Simple solution to bitcoin deflation
It is really simple: make bitcoin mining more democratic. Confused? Let me explain.
While I personally think, a deflating bitcoin can be used as an investing community, but not as a real currency, the proposed change not only deals with deflation, but also with centralization of power. If you need introduction to deflation and why it is bad, read one of these:
- http://en.wikipedia.org/wiki/Deflation
- http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/
- http://undergroundeconomist.com/post/1528511369
The problem
Now you understand that bitcoins face a big problem. The core of the problem lies in the amount of bitcoins in circulation.
The amount of a physical currency is controlled by a central bank or another institution that decides how much of USDs, EURs or whatever should exist. This solution has its drawbacks, namely centralization of power. The few “wise” and “independent” economists working at the central bank have tremendous power over state economies and the buying power of the citizens that own “their” money.
Bitcoin is supposed to be democratic, “free”, without a central authority. But it is not. He, who controls the source code of the bitcoin client, controls the whole bitcoin economy. The powers that be made a very undemocratic decision that there should be a fixed amount of bitcoins. They would probably argue that (besides being advantageous for early adopters – them) this solves the problem with overpowered central banks. It kind of does, but at the cost of making the bitcoin economy deflationary and thus unattractive to many real buyers and sellers.
The solution
I am sure, some of you already know the solution. Let’s make the bitcoin mining process more democratic. The mining process is a process that controls how much bitcoins there should be. Let each participant in the bitcoin network repeatedly cast their vote (drag a slider in the client application) on how difficult the mining should be. Gather the votes and set the mining difficulty for the next hour or so.
Why it could work? Because…
- it is scalable – allows growth of economies without implicitly affecting value of single bitcoin (value is affected by demography of users),
- it is democratic – there are no second-class citizens who joined too late (I feel like that despite bitcoin is still in its infancy and everyone, who knows about bitcoin now, is an early adopter),
- built-in negative feedback that forces an equilibrium for mining speed – when you are new and mining, you want easy mining, after you get some coins, you want their value stable and hence difficult mining.
Is it guaranteed to work? No, but the current system is guaranteed not to work. So, there is nothing to lose and a lot to gain.
