The following is a non-technical overview of concepts that will be helpful to design a better Cryptography enabled virtual or electronic currency (crypto-currency) system.
Crypto-currency represents an amazing opportunity to bring fairness, prosperity, and freedom to all citizens of our planet. There is no limit to the number and type of crypto-currencies that may be implemented, and like any new invention, only the best implementations will thrive.
The first examples of crypto-currency have been demonstrations of the viability of the concept. Some crypto-currency examples, like Bitcoin and Litecoin have proven that an electronic token, independent of any national government, can hold value and transmit that value fairly and securely among members of the currency network. Others, like BBQcoin or MMMcoin, had design or implementation flaws that led to their early demise. All of these first attempts were primarily focused on overcoming the engineering difficulties associated with creating and distributing the currency, and managing transactions securely. However, there is no limit to the features that a crypto-currency could have.
Eventually, the most successful crypto-currency will not only solve the technicalities of electronic funds handling, but it will also present more economic value to its users than any other system. Now is the time to ask the right questions to make newly designed crypto-currencies more economically viable for more people. If you have ideas, please submit them in the comments section below. Until then, here is my list of concepts that I believe should be considered in the design of a new crypto-currency:
1. How might we achieve a reasonable level of price stability?
2. How might we promote productive behavior and discourage destructive behavior?
3. How might we protect individuals who live under oppressive governments?
4. How might we automate financial services like escrow, loans, insurance, and investments?
5. How might we protect people from, or compensate them for, fraudulent activities?
6. How might we provide probate services and protect against lost funds?
In the real world, we have governments to regulate and handle the issues mentioned above. I believe we can do a better job by designing a monetary system to handle these issues as an engineering problem rather than from a social or regulatory perspective. In fact, my goal is to remove people from the process as much as possible. People have self-interests, computers not so much, yet.
So, here we go off to build a better monetary mouse trap. First, in order to scale up a crypto-currency for worldwide usage by billions of people, we need to move away from "proof-of-work" reward/mining systems to "process transactions as efficiently as possible" reward systems. The idea is that new money will be introduced into the system as a reward for people who support the network with their hardware and processing power. Of course measures will be needed to assure that people aren't making bogus transactions simply to earn rewards (discussed in answer to question #2 above). Automatic adjustments to rewards for transaction processing and fees on transactions will be the primary tools used to implement monetary policy in the network.
PRICE STABILITY
The first goal for a good currency is to achieve price stability, and some form of monetary policy will eventually be needed to accomplish that goal. The goal is to prevent hoarding, depressions, rampant inflation, and all the other monetary problems that keep repeating throughout history. One cool feature about crypto-currency is that all transactions can be known in real time. All the economic data that is painstakingly collected, submitted quarterly, and used for making real world monetary decisions would be instantly available to a crypto-currency network. So, it is simply a matter creating a system that can process the data and make adjustments to money supply as needed. Bitcoin is off to a great start, and it is now being propelled by investors and speculators. That's great for the beginning stages of a new currency, and that situation can be mimicked by limiting any increase of currency supply to a rate below the adoption rate by new users.
As the currency matures, it would enter a new "era" called the usage era. During the usage era, new currency would be introduced at a rate slightly higher than what is demanded by new users and crypto-economic growth. The idea is to get a very slight inflation rate such that the currency itself is no longer valuable as an investment item. If the system detects excessive inflation, currency would be automatically removed from the system. One method would be to lower the rewards paid out for processing transactions coupled with an increase of fees charged per transaction. Users will always be protected from that slight inflation rate by being able to freely convert their savings to a crypto-currency, like Bitcoin, which is designed to always appreciate in value.
PRODUCTIVE BEHAVIOR
We live in a world where one's reputation has been devalued by law, regulation, and government enforcement. There was a time when it wasn't safe to do business with someone that you didn't already know and trust. Today, we don't necessarily bother to check out a restaurant's reputation before we eat there. We trust the government, in part, to make sure that the restaurant is safe and/or to provide a means of recourse in court if we are cheated or poisoned. In the world of crypto-currency, there is no law, regulation, or government. The best crypto-currency networks will have built-in features to promote healthy and productive interactions among its users. The best networks will at least include a capability to log complaints and compliments. While any user could always get a new ID if there was a complaint against them, they couldn't fake compliments from other users with impeccable reputations, at least not without a lot of extra effort. Since every transaction is logged in a crypto-currency network, unique users with multiple IDs can often be isolated. For reasons listed in the section on protecting individuals from oppressive governments, a user's real world identity is not always wanted, but that user's "in-network" reputation is a very effective tool to help promote productive behavior. This is seen to be the case on sites like the silk-road.
