Red/Green CryptoCoin

Bitcoin has some features that might be considered 'bugs'.  I'll propose here a couple of changes that might be improvements.

Bitcoin is currently deflationary - the number of coins increases at a declining pace, while the number of users has been increasing rapidly.  This has the benefit of making it very profitable to create bitcoins and hold bitcoins as an investment since they increase in value - encouraging people to mine them and merchants to accept them, though it also somewhat discourages spending them.

But even if Bitcoin becomes the sole currency for every person in the world, usage will eventually plateau and the currency will mostly cease to deflate.   With the end of deflation, more people will spend their coins instead of saving them, so that more coins will chase goods and services, which will begin driving down the value of a bitcoin.   Seeing inflation coming, the "smart money" types will dump their bitcoins as soon as they think Bitcoin has started to plateau, resulting in a crash in value just as the maximum number of people have begun using it as a store of value.  A few will turn their stashes of bitcoins into large 'real' profits, while everyone else has their confidence in Bitcoin shaken.  If Bitcoin has become a major currency, this would probably result in a recession.  If it is still a relatively minor currency, it might be discarded along with rotting tulip bulbs and Beanie Babies.

Bitcoin generates and pays new bitcoins to 'miners' who run proof of work calculations that insure a valid record of transactions.   This has led to a bit of a technological arms race, leading to faster and more energy efficient mining hardware.  With new ASIC mining hardware that race is probably coming to an end for a while, though more miners purchasing the newest hardware will likely drive down hardware prices for a bit yet.   Some have commented that the Bitcoin scheme is designed to deliberately increase the amount of computation expended, and while the latest mining hardware is much more energy efficient, Bitcoin adapts to that by further increasing mining.  So Bitcoin is inherently energy intensive.

The allocation of new bitcoins to miners is "fair" in the sense that anyone can invest in mining hardware and try to mine new coins.  But it still remains essentially a fiat currency - bitcoins have value only because people believe they have value, not because there is any real value backing them.  (No, I'm not leading into arguing for gold backed currency!)  Most people will not wish to undertake the risks and complex uncertainties involved in becoming a bitcoin mining specialist.   But in fact it is the acceptance of Bitcoin as having value that creates that value.   Isn't that worth at least as much as the act of mining to secure transactions?  Would it not make sense to reward every participant in Bitcoin currency in some fashion?   Particularly in some fashion that lends itself to making the currency's value more stable?

Enough background - what am I proposing?

Why not design a cryptocurrency that allows each person to create a limited number of coins and by their commitment to the currency, give those coins value?  That is inherently neither inflationary nor deflationary, as the number of coins scales with the number of participants in the currency, and with their increased usage of it?  And which directly rewards new users of the currency by giving them coins to spend - while at the same time giving them a duty to accept the currency in payment?

The Red/Green crypto-currency concept is that each new participant in the currency creates new coins by taking on a debt - essentially loaning coins into existence, exactly as governmental creators of fiat currencies do.   A new user would set up software to manage the currency, and create some number of 'green' coins that they can spend, as well as an equal number of 'red' coins representing their debt.  By creating and holding red coins, they are publicly declaring their willingness to accept payments of at least that many green coins in payment for their own goods or services.  At any time, if they hold at least as many green coins as red, they have the option of opting out by cancelling their red coins with green coins - essentially getting out of debt. (They could still accept green coins in payment, but would not be obligated to accept them.)

In addition, to avoid the extreme computational requirements of Bitcoin, each individual who holds red coin would be responsible for keeping up a certain amount of transaction processing.  They could hire some 3rd party to do that transaction processing.  The transaction processing would authenticate a clear and up-to-date record of all red coin (debts) and identities, as well as green coin transactions.

This scheme gives each individual potential participant a solid reason for joining the community of crypto-currency users - it appears to give them 'free money', though in actual fact it is only giving them 'free credit'.

Some potential objections are immediately obvious.  What keeps someone from generating lots of free green coins, perhaps under alternative identities?  Might a creator and spender of green coins refuse to accept green coins in payment for their own goods and services?  And doesn't this scheme eliminate the anonymity that many consider a key feature of Bitcoin?

Taking the last question first - holding red coins would be public and tied to a specific person.  Transactions with green coins could be anonymous.  Mechanisms would be needed to insure that no person can commit fraud by generating and then try to repudiate the red coins, while keeping the green coins generated or refusing to accept green coins in payment.  (Most people, especially once they have spent their free green coins for real goods, would not be so short sighted as to refuse to accept green coins that they know they can spend.  Nonetheless, a few people might cause such a problem initially, and that would tend to discourage other participants.)

There are may be other good methods to insure that each individual generates only one set of red and green "starter" coins, but I am going to propose using 'Networks of Trust', in which possession of red coin debt would be publicly tied to specific individual identities, and bound to names of persons who vetted that person's trustworthiness and identity.

In order to generate red and green "start up" coins, an individual would need to be vetted by someone already in the network, who trusts them.  And that can't be a non-consequential 'sure, I trust this guy I've never seen before' type of false trust.  It has to be trust with consequences if that trust is demonstrated to be unwarranted.   Vetting someone would mean declaring that they are a particular known person - that they are using their real identity, and have not already used that identity to already generate red/green coins.

And to make sure that that vetting responsibility is not taken lightly or abused, the person doing the vetting would become responsible for part of the debts of the person being vetted.  For that reason, one would prefer to be only one of several who vett someone - sharing responsibility for their red coin.

If the vetted person repudiates their red coin - refusing to accept green coins in payment up to the number of red coins they had created - there might be a fine (in green coin) for which those who trusted him would be responsible (assuming the person refusing to accept payment would not pay the fine himself.

If the vetted person committed fraud by generating another set of red/green coins, all who vetted him (both identities) might have to pay off his red coin debt using their green coin (or at least the duplicate red coin debt).

Anyone who repudiated or defrauded would quickly have their identity logged as "currently distrusted", along with the reasons.

Just to be clear - while I strongly feel that basing a new crypto-currency on individual debts can be a rational and fair approach to a shared currency, which there may be better ways to implement it.


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