between rates of borrowing and repayment
which drive the currency value up and down are kept in check by algorithmic
adjustments to "interest rates" creditors face when borrowing to meet margin
calls and "taxes" which make debtors have to buy even more coin to meet
payment obligations. (This still isn't going to work unless credit creators
are regulated though...)

whether it's still a cryptocurrency after all that is another question....

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shoo
maybe it does have a stable value, we just need to wait out initial short-term
phase of euphoric speculation:

[https://en.wikipedia.org/wiki/File:Tulip_price_index1.svg](https://en.wikipedia.org/wiki/File:Tulip_price_index1.svg)

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SirLJ
Everything is about speculation, so you cannot prevent it, unless you have a
large quantity of reserve tokens and act as a central bank...

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Suncho
You can't design a cryptocurrency with stable value. At least not without a
central monetary authority anyway. A key selling point of cryptocurrency is
that it (theoretically) exists outside of the influence of a central
authority. But this very feature is the thing that will prevent it from ever
having a stable value.

Because there's a limited amount of it, it's deflationary in nature. If a
currency becomes deflationary, then it's not going to be a currency for very
long. People will hoard it instead of using it in their everyday transactions.

Cryptocurrency gets most of its value from speculation. In the case of
Bitcoin, at least, that speculation is spurred by some people's belief that it
has importance as a potential future currency. It doesn't matter that they're
wrong. Their beliefs are still enough to boost the price of the speculative
asset. Then you have this cycle where its price will crash every so often. If
Bitcoin's price ever stabilizes, it will be because most people have given up
on it as a currency.

Once the hype dies down, the question is whether it can do what gold did and
become a valuable asset with a relatively steady price. Will there be fringe
Bitcoin bugs like there are gold bugs who create enough demand for it to keep
the price from going to zero? I guess we'll see.

At its core, Bitcoin is gold. And if you want an answer to why we'll never be
using Bitcoin as our currency, ask yourself why gold is never again going to
be our currency. It's the same answer. Without a central authority, you can't
keep the price stable.

Now we could certainly construct a credit structure on top of Bitcoin. So
instead of trading Bitcoin directly, we trade IOUs for Bitcoin. That's what we
did with the gold standard. If they're "just as good" as Bitcoin, then it
effectively increases the circulation of Bitcoin-denominated assets and can
help keep prices stable.

You'd of course need some kind of trusted authority to tweak various
macroeconomic variables to ensure that the value of Bitcoin (or Bitcoin IOUs)
remains stable. But it's _possible_ at least for a while. You just have to
give up one of the core principles of cryptocurrency.

Eventually you're going to have so much money circulating and so little actual
Bitcoin to back it up that the system is going to become too brittle and
you'll have to leave the Bitcoin standard.

Hey look. You just bootstrapped another fiat currency.

Bitcoin is gold. It can be manipulated by governments just as much as gold
can. And it has just as much potential to be a real currency as gold does. For
a long time there, we were lucky and we were mining new gold at roughly the
rate required to keep prices stable. No such luck with the cryptocurrencies.
And even if you manage to hit on the right rate of currency minting today, the
future looks different.

~~~
wmf
Deflation/Austrian economics isn't a core principle of cryptocurrency; it's
just a historical accident that Bitcoin works that way and it's also helpful
for scams.