The organizers of the MtGox exchange for Bitcoin already implement one strategy that will also be effective. That is to offer verified accounts which have more freedom, but which also are associated with a user's real world identity. There is a fine balance between offering user's new freedom, but also encouraging them to use that new freedom wisely. There are many options that the crypto-currency system might use. For example, higher rewards might be paid for transaction processing to verified account holders. Rewards could be offered for transaction feedback. Transactions which become suspect of fraud or (bogus transactions to gain transaction processing rewards) might be automatically categorized and charged higher transaction fees. Specific units of a crypto-currency could also be labeled as "dirty-money". The possibilities are endless, but we shouldn't get too carried away with them lest we end up with a monetary system that is more cumbersome than the one we have in the real world with its myriad of laws and regulations.
PROTECTION FROM GOVERNMENT
Control of money is probably the most effective way a government has to control its citizens. Crypto-currencies have the potential to empower more individuals to live life as they choose more than anything since the Gutenberg Press. It is a lost concept that an individual may produce what others want, and that individual has the right to request from others a reward similar in value to that which was produced. It is a simple contract among individuals. No other entity deserves a portion of that value unless they were a part of creating that value. If another entity does contribute to the creation of value, like by providing roads for example, then it is the responsibility of the providing entity to monetize that contribution in a way that is voluntary to all parties involved. In other words, it is not OK to produce something that no one wants, and then force them to buy it at the point of a gun (the working mantra of most governments). It is OK to restrict usage to paying customers. Any system that threatens the power of governments over their citizens will meet with resistance by the people currently in power. The resistance will be more harsh in some countries than others, and so "real-world" anonymity is an absolute requirement for any crypto-currency network.
FINANCIAL SERVICES
Think about how many people are employed in financial services. Now think about how much more productive our world would be if their jobs were all automated. Think about how much better off you would be if there were no closing costs associated with selling or buying a house. Imagine that interest was always paid directly to the lowest bidding lender and that there were no middle men in the process. This one aspect of potential for crypto-currency stands to improve the living standards for billions of people. How frustrating is it that banks can borrow money at 0.01% interest rate, yet we have to pay 5 to 6% if we borrow money from them? At the same time, if we keep savings in a bank, we would only make .01% interest on our savings while the money itself devalues at a rate of 3% per year. All of these shenanigans would become history with a properly designed crypto-currency.
Rates for insurance can be automatically calculated in real time based on claims history. As far as automating the process, imagine this scenario:
- someone buys a house with Jambits.
- insurance is purchased
- house is reported to have burned
- claim is filed
The crypto-currency system is now tasked with the job of determining whether or not a legitimate claim is being filed, or a fraudulent one. Suppose that once a claim was filed the process was to auction off the property to highest bidder. The claim would only payout the difference between the purchase price of the house, and the amount received at auction. If the house really didn't burn, it would draw market value at auction.
We can also suppose that an owner might file a claim if the value of the house dropped. In that case it becomes true that the insurance policy actually provides devaluation coverage also. That is in fact superior to currently available insurance; and when one factors in the cost savings of having the whole insurance system automated and "not-for-profit", the premiums are not likely to be much higher.
Of course, the whole process must start from an auction based approach on asset sales from the beginning. That is the only way to off-load the task of determining an asset's value and legitimacy to the network of users rather than paid appraisers, surveyors, agents, etc. All insurable items must be bought and sold in an auction format in order to accomplish any sort of automation. A system of auction based transactions for larger ticket items also lends itself to loan automation.
Since any user can always go get a new ID, individual bankruptcy should be expected to be a quick and easy process. Given that, credit should be approached with caution and only offered in amounts and terms comparable to the credit worthiness of a given ID. In other words, the system should not lend a 2 month old ID enough money to buy a house. Since algorithms and transaction fees can constantly be tweaked to root out bogus transactions, it will be somewhat straight forward to determine an ID's income and credit worthiness.
Escrow services are often used in external systems related to current crypto-currency transactions. It will be a value add to the users of the network to have escrow services built in and automated as fully as possible. It is a fact of life that mail gets lost and stolen. Cargo ships even still sink sometimes. The escrow services could also be combined with insurance services to protect users as much as possible; users must receive the items that they purchased, or a refund. Fraudulent claims must always be guarded against, and this is where having real time access to all currency movements will be useful to the system. Even in the Bitcoin world, suspicious activity is watched by the community. That information can be used to affect the ratings of suspicious ID's and to flag new ID's who appear to be related to suspicious ID's. I like the theme here though, any real person has the opportunity to turn a new leaf at any time. The past is always forgiven, albeit built into the cost structure that everyone must bear.
FRAUD PROTECTION
Trust in this new crypto-currency system is a prerequisite to wide spread use of the system. The most important goal of the whole system is to protect value that individuals have entrusted to the system. Fraud that unfairly wipes out a single individual's value is the most damaging of all to their trust in the system. Many safeguards can be implemented at the client level. As the MtGox exchange limits withdrawals of Bitcoin based on their value, so can the Jambit client limit transaction sizes for various account ID's. Users must be educated on strategies to protect their assets. They could even be rewarded with insurance protections based on how well they comply with recommended best practices. In other words, if you use a hardware key device and a secure password, keep large sums in offline encrypted wallets, have a great community reputation for your ID; if you are defrauded, the system can automatically settle reimburse you for your losses. The information provided by the user on how they were defrauded could be used to improve the whole system.
Other helpful options might be to integrate transactions with shipping tracking numbers, or at least provide tools for vendors to do that easily. I'm dreaming now, but wouldn't it be cool if the network of users handled deliveries for packages within their cities. Everyone would have an easy way to earn JamBits by providing package delivery services.
PROBATE AND LOSS
As crypto-currency usage grows, people will want to know that their assets are safe from loss and that they can be passed down to people of their choosing even in the case of their own demise. Currently, if a person encrypts their Bitcoin wallet and forgets their password, the funds are lost forever. If their computer crashes and they lose their wallet.dat file, their funds are lost forever. If they die and haven't told anyone else how to access their funds, the funds are lost forever. There is a simple solution for these situations that can be built into the JamBit client tool. When a new ID is created, a user should have an option to select an inactivity period and a beneficiary ID address. If an ID goes inactive for 5 years (or whatever time the user chooses), then the funds credited in that account would automatically be split as defined by the original user, and credited to the beneficiary account or accounts. This would help protect people from lost passwords and provide a means of transferring funds postmortem.
This article is just my brainstorm on the subject, so please do add your ideas to the comments sections below.
Crypto-currency represents an amazing opportunity to bring fairness, prosperity, and freedom to all citizens of our planet. There is no limit to the number and type of crypto-currencies that may be implemented, and like any new invention, only the best implementations will thrive.
The first examples of crypto-currency have been demonstrations of the viability of the concept. Some crypto-currency examples, like Bitcoin and Litecoin have proven that an electronic token, independent of any national government, can hold value and transmit that value fairly and securely among members of the currency network. Others, like BBQcoin or MMMcoin, had design or implementation flaws that led to their early demise. All of these first attempts were primarily focused on overcoming the engineering difficulties associated with creating and distributing the currency, and managing transactions securely. However, there is no limit to the features that a crypto-currency could have.Eventually, the most successful crypto-currency will not only solve the technicalities of electronic funds handling, but it will also present more economic value to its users than any other system. Now is the time to ask the right questions to make newly designed crypto-currencies more economically viable for more people. If you have ideas, please submit them in the comments section below. Until then, here is my list of concepts that I believe should be considered in the design of a new crypto-currency:
1. How might we achieve a reasonable level of price stability?
2. How might we promote productive behavior and discourage destructive behavior?
3. How might we protect individuals who live under oppressive governments?
4. How might we automate financial services like escrow, loans, insurance, and investments?
5. How might we protect people from, or compensate them for, fraudulent activities?
6. How might we provide probate services and protect against lost funds?
In the real world, we have governments to regulate and handle the issues mentioned above. I believe we can do a better job by designing a monetary system to handle these issues as an engineering problem rather than from a social or regulatory perspective. In fact, my goal is to remove people from the process as much as possible. People have self-interests, computers not so much, yet.
So, here we go off to build a better monetary mouse trap. First, in order to scale up a crypto-currency for worldwide usage by billions of people, we need to move away from "proof-of-work" reward/mining systems to "process transactions as efficiently as possible" reward systems. The idea is that new money will be introduced into the system as a reward for people who support the network with their hardware and processing power. Of course measures will be needed to assure that people aren't making bogus transactions simply to earn rewards (discussed in answer to question #2 above). Automatic adjustments to rewards for transaction processing and fees on transactions will be the primary tools used to implement monetary policy in the network.
PRICE STABILITY
The first goal for a good currency is to achieve price stability, and some form of monetary policy will eventually be needed to accomplish that goal. The goal is to prevent hoarding, depressions, rampant inflation, and all the other monetary problems that keep repeating throughout history. One cool feature about crypto-currency is that all transactions can be known in real time. All the economic data that is painstakingly collected, submitted quarterly, and used for making real world monetary decisions would be instantly available to a crypto-currency network. So, it is simply a matter creating a system that can process the data and make adjustments to money supply as needed. Bitcoin is off to a great start, and it is now being propelled by investors and speculators. That's great for the beginning stages of a new currency, and that situation can be mimicked by limiting any increase of currency supply to a rate below the adoption rate by new users.
As the currency matures, it would enter a new "era" called the usage era. During the usage era, new currency would be introduced at a rate slightly higher than what is demanded by new users and crypto-economic growth. The idea is to get a very slight inflation rate such that the currency itself is no longer valuable as an investment item. If the system detects excessive inflation, currency would be automatically removed from the system. One method would be to lower the rewards paid out for processing transactions coupled with an increase of fees charged per transaction. Users will always be protected from that slight inflation rate by being able to freely convert their savings to a crypto-currency, like Bitcoin, which is designed to always appreciate in value.
PRODUCTIVE BEHAVIOR
We live in a world where one's reputation has been devalued by law, regulation, and government enforcement. There was a time when it wasn't safe to do business with someone that you didn't already know and trust. Today, we don't necessarily bother to check out a restaurant's reputation before we eat there. We trust the government, in part, to make sure that the restaurant is safe and/or to provide a means of recourse in court if we are cheated or poisoned. In the world of crypto-currency, there is no law, regulation, or government. The best crypto-currency networks will have built-in features to promote healthy and productive interactions among its users. The best networks will at least include a capability to log complaints and compliments. While any user could always get a new ID if there was a complaint against them, they couldn't fake compliments from other users with impeccable reputations, at least not without a lot of extra effort. Since every transaction is logged in a crypto-currency network, unique users with multiple IDs can often be isolated. For reasons listed in the section on protecting individuals from oppressive governments, a user's real world identity is not always wanted, but that user's "in-network" reputation is a very effective tool to help promote productive behavior. This is seen to be the case on sites like the silk-road.
The organizers of the MtGox exchange for Bitcoin already implement one strategy that will also be effective. That is to offer verified accounts which have more freedom, but which also are associated with a user's real world identity. There is a fine balance between offering user's new freedom, but also encouraging them to use that new freedom wisely. There are many options that the crypto-currency system might use. For example, higher rewards might be paid for transaction processing to verified account holders. Rewards could be offered for transaction feedback. Transactions which become suspect of fraud or (bogus transactions to gain transaction processing rewards) might be automatically categorized and charged higher transaction fees. Specific units of a crypto-currency could also be labeled as "dirty-money". The possibilities are endless, but we shouldn't get too carried away with them lest we end up with a monetary system that is more cumbersome than the one we have in the real world with its myriad of laws and regulations.
PROTECTION FROM GOVERNMENT
Control of money is probably the most effective way a government has to control its citizens. Crypto-currencies have the potential to empower more individuals to live life as they choose more than anything since the Gutenberg Press. It is a lost concept that an individual may produce what others want, and that individual has the right to request from others a reward similar in value to that which was produced. It is a simple contract among individuals. No other entity deserves a portion of that value unless they were a part of creating that value. If another entity does contribute to the creation of value, like by providing roads for example, then it is the responsibility of the providing entity to monetize that contribution in a way that is voluntary to all parties involved. In other words, it is not OK to produce something that no one wants, and then force them to buy it at the point of a gun (the working mantra of most governments). It is OK to restrict usage to paying customers. Any system that threatens the power of governments over their citizens will meet with resistance by the people currently in power. The resistance will be more harsh in some countries than others, and so "real-world" anonymity is an absolute requirement for any crypto-currency network.
FINANCIAL SERVICES
Think about how many people are employed in financial services. Now think about how much more productive our world would be if their jobs were all automated. Think about how much better off you would be if there were no closing costs associated with selling or buying a house. Imagine that interest was always paid directly to the lowest bidding lender and that there were no middle men in the process. This one aspect of potential for crypto-currency stands to improve the living standards for billions of people. How frustrating is it that banks can borrow money at 0.01% interest rate, yet we have to pay 5 to 6% if we borrow money from them? At the same time, if we keep savings in a bank, we would only make .01% interest on our savings while the money itself devalues at a rate of 3% per year. All of these shenanigans would become history with a properly designed crypto-currency.
Rates for insurance can be automatically calculated in real time based on claims history. As far as automating the process, imagine this scenario:
- someone buys a house with Jambits.
- insurance is purchased
- house is reported to have burned
- claim is filed
The crypto-currency system is now tasked with the job of determining whether or not a legitimate claim is being filed, or a fraudulent one. Suppose that once a claim was filed the process was to auction off the property to highest bidder. The claim would only payout the difference between the purchase price of the house, and the amount received at auction. If the house really didn't burn, it would draw market value at auction.
We can also suppose that an owner might file a claim if the value of the house dropped. In that case it becomes true that the insurance policy actually provides devaluation coverage also. That is in fact superior to currently available insurance; and when one factors in the cost savings of having the whole insurance system automated and "not-for-profit", the premiums are not likely to be much higher.
Of course, the whole process must start from an auction based approach on asset sales from the beginning. That is the only way to off-load the task of determining an asset's value and legitimacy to the network of users rather than paid appraisers, surveyors, agents, etc. All insurable items must be bought and sold in an auction format in order to accomplish any sort of automation. A system of auction based transactions for larger ticket items also lends itself to loan automation.
Since any user can always go get a new ID, individual bankruptcy should be expected to be a quick and easy process. Given that, credit should be approached with caution and only offered in amounts and terms comparable to the credit worthiness of a given ID. In other words, the system should not lend a 2 month old ID enough money to buy a house. Since algorithms and transaction fees can constantly be tweaked to root out bogus transactions, it will be somewhat straight forward to determine an ID's income and credit worthiness.
Escrow services are often used in external systems related to current crypto-currency transactions. It will be a value add to the users of the network to have escrow services built in and automated as fully as possible. It is a fact of life that mail gets lost and stolen. Cargo ships even still sink sometimes. The escrow services could also be combined with insurance services to protect users as much as possible; users must receive the items that they purchased, or a refund. Fraudulent claims must always be guarded against, and this is where having real time access to all currency movements will be useful to the system. Even in the Bitcoin world, suspicious activity is watched by the community. That information can be used to affect the ratings of suspicious ID's and to flag new ID's who appear to be related to suspicious ID's. I like the theme here though, any real person has the opportunity to turn a new leaf at any time. The past is always forgiven, albeit built into the cost structure that everyone must bear.
FRAUD PROTECTION
Trust in this new crypto-currency system is a prerequisite to wide spread use of the system. The most important goal of the whole system is to protect value that individuals have entrusted to the system. Fraud that unfairly wipes out a single individual's value is the most damaging of all to their trust in the system. Many safeguards can be implemented at the client level. As the MtGox exchange limits withdrawals of Bitcoin based on their value, so can the Jambit client limit transaction sizes for various account ID's. Users must be educated on strategies to protect their assets. They could even be rewarded with insurance protections based on how well they comply with recommended best practices. In other words, if you use a hardware key device and a secure password, keep large sums in offline encrypted wallets, have a great community reputation for your ID; if you are defrauded, the system can automatically settle reimburse you for your losses. The information provided by the user on how they were defrauded could be used to improve the whole system.
Other helpful options might be to integrate transactions with shipping tracking numbers, or at least provide tools for vendors to do that easily. I'm dreaming now, but wouldn't it be cool if the network of users handled deliveries for packages within their cities. Everyone would have an easy way to earn JamBits by providing package delivery services.
PROBATE AND LOSS
As crypto-currency usage grows, people will want to know that their assets are safe from loss and that they can be passed down to people of their choosing even in the case of their own demise. Currently, if a person encrypts their Bitcoin wallet and forgets their password, the funds are lost forever. If their computer crashes and they lose their wallet.dat file, their funds are lost forever. If they die and haven't told anyone else how to access their funds, the funds are lost forever. There is a simple solution for these situations that can be built into the JamBit client tool. When a new ID is created, a user should have an option to select an inactivity period and a beneficiary ID address. If an ID goes inactive for 5 years (or whatever time the user chooses), then the funds credited in that account would automatically be split as defined by the original user, and credited to the beneficiary account or accounts. This would help protect people from lost passwords and provide a means of transferring funds postmortem.
This article is just my brainstorm on the subject, so please do add your ideas to the comments sections below.
